Informality, firm performance and labor market outcomes: Evidence from Matched Employer-employee Data for Morocco 1

How do micro-firms relate to informality? Is informality systematically associated with firm performance? What does informal employment in micro-firms really mean? To answer these questions we use matched employer-employee data on firms with up to 5 workers and all their workers from the Moroccan Enterprise Survey of Micro-firms 2007. Our main findings are as follows. First, the strongest predictors of a firm lack of registration are the owner’s level of education, having started the business following from a period of unemployment, absence of business with larger firms, and concerns about tax increase and labor law enforcement. Second, even among small and similar firms, those choosing to register have better performance, including higher labor productivity and likelihood of producing a level of income classified as satisfactory by the owner. Third, informal employment goes beyond informal firms: 55% of the workforce of registered firms is informal. It is mainly associated with labor market-unrelated workers’ characteristics, such as household size and being a married woman. Similarly, worker gender is the sole systematic determinant of hours worked. Besides being systematically related to age and education, wages of informal workers rise with the number of children and household size, and tend to be higher for the head of the household, suggesting a higher bargaining power and that informality may be in itself a coping mechanism with vulnerability. Nonetheless, firms’ characteristics play an important role in wage determination, particularly labor productivity and, to a smaller extent, size. Finally, while there is no significant wage (or hours worked) premium to formality, earnings of informal entrepreneurs tend to be significantly higher than those of informal salaried workers.