Determinants and performance of the formal sector

: evidence from data of small and medium enterprises in North Africa

Abstract

This paper analyses what the determinants of firm formality are and the impact of that formality on firm productivity and paid wages. Using a matched firm-entrepreneur dataset for two North African countries, we conclude that firm size and age as well as the age and education of the entrepreneur have a significant and positive impact on the likelihood of firm formality. In opposite direction, firms with a seasonal activity or with a single plant are more likely to be informal. We also provide empirical evidence supporting the view that, ceteris paribus, formal firms have a better performance. We use the OLS estimate to show that formal firms have a higher productivity in Egypt and in Morocco, 10% and 34% respectively. These results are robust to instrument possible endogenous variables, such as the firm registration and the number of workers. Lastly, the evidence dealt with is not conclusive enough to support the idea that formal firms pay a premium to their workers in comparison to the wages paid by their counterparts in the informal sector.

Date of Award	2011
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Rita Almeida (Supervisor) & Leonor Modesto (Co-Supervisor)