On the Effects of Formalization on Taxes and Wages
Panel Evidence from Vietnam
Based on a unique panel dataset consisting of both formal and informal firms surveyed every other year from 2005 to 2013, this paper explores the benefits of formalization to the government and firm employees in Vietnam. We find that formalization benefits the government by increasing the amount and the likelihood of tax payments. Formalization also increases the wage level paid by firms that shift out of the informal sector, as well as the share of wages in value added. Our results are therefore supportive of governments’ efforts to reduce the size of the informal sector by promoting formalization.