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Firm-Size Wage Gaps Along the Formal-Informal Divide: Theory and Evidence

Author

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  • Binnur Balkan

    (Central Bank of the Republic of Turkey)

  • Semih Tumen

    (Central Bank of the Republic of Turkey)

Abstract

Observationally equivalent workers are paid higher wages in larger firms. This fact is often named as the “firm-size wage gap” and is regarded as a key empirical puzzle. Using a nationally representative micro- level survey data from Turkey, this paper documents a new stylized fact: the firm-size wage gap is more pronounced for informal (unregistered) jobs than for formal (registered) jobs. To explain this fact, we develop a two-stage wage-posting game with market imperfections and segmented markets, the solution to which produces wages as a function of firm size in a well-defined subgame-perfect equilibrium. The model proposes two distinct mechanisms. First, setting high tax rates on formal activity generates a wedge between formal and informal size wage gaps. Thus, government policy can potentially affect the magnitude of the firm-size wage gaps. We provide auxiliary empirical evidence justifying this finding. The model is able to explain the stylized fact through a second mechanism-even when the tax dimension is shut down. Higher wages offered by a larger firm for a formal job can attract a larger number of applicants, than the same amount offered by the same firm can attract for an informal job. The larger pool of applicants for the formal job, in turn, enables the firm to keep the size differentials modest, while this mitigating effect is weaker for informal jobs.

Suggested Citation

  • Binnur Balkan & Semih Tumen, 2013. "Firm-Size Wage Gaps Along the Formal-Informal Divide: Theory and Evidence," Working Papers 012, Bahcesehir University, Betam.
  • Handle: RePEc:bae:wpaper:012
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    Cited by:

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    2. Steven B. Caudill & Charles O. Kroncke & Franklin G. Mixon, 2021. "Is there a firm size‐wage gap after economic transition? – An examination of for‐profit and not‐for‐profit firms in Estonia," LABOUR, CEIS, vol. 35(4), pages 435-449, December.
    3. Kerem Cantekin & Ceyhun Elgin, 2017. "Extent And Growth Effects Of Informality In Turkey: Evidence From A Firm-Level Survey," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 62(05), pages 1017-1037, December.
    4. Gizem Akar & Binnur Balkan & Semih Tümen, 2013. "Overview of Firm-Size and Gender Pay Gaps in Turkey: The Role of Informal Employment," Ekonomi-tek - International Economics Journal, Turkish Economic Association, vol. 2(3), pages 1-21, September.
    5. Ceyhun Elgin & Muhammed Burak Sezgin, 2017. "Sectoral Estimates of Informality: A New Method and Application for the Turkish Economy," The Developing Economies, Institute of Developing Economies, vol. 55(4), pages 261-289, December.

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    More about this item

    Keywords

    Firm size; wage gap; informal employment; wage posting; subgame perfection; taxes.;
    All these keywords.

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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