This paper explores the earnings gap between the self-employed and wage earners in urban Ghana. This is important in understanding the drivers of inequality, we hypothesise that heterogeneity in informal sector earnings will have implications for the income gap between self-employed individuals and wage earners. This heterogeneity in earnings will be concealed at the mean. However, the information about who benefits and who is penalized in the informal sector can be important from the policy perspective. Furthermore, this paper investigates the possibility that result from quantile regression can depend on the assumption of the estimator about the variation due to the fixed effect.

The results show that at the mean, self-employed individuals enjoy a premium, however, quantile result suggests that this is driven by the individuals at the upper end of the self-employment earning distribution. At the lower quantiles, being self-employed attracts a penalty. We note that this result becomes apparent only when we allow the quantile effect to be arbitrarily correlated with fixed effects. Finally, our results show that formal sector premium, gender earnings gap and informal sector premium (where it exists) all favour male and older cohorts of workers at the expense of young and female workers.