Abstract
• There have be extensive studies on the role of formalization in firm performance, but limited evidence as to how that practice indirectly affects employee welfare. • Using instrument variable approaches for an employer-employee panel dataset from Vietnamese SME surveys during the 2009–2015 period. • We find that formalization has an insignificant effect on employee wages. However, positive relationships between formalization and non-monetary employee benefits have been noted, including a formal contract for workers, health insurance, annual leave, severance payment and retirement pay. • Also significant are several potential mechanisms though which formalization has a positive effect on other workers’ welfare, including an improvement in value added and a reduction in the amount firms spend on bribes. There have be extensive studies on the role of formalization in firm performance, but limited evidence as to how that practice indirectly affects firm investment in human capital. Using instrument variable approaches for an employer-employee panel dataset from Vietnamese SME surveys during the 2009–2015 period, this study finds that formalization has an insignificant effect on employee wages. However, positive relationships between formalization and non-monetary employee benefits have been noted. Also significant are several potential mechanisms though which formalization has a positive effect on workers’ welfare, including an improvement in value added and a reduction in the amount firms spend on bribes.
Published Version
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