Labour Market Segmentation in the Indian Economy: An Investigation

Abstract

The paper investigates the hypothesis of labour market segmentation in the Indian labour market along the lines of formality and informality using NSSO data over the period 2004-05 to 2011-12. The results of our analysis lend credible support in favour of the labour market segmentation hypothesis. The study finds significant wage gap between the formal and the informal sectors which cannot be explained entirely due to the differences in endowments of workers. However, the extent of discrimination is seen to decline over the study period. Further, decomposition analysis along the quantiles reveals the discrimination effect to be smaller in the lower quantiles compared to the higher quantiles. The results highlight the need for appropriate government measures to counter the above adverse trends.

Keywords: Decomposition, Selection Correction, Segmentation, Informality, Quantile regression

JEL Classification: C14, C21, C31, J42, J46, O17