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Enforcement of Labor Regulation and Informality

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Author Info

  • 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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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/app.4.3.64
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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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  1. Alvarez, Fernando & Veracierto, Marcelo, 2001. "Severance payments in an economy with frictions," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 477-498, June.
  2. Lars Ljungqvist, 2002. "How Do Lay--off Costs Affect Employment?," Economic Journal, Royal Economic Society, vol. 112(482), pages 829-853, October.
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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. 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).

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