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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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    Cited by:

    1. Badi H. Baltagi & Yusuf Soner Başkaya, 2022. "Spatial wage curves for formal and informal workers in Turkey," Journal of Spatial Econometrics, Springer, vol. 3(1), pages 1-24, December.
    2. D. Boccanfuso & L. Savard, 2012. "A Segmented Labour Supply Model Estimation for the Construction of a CGE Microsimulation Model: An Application to the Philippines," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 6(2), pages 211-234, May.
    3. Costas Meghir & Renata Narita & Jean-Marc Robin, 2015. "Wages and Informality in Developing Countries," American Economic Review, American Economic Association, vol. 105(4), pages 1509-1546, April.
    4. Dennis Becker, 2018. "Heterogeneous firms and informality: the effects of trade liberalization on labour markets," Oxford Economic Papers, Oxford University Press, vol. 70(1), pages 47-72.
    5. Olivier Bargain & Prudence Kwenda, 2014. "The Informal Sector Wage Gap: New Evidence Using Quantile Estimations on Panel Data," Economic Development and Cultural Change, University of Chicago Press, vol. 63(1), pages 117-153.
    6. repec:hal:spmain:info:hdl:2441/4ra95789n9nrr59b6lmini6tp is not listed on IDEAS
    7. Costas Meghir & Renata Narita & Jean-Marc Robin, 2015. "Wages and Informality in Developing Countries," Post-Print hal-03587627, HAL.
    8. Binnur Balkan & Semih Tumen, 2016. "Firm-Size Wage Gaps along the Formal-Informal Divide: Theory and Evidence," Industrial Relations: A Journal of Economy and Society, Wiley Blackwell, vol. 55(2), pages 235-266, April.
    9. Almeida, Eloiza R.F. & Araújo, Veneziano & Gonçalves, Solange L., 2022. "Urban wage premium for women: evidence across the wage distribution," World Development, Elsevier, vol. 159(C).
    10. Falco, Paolo & Kerr, Andrew & Rankin, Neil & Sandefur, Justin & Teal, Francis, 2011. "The returns to formality and informality in urban Africa," Labour Economics, Elsevier, vol. 18(S1), pages 23-31.
    11. Costas Meghir & Renata Narita & Jean-Marc Robin, 2015. "Wages and Informality in Developing Countries," SciencePo Working papers hal-03587627, HAL.
    12. Eliane Badaoui & Olivier Bargain & Prudence Magejo & Eric Strobl & Frank Walsh, 2023. "A Search Model with Self-Employment and Heterogeneity in Managerial Ability," EconomiX Working Papers 2023-9, University of Paris Nanterre, EconomiX.
    13. Ana Maria Bonomi Barufi & Eduardo A. Haddad, Peter Nijkamp, 2016. "New evidence on the wage curve: non-linearities, urban size, and spatial scale in Brazil," Working Papers, Department of Economics 2016_39, University of São Paulo (FEA-USP).
    14. Daniel Haanwinckel & Rodrigo R Soares, 2021. "Workforce Composition, Productivity, and Labour Regulations in a Compensating Differentials Theory of Informality [Search with Multi-worker Firms]," Review of Economic Studies, Oxford University Press, vol. 88(6), pages 2970-3010.
    15. Siba, Eyerusalem, 2015. "Returns to Physical Capital in Ethiopia: Comparative Analysis of Formal and Informal Firms," World Development, Elsevier, vol. 68(C), pages 215-229.
    16. Ana Barufi & Eduardo Haddad & Peter Nijkamp, 2016. "A comprehensive analysis of the wage curve in Brazil: Non-linearities, urban size, and the spatial dimension," ERSA conference papers ersa16p279, European Regional Science Association.
    17. Bargain, Olivier & El Badaoui, Eliane & Magejo, Prudence & Strobl, Eric & Walsh, Frank, 2012. "The Formal Sector Wage Premium and Firm Size for Self-employed Workers," IZA Discussion Papers 6604, Institute of Labor Economics (IZA).
    18. Simon COMMANDER & Natalia ISACHENKOVA & Yulia RODIONOVA, 2013. "Informal employment dynamics in Ukraine: An analytical model of informality in transition economies," International Labour Review, International Labour Organization, vol. 152(3-4), pages 445-467, December.
    19. Cano-Urbina, Javier, 2015. "The role of the informal sector in the early careers of less-educated workers," Journal of Development Economics, Elsevier, vol. 112(C), pages 33-55.
    20. Mr. Christopher S Adam & Mr. Edward F Buffie, 2020. "The Minimum Wage Puzzle in Less Developed Countries: Reconciling Theory and Evidence," IMF Working Papers 2020/023, International Monetary Fund.
    21. Costas Meghir & Renata Narita & Jean-Marc Robin, 2015. "Wages and Informality in Developing Countries," SciencePo Working papers Main hal-03587627, HAL.
    22. Erol Taymaz, 2009. "Informality and Productivity: Productivity Differentials between Formal and Informal Firms in Turkey," ERC Working Papers 0901, ERC - Economic Research Center, Middle East Technical University, revised Mar 2009.
    23. Olivier Bargain & Prudence Kwenda, 2009. "The Informal Sector Wage Gap: New Evidence Using Quantile Regressions on Panel Data," CEDI Discussion Paper Series 09-06, Centre for Economic Development and Institutions(CEDI), Brunel University.
    24. Michiel Gerritse & Ana Isabel Moreno-Monroy, 2012. "Informal Sector and Manufacturing Location: In Search of the Missing Links," Spatial Economic Analysis, Taylor & Francis Journals, vol. 7(2), pages 179-201, June.
    25. Charlot, Olivier & Malherbet, Franck & Terra, Cristina, 2015. "Informality in developing economies: Regulation and fiscal policies," Journal of Economic Dynamics and Control, Elsevier, vol. 51(C), pages 1-27.

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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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