Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/34288 
Year of Publication: 
2007
Series/Report no.: 
IZA Discussion Papers No. 3145
Publisher: 
Institute for the Study of Labor (IZA), Bonn
Abstract: 
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.
Subjects: 
Informal sector
wage premium
firm size
Document Type: 
Working Paper

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