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Enforcement of Labor Regulation and Informality

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  • Rita Almeida
  • Pedro Carneiro

Abstract

Enforcement of labor regulations in the formal sector may drive workers to informality because they increase the costs of formal labor. But better compliance with mandated benefits makes it attractive to be a formal employee. We show that, in locations with frequent inspections, workers pay for mandated benefits by receiving lower wages. Wage rigidity prevents downward adjustment at the bottom of the wage distribution. As a result, lower paid formal sector jobs become attractive to some informal workers, inducing them to want to move to the formal sector. (JEL J31, J63, J88, K31, O15)

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Journal: Applied Economics.

Volume (Year): 4 (2012)
Issue (Month): 3 (July)
Pages: 64-89

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Handle: RePEc:aea:aejapp:v:4:y:2012:i:3:p:64-89

Note: DOI: 10.1257/app.4.3.64
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Enforcement of Labor Regulation and Informality
    by maximorossi in NEP-LTV blog on 2011-08-23 20:23:36
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Cited by:
  1. Basu, Arnab K. & Chau, Nancy & Siddique, Zahra, 2011. "Tax Evasion, Minimum Wage Non-Compliance and Informality," IZA Discussion Papers 6228, Institute for the Study of Labor (IZA).
  2. Margolis, David N., 2014. "By Choice and by Necessity: Entrepreneurship and Self-Employment in the Developing World," IZA Discussion Papers 8273, Institute for the Study of Labor (IZA).
  3. Poschke, Markus, 2013. "The Decision to Become an Entrepreneur and the Firm Size Distribution: A Unifying Framework for Policy Analysis," IZA Discussion Papers 7757, Institute for the Study of Labor (IZA).
  4. Luz Adriana Flórez, 2014. "The Search and Matching Equilibrium in an Economy with an Informal Sector: A Positive Analysis of Labor Market Policies," Borradores de Economia 831, Banco de la Republica de Colombia.
  5. Paz, Lourenço S., 2014. "The impacts of trade liberalization on informal labor markets: A theoretical and empirical evaluation of the Brazilian case," Journal of International Economics, Elsevier, Elsevier, vol. 92(2), pages 330-348.
  6. Luz Adriana Flórez, 2014. "The Search and Matching Equilibrium in an Economy with an Informal Sector: A Positive Analysis of Labor Market Policies," BORRADORES DE ECONOMIA 011953, BANCO DE LA REPÚBLICA.
  7. Gindling, T. H. & Mossaad, Nadwa & Trejos, Juan Diego, 2014. "The Consequences of Increased Enforcement of Legal Minimum Wages in a Developing Country: An Evaluation of the Impact of the Campaña Nacional de Salarios Mínimos in Costa Rica," IZA Discussion Papers 8253, Institute for the Study of Labor (IZA).

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