The paper examines the flow of workers between employment states, the role of
education in these transitions and the impact of the transitions on earnings. It uses
panel data for three waves (2005/06, 2009/10 and 2010/11) of household surveys in
Uganda. Using the Markov chain process, we estimate transition probability matrices
and find bi-directional transitions between formal and informal employment but with a
higher tendency of workers to transition from formal to informal than in the opposite
direction. When we investigate the relation between education and transitions using
probit models, we find the transition from informal to formal increases with education
but the movement from formal to informal employment and switching from not
working to working declines with education. We further investigate the impact of the
transitions on the worker’s welfare by estimating wage equations and find evidence for
a decline in monthly wages for workers moving from formal to informal employment
and a wage gain for workers moving in the reverse direction. We suggest that
transitions from informal to formal employment are induced by higher wage offers,
while transitions in the opposite direction are more likely to be due to losing a job.