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The formal sector wage premium and firm size

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

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

  • El Badaoui, Eliane & Strobl, Eric & Walsh, Frank, 2010. "The formal sector wage premium and firm size," Journal of Development Economics, Elsevier, vol. 91(1), pages 37-47, January.
    • Handle: RePEc:eee:deveco:v:91:y:2010:i:1:p:37-47
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    More about this item

    Keywords

    Formal sector wage premium Firm size;

    JEL classification:

    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets

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