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Enforcement of labor regulation and informality

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  • Rita Almeida
  • Pedro Carneiro

    ()
    (Institute for Fiscal Studies and University College London)

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.

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File URL: http://cemmap.ifs.org.uk/wps/cwp2911.pdf
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Bibliographic Info

Paper provided by Centre for Microdata Methods and Practice, Institute for Fiscal Studies in its series CeMMAP working papers with number CWP29/11.

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Date of creation: Sep 2011
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Handle: RePEc:ifs:cemmap:29/11

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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. 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).
  2. 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, vol. 92(2), pages 330-348.
  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. 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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