Huyen Hoang and George Kudrna
Abstract: This study examines the effects of sectoral choices between formal and informal labour on household consumption and welfare in emerging economies. Analysing data from the Vietnam Household Living Standards Survey (2014-2018), we investigate two main questions: (1) What factors influence sectoral labour choices? and (2) How do these choices impact household consumption and welfare? We use a multinomial logit model to show that sectoral choices are primarily influenced by education level, gender, and marital status. The analysis extends to propensity score matching, supplemented by instrumental variable and multinomial endogenous switching regression models. Our results indicate that entering informal employment, particularly by low-skill workers, significantly reduces spending on food, while high-skill employment induces higher consumption of non-durable goods. Interestingly, informal employment increases housing wealth compared to low-skill formal employment, suggesting that informal workers invest in safe assets to mitigate high employment risks, while formal workers diversify their assets portfolio. The findings highlight the need for improved professional training and social security measures to facilitate transitions from informal to formal employment, enhancing household welfare.
Keywords: Informality, Sectoral choice, Structural change, Welfare, Propensity score matching, Multinomial endogenous switching regression
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