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The formal sector wage premium and firm size

  • El Badaoui, Eliane
  • Strobl, Eric
  • Walsh, Frank

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.

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Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 91 (2010)
Issue (Month): 1 (January)
Pages: 37-47

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Handle: RePEc:eee:deveco:v:91:y:2010:i:1:p:37-47
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