The Formal Sector Wage Premium and Firm Size for Self-employed Workers
We develop a model where formal sector firms pay tax and informal ones do not, but informal firms risk incurring the penalty associated with non-compliance. Workers may enter self-employment or search for jobs as employees. Workers with higher managerial skills will run larger firms while workers with lower will manage smaller firms and will be in self-employment only when they cannot find a salary job. For these workers self-employment is a secondary/informal form of employment. The Burdett and Mortensen (1998) equilibrium search model turns out to be a special case that we amend by incorporating taxes and a penalty for non-payment of taxes. Our model is also consistent with some of the empirical literature in that the informal wage penalty does appear to be limited to low wage/skill workers while firm size is an important determinant of the employee formal sector premium. We test theoretical predictions using empirical evidence from Mexico and find that firm size wage effects for employees and self-employed workers are broadly consistent with the model.
|Date of creation:||May 2012|
|Contact details of provider:|| Postal: IZA, P.O. Box 7240, D-53072 Bonn, Germany|
Phone: +49 228 3894 223
Fax: +49 228 3894 180
Web page: http://www.iza.org
|Order Information:|| Postal: IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Dale T. Mortensen & Christopher A. Pissarides, 1993.
"Job Creation and Job Destruction in the Theory of Unemployment,"
CEP Discussion Papers
dp0110, Centre for Economic Performance, LSE.
- Mortensen, Dale & Pissarides, Christopher, 2011. "Job Creation and Job Destruction in the Theory of Unemployment," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 1-19.
- Dale T. Mortensen & Christopher A. Pissarides, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Oxford University Press, vol. 61(3), pages 397-415.
- Rauch, James E., 1991. "Modelling the informal sector formally," Journal of Development Economics, Elsevier, vol. 35(1), pages 33-47, January.
- Amaral, Pedro S. & Quintin, Erwan, 2006. "A competitive model of the informal sector," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1541-1553, October.
- Fiess, Norbert M. & Fugazza, Marco & Maloney, William F., 2010. "Informal self-employment and macroeconomic fluctuations," Journal of Development Economics, Elsevier, vol. 91(2), pages 211-226, March.
- Pratap, Sangeeta & Quintin, Erwan, 2006. "Are labor markets segmented in developing countries? A semiparametric approach," European Economic Review, Elsevier, vol. 50(7), pages 1817-1841, October.
- Dabla-Norris, Era & Gradstein, Mark & Inchauste, Gabriela, 2008.
"What causes firms to hide output? The determinants of informality,"
Journal of Development Economics,
Elsevier, vol. 85(1-2), pages 1-27, February.
- Gabriela Inchauste & Mark Gradstein & Era Dabla-Norris, 2005. "What Causes Firms to Hide Output? the Determinants of Informality," IMF Working Papers 05/160, International Monetary Fund.
- Robert E. Lucas Jr., 1978. "On the Size Distribution of Business Firms," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 508-523, Autumn.
- Eliane El Badaoui & Eric Strobl & Frank Walsh, 2010.
"The formal sector wage premium and firm size,"
Open Access publications
10197/8052, School of Economics, University College Dublin.
- Pradhan, M.P. & van Soest, A.H.O., 1995.
"Formal and informal sector unemployment in urban areas of Bolivia,"
Other publications TiSEM
4b6b27c8-e099-40fd-bee4-3, Tilburg University, School of Economics and Management.
- Pradhan, Menno & van Soest, Arthur, 1995. "Formal and informal sector employment in urban areas of Bolivia," Labour Economics, Elsevier, vol. 2(3), pages 275-297, September.
- Pradhan, M. & Van Soest, A., 1993. "Formal and Informal Sector Employment in Urban Areas of Bolivia," Papers 9311, Tilburg - Center for Economic Research.
- Pradhan, M.P. & van Soest, A.H.O., 1993. "Formal and informal sector employment in urban areas of Bolivia," Discussion Paper 1993-11, Tilburg University, Center for Economic Research.
- Günther, Isabel & Launov, Andrey, 2012. "Informal employment in developing countries," Journal of Development Economics, Elsevier, vol. 97(1), pages 88-98.
- James Albrecht & Lucas Navarro & Susan Vroman, 2008.
"The Effects of Labour Market Policies in an Economy with an Informal Sector,"
ILADES-Georgetown University Working Papers
inv208, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.
- James Albrecht & Lucas Navarro & Susan Vroman, 2009. "The Effects of Labour Market Policies in an Economy with an Informal Sector," Economic Journal, Royal Economic Society, vol. 119(539), pages 1105-1129, 07.
- Albrecht, James & Navarro, Lucas & Vroman, Susan, 2006. "The Effects of Labor Market Policies in an Economy with an Informal Sector," IZA Discussion Papers 2141, Institute for the Study of Labor (IZA).
- James Albrecht & Lucas Navarro & Susan Vroman, 2006. "The Effects of Labor Market Policies in an Economy with an Informal Sector," Working Papers gueconwpa~06-06-06, Georgetown University, Department of Economics.
- Tokman, Víctor E., 1982. "Unequal development and the absorption of labour: Latin America 1950-1980," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), August.
- repec:dau:papers:123456789/1888 is not listed on IDEAS
- Ulyssea, Gabriel, 2010. "Regulation of entry, labor market institutions and the informal sector," Journal of Development Economics, Elsevier, vol. 91(1), pages 87-99, January.
- McKenzie, David & Sakho, Yaye Seynabou, 2007.
"Does It Pay Firms to Register for Taxes? The Impact of Formality on Firm Profitability,"
IZA Discussion Papers
3179, Institute for the Study of Labor (IZA).
- McKenzie, David & Seynabou Sakho, Yaye, 2010. "Does it pay firms to register for taxes? The impact of formality on firm profitability," Journal of Development Economics, Elsevier, vol. 91(1), pages 15-24, January.
- McKenzie, David & Sakho, Yaye Seynabou, 2007. "Does it pay firms to register for taxes ? the impact of formality on firm profitability," Policy Research Working Paper Series 4449, The World Bank.
- Olivier Bargain & Prudence Kwenda, 2011. "Earnings Structures, Informal Employment, And Self‐Employment: New Evidence From Brazil, Mexico, And South Africa," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 57, pages 100-122, 05.
- Fugazza, Marco & Jacques, Jean-Francois, 2004. "Labor market institutions, taxation and the underground economy," Journal of Public Economics, Elsevier, vol. 88(1-2), pages 395-418, January.
- Mazumdar, Dipak, 1975. "The Theory of Share-Cropping with Labour Market Dualism," Economica, London School of Economics and Political Science, vol. 42(167), pages 261-271, August.
- Cunningham, Wendy V & Maloney, William F, 2001.
"Heterogeneity among Mexico's Microenterprises: An Application of Factor and Cluster Analysis,"
Economic Development and Cultural Change,
University of Chicago Press, vol. 50(1), pages 131-156, October.
- Cunningham, Wendy V. & Maloney, William F., 1998. "Heterogeneity among Mexico's micro-enterprises - an application of factor and cluster analysis," Policy Research Working Paper Series 1999, The World Bank.
- Aysit Tansel, 1999. "Formal Versus Informal Sector Choice of Wage Earners and their Wages in Turkey," Working Papers 9927, Economic Research Forum, revised Sep 1999.
- Teal, Francis, 2011. "The price of labour and understanding the causes of poverty," Labour Economics, Elsevier, vol. 18(S1), pages 7-15.
When requesting a correction, please mention this item's handle: RePEc:iza:izadps:dp6604. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mark Fallak)
If references are entirely missing, you can add them using this form.