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The Formal Sector Wage Premium and Firm Size

  • El Badaoui, Eliane

    ()

    (University Paris Ouest-Nanterre)

  • Strobl, Eric

    ()

    (Ecole Polytechnique, Paris)

  • Walsh, Frank

    ()

    (University College Dublin)

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.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3145.

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Length: 31 pages
Date of creation: Nov 2007
Date of revision:
Handle: RePEc:iza:izadps:dp3145
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