Living Standards Measurement Study No. 113. This paper analyzes the extent to which workers in Bolivia face barriers to entry in the formal and informal sectors of the urban labor market. These barriers are most prevalent in the formal sector because of regulation. The higher wages found in the that sector are often regarded as evidence of labor market segmentation. However, wage differences between sectors may also result from compensating wage differentials, which follow from non-monetary returns to the job such as health insurance, utility associated with the workplace, and job security. The author proposes a model that allows testing for labor market segmentation between the two sectors on the basis of cross- sectional data. The methodology incorporates data on ways in which individuals search for new jobs and information about discouraged workers who have stopped searching for jobs. The proposed model accounts for all of the specific features of urban labor markets in developing countries, in particular the existence of a competitive informal sector.