The Formal Sector Wage Premium and Firm Size

Badaoui, Eliane; Strobl, Eric; Walsh, Frank

doi:10.2139/ssrn.1032587

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The Formal Sector Wage Premium and Firm Size

IZA Discussion Paper No. 3145

31 Pages Posted: 26 Nov 2007

See all articles by Eliane Badaoui

Eric Strobl

École Polytechnique, Paris - Department of Economic Sciences; IZA Institute of Labor Economics

Frank Walsh

National University of Ireland - University College Dublin

Date Written: November 2007

Abstract

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.

Keywords: informal sector, wage premium, firm size

JEL Classification: J42

Suggested Citation: Suggested Citation

Badaoui, Eliane and Strobl, Eric and Walsh, Frank, The Formal Sector Wage Premium and Firm Size (November 2007). IZA Discussion Paper No. 3145, Available at SSRN: https://ssrn.com/abstract=1032587 or http://dx.doi.org/10.2139/ssrn.1032587