Wage differential between formal and informal employment in Nepal
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Department of Economics
Abstract
This research investigates the wage gap between formal and informal employment
in Nepal using data from the Nepal Labor Force Survey (NLFS) III. We employ
OLS regressions and Oaxaca-Blinder decomposition to examine the influence of
various factors, such as education, experience, occupation, firm size, and sector of
employment, on wages in formal and informal employment. Our findings indicate
that formal workers earn higher wages and that the wage gap between formal and
informal employment is significant, with informal workers earning approximately
64.77% less than formal workers. Additionally, we find that informality is correlated
with lower wages and that factors such as occupation class, firm size, and
sector of employment all have a significant impact on wages in informal employment.
The results of this study suggest that policies aimed at formalizing informal
employment and enhancing the skills and education of informal workers could reduce
the wage gap and improve economic security for informal workers in Nepal.