Theoretical Framework This paper uses a random utility model (Train 2009) to construct a model of participation in the labor

market and employment sector. An individual, n, chooses among J alternatives. The choice set or the set of alternatives of the random utility framework must be finite, mutually exclusive, and exhaustive. The individual obtains a particular level of utility from each alternative. The utility that individual n obtains from alternative j among J alternatives is: Unj , j = 1, . . . , J . The individual chooses the alternative that gives maximal utility. Therefore, the behavioral model can be expressed as: Choose alternative i if and only if Uni > Unj j i (Train 2009, 14). Putting the general random utility model in the more specific form of the neoclassical employment-choice maximization problem, the individuals utility function is constrained by several factors such as the rates of wages, job vacancies and characteristics, the individuals credentials, and macroeconomic conditions (Chua 2004, 52). Thus, the model for employment outcome can be constructed as: max Unj = f (wnj (S, D), Xnj) s.t. {wnj Xnj} , where wnj is a vector of [equilibrium] wage levels as a function of labor demand (D) and labor supply (S); Xnj is a vector of individual, household, job, regional characteristics and other factors related to the individual and the employment outcome; and is the feasible set or the set of employment outcomes which the individual can feasibly choose (Chua 2004, 52). The expected utility of employment outcome (Unj) is expressed as a function of wage level and a set of characteristics. There is a corresponding equilibrium wage level for every set of characteristics,

and vice versa; this correspondence is mathematically expressed as a vector-product of the wnj and Xnj. These matched wage levels and set of characteristics form the set of feasible employment outcomes. This means a person can only choose among forms of employment that appeal to him based on their respective wages, each of which corresponds to a relevant set of characteristics or factors (like working conditions, job qualifications, economic conditions, etc). For example, a person with few skills can never hope to have a higher expected utility than a person with many skills, ceteris paribus. Thus, this person with few skills will have to settle with the resulting employment outcome, i.e. he is constrained to choose a sector which does not require many skills yet at the same time pays well enough for him to maximize his utility. Another example: a person who provides for a large family is constrained to choose a job which pays a wage that can cover his expenses. Thus, as illustrated, the mentioned vector of characteristics (Xnj) can serve as the determinants of employment choice. Econometric Model At this point, Xnj is redefined as the vector of household-head, household and regional characteristics. This means that characteristics or factors other than those mentioned, like working and economic conditions, remain unobserved in this empirical study. Thus, utility is statistically decomposed as: Unj = Vnj + nj , such that Vnj = V(wnj , Xnj) j, where Vnj is the representative utility and nj captures the factors that affect utility but are neither included nor observable in Vnj (Train 2009, 15). This paper follows Trains notation and flow in deriving the multinomial logit model (2009, 33-37). To start the derivation, each is assumed to be an independently, identically

distributed extreme value, following the Gumbel and type I extreme value distribution. For each ( ) , the density is: ( ) is:

and the distribution for each ( ) ( )

The difference between two extreme value variables ( distirbution: ( ) .

) follows a logistic

The logit choice probabilities are derived based on McFadden (1974). The probability that individual n chooses employment outcome i over all other alternatives ( ( ) ( ( Considering ) ) as a given, (3) is the cumulative distribution for every evaluated at ) is:

, which is cumulative distribution over all

(

according to (2). Given that the s are independent, the is:

)

But since

is not observable and given, the probability is expressed as the integral of weighted by its density (1) (Train 2009, 36):
( )

over all values of

which can be algebraically manipulated to a simpler form:

( )

Equation (4) is the derived logit choice probability. Representative utility is specified to be linear in parameters (Train 2009, 37): , where is a vector of coefficients and

is a vector of observed set of household-head, household and regional characteristics related to employment outcome j. The logit choice probability can thus be specified as: ( ) where: i = 0 if household is under agriculture i = 1 if household is under formal wage i = 2 if household is under informal wage i = 3 if household is under self-employed i = J= 4 if household is under others Equation (5) is the probability that individual n chooses particular employment outcome i, given a set of characteristics . This probability is a non-linear function of X, similar to Chuas

multinomial logit econometric model (2004, 59). However, unlike Chuas study, this paper does not use village characteristics due to lack of data. Also, this paper assumes that villages are not isolated from each other in the urban sector, unlike in the rural sector. This paper uses regional characteristics instead, in order to control for regional differences. Household characteristics reflect the interdependence of household members in smoothening their consumption considering the labor market and credit constraints (2004, 53). Choices of employment depend on how different sectors in the labor market are defined. Unfortunately, there is no single way to classify of urban labor market sectors which

unambiguously includes the informal sector (Yamada 1996, 290). Approaching this problem, Yamada considered two concurrent dichotomies in the urban labor market: a person can 1) either be an employee or be self-employed, and belong to 2) either the informal or formal employment. Based on each urban households main source of income (Chua 2004, 59) and on Yamadas informal-formal dichotomy, this papers model considers five employment choices (as enumerated below equation (5)). Households classified under agriculture have their main source of income from salaries/wages and entrepreneurial activities in the agricultural sector. Both formal wage and informal wage cover households whose main sources of income are non-agricultural salaries and wages, but the former have life insurance and pension expenditures greater than zero, assuming that only those in formal employment pay for social security coverage (Yamada 1996, 304). This paper therefore confines the definition of informal wage to households which do not pay for any form of social security (life insurance, Medicare, SSS, GSIS, and private insurance premiums). The paper avoids relying on an ambiguous idea of the informal sector (Ozorio de Almeida 2000, 18) by clearly equating formality to social security coverage. Several studies either used or acknowledged this definition (Tansel 2000, 4; Maloney 1999, 276; Portes and Schauffler, 1993; Calderon-Madrid 2000, 15). One World Bank study even considered social security as perhaps the most basic job benefit (Ozorio de Almeida 1995, 36). Households under self-employed include all those which listed any entrepreneurial activity as their main source of income. Non-agricultural entrepreneurial activities are listed in Figure 1. Others mainly earn from remittances, rent-seeking activities, pensions and retirement activities. The rest of the items under others are listed in Figure 2, following Chuas

classification (2004, 60) and based on data from the 2006 Family Income and Expenditure Survey (FIES). This paper gears its empirical effort towards the analysis of the supply-side of the labor market with a special focus on the determinants of employment at regional, household, and individual levels. As the theoretical framework mentioned, both labor supply and labor demand affect the participation of an individual in the labor market. However, similar to a study done in Kenya (Wamuthenya et al. 2010, 8), this paper does not pursue the specification of the demand schedule due to confinement of data to the household level, which lacks information on labor demand variables. As mentioned, the independent variables come from household-head, household, and regional characteristics. Household-head characteristics are sex, age, level of education, and marital status. Household characteristics include the numbers of young children (below one year old and below seven years old), number of household members employed, and financial and land assets. The regional characteristics include population density, poverty threshold, and number of state universities of a region. Sex is chosen as an independent variable to determine to which labor market maleheaded or female-headed households would tend to belong (Chua 2004, 61). Previous studies in the Philippines vary in their conclusions with regard to the effect of sex in employment choice: in rural areas, a person who is male is more likely to be self-employed (Chua 2004, 61) while in a more general point of view, those who are male are more likely to be a formal wage earner (Hasan and Jandoc 2010, 71).

Age is included to reflect both the life cycle effects and labor market experience (Wamuthenya et. al 2010, 9). The probability of engaging in self-employment is expected to be positively related to age (Hasan and Jandoc 2010, 54). Education is categorized into the levels of education completed (no grade completed, elementary graduate, high school graduate, college graduate, post graduate). Those who are better educated are more likely to be formal wage earners than self-employed (Hasan and Jandoc 2010, 71). Marital status, the number of household members employed, and the number of young children may become either a deterrent or motivation to certain employment choices (Wamuthenya et. al 2010, 9; Chua 2004, 62). The more land assets, the more likely a household will earn its main income in the agricultural sector (Chua 2004, 62). Lanzonas study (1998) stated that for males, having more financial assets increases the likelihood of being self-employed. Turning to regional determinants, a higher population density (number of residents per square-kilometer in 2006) means higher demand in the region (Wagner and Sternberg 2002, 9). This has an expected positive effect on the expected returns on a small business in a developed country, and can positively affect the probability of entering into self-employment. But given that the self-employed in the Philippine urban sector belong to the informal sector, the coefficients of the regional determinants might have a different effect in this paper. Bibliography: Chua, Karl Kendrick Tiu. 2004. Village characteristics and employment choice in rural Philippines. Philippine Review of Economics, 41, no. 2 (December): 49-79.

Glick, Peter and David E. Sahn. 1997. Gender and Education Impacts on Employment Earnings in West Africa: Evidence from Guinea. Economic Development and Cultural Change, 45, no. 4: 793-823. Hasan, Rana and Karl Robert L. Jandoc. 2010. Worker's Earnings in the Philippines: Comparing self-employment with wage employment. Asian Development Review, 27, no. 1: 43-79. Lanzona, Leonardo A., 1998. Migration, self-selection and earnings in Philippine rural communities. Journal of Development Economics 56: 27-50. Maloney, William. 1999. Does Informality Imply Segmentation in Urban Labor Markets? Evidence from Sectoral Transitions in Mexico. World Bank Economic Review 13: 275 302. Ozorio de Almeida, Anna Luiza, Leandro Alves, and Scott E. M. Graham. 1995. "Poverty, Deregulation, and Employment in the Informal Sector of Mexico." ESP Discussion Paper 54. Education and Social Policy Department, World Bank, Washington, D.C. March. Processed. 1-113. Portes, A. and R. Schauffler. 1993. Competing Perspectives on the Latin American Informal Sector. Population and Development Review, 19(1): 33-49. Tansel, Aysit. 2000. Wage Earners, Self Employed and Gender in the Informal Sector in Turkey. Working Paper Series no. 24 (November), Policy Research Report on Gender and Development, Washington, DC. 1-46. Theil, Henri. 1969. A multinomial extension of the linear logit model. International Economic Review 10: 251-259.

Train, Kenneth E. 2009. Discrete Choice Methods with Simulation. 2nd ed. New York: Cambridge University Press. Wagner, Joachim and Rolf Sternberg. 2002. Personal and Regional Determinants of Entrepreneurial Activities: Empirical Evidence from the REM Germany. IZA Discussion Paper No. 624: 1-17. Wamuthenya, Wambui R. Determinants of Employment in the Formal and Informal Sectors of the Urban Areas of Kenya. AERC Research Paper 194: 1-49. Yamada, Gustavo. 1996. Urban Informal Employment and Self-Employment in Developing Countries: Theory and Evidence. Economic Development and Cultural Change, 44 (January): 289314.
Figure 1 Main sources of household income classified as selfemployed (non-agricultural): 1. 2. 3. Wholesale and retail Manufacturing Community, social, recreational and personal services 4. 5. 6. 7. Transport and communication Mining Construction Other entrepreneurial activities not elsewhere classified Source: 2006 FIES 9. Figure 2 Main sources of household income classified as others: 1. 2. 3. 4. 5. 6. 7. 8. Net share of crops and others Assistance from abroad Assistance from domestic source Rental of lands and other properties Interests from banks/loans Pensions and retirement benefits Dividends from investments Rental-value of owner-occupied dwelling unit for income Income from family sustenance activities

10. Received as gifts 11. Other unclassifiable items Source: 2006 FIES