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Badaoui, Eliane
Strobl, Eric
Walsh, Frank A.
Year of Publication: 
Series/Report no.: 
IZA Discussion Papers 3145
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.
Informal sector
wage premium
firm size
Document Type: 
Working Paper

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