5.3 Heckman Selection Model

Econometric analysis based on non-randomly selected samples can yield biased results.

One can only observe the type of employment—formal or informal—based on pension status but

we cannot easily observe the justifications for their employment decisions. The social and material

conditions for indigenous and non-indigenous individuals are very different, possibly leading each

group to make employment decisions differently. If, for example, indigenous individuals have a

stronger support system in their homes that allows them to place a lower value on pensions, then

they may opt into professions less likely to offer pensions. In order to correct for the possibility of

sample selection bias, we implement a two-step Heckman selection model. 21

Table V shows the results for the Heckman selection model. The coefficient for the

interaction term of indigenous and secondary education is shown to be equivalent to 10.9

percentage points and remains statistically significant at the 1%. Furthermore, the selection

coefficient (lambda), suggests that the selection effect negatively biases the interaction term on the

returns to secondary education for indigenous workers.

[Table V Goes Here]

6. Explaining the Informality Gap Among High-School Graduates

Four potential channels may explain the informality gap at the secondary level, but the

strongest evidence lies with one of them—quality of secondary education.


Our two-step selection model includes a selection equation to estimate the likelihood that an

individual will be observed, and a regression equation to estimate the returns to education. See

Online Appendix Section A1 for more details.


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