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The formal sector wage premium and firm size

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  • Eliane El Badaoui
  • Eric Strobl
  • Frank Walsh

Abstract

We show theoretically that when larger firms pay higher wages and are more likely to be caught defaulting on labor taxes, then large-high wage firms will be in the formal and small-low wage firms will be in the informal sector. The formal sector wage premium is thus just a firm size wage differential. Using data from Ecuador we illustrate that firm size is indeed the key variable determining whether a formal sector premium exists.

Suggested Citation

  • Eliane El Badaoui & Eric Strobl & Frank Walsh, 2010. "The formal sector wage premium and firm size," Open Access publications 10197/8052, School of Economics, University College Dublin.
    • Handle: RePEc:ucn:oapubs:10197/8052
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    File URL: http://hdl.handle.net/10197/8052
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    More about this item

    Keywords

    Formal sector wage premium; Firm size; Trinidad-and-tobago; Labor-market; Developing-countries; Informal sector; Propensity score; Employer size; Unemployment; Differentials; Consequences; Taxation;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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