WIDER Working Paper 2015/042 On the effects of formalization on taxes and wages: Panel evidence from Vietnam

as its first research and training centre and started work in Helsinki, Finland in 1985. The Institute undertakes applied research and policy analysis on structural changes affecting the developing and transitional economies, provides a forum for the advocacy of policies leading to robust, equitable and environmentally sustainable growth, and promotes capacity strengthening and training in the field of economic and social policy-making. Work is carried out by staff researchers and visiting scholars in Helsinki and through networks of collaborating scholars and institutions around the world. The views expressed in this publication are those of the author(s). Publication does not imply endorsement by the Institute or the United Nations University, nor by the programme/project sponsors, of any of the views expressed. Abstract: 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. Acknowledgements: I would like to thank the Development Economics Research Group at the University of Copenhagen for granting access to the Vietnam data; in particular Finn Tarp; and Christina Kinghan for constructing the panel dataset. The views expressed here do not necessarily reflect those of the United Nations University.