The Formal Sector Wage Premium and Firm Size
University of Cergy-Pontoise - THEMA
Ecole Polytechnique, Paris - Department of Economic Sciences; Institute for the Study of Labor (IZA)
National University of Ireland - University College Dublin
IZA Discussion Paper No. 3145
We show theoretically that when larger firms pay higher wages and are more likely to be caught defaulting on labour taxes, then large high-wage firms will be in the formal sector 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 the South African labour force survey we illustrate that firm size is indeed the key variable determining whether a formal sector premium exists.
Number of Pages in PDF File: 31
Keywords: informal sector, wage premium, firm size
JEL Classification: J42
Date posted: November 26, 2007
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