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Institutions, Informality, and Wage Flexibility

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  • Irineu E. Carvalho Filho
  • Marcello M. Estevão

Abstract

Even though institutions are created to protect workers, they may interfere with labor market functioning, raise unemployment, and end up being circumvented by informal contracts. This paper uses Brazilian microeconomic data to show that the institutional changes introduced by the 1988 Constitution lowered the sensitivity of real wages to changes in labor market slack and could have contributed to the ensuing higher rates of unemployment in the country. Moreover, the paper shows that states that faced higher increases in informality (i.e., illegal work contracts) following the introduction of the new Constitution tended to have smaller drops in wage responsiveness to macroeconomic conditions, thus suggesting that informality serves as a escape valve to an over-regulated environment.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/84.

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Length: 27
Date of creation: 01 Mar 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/84

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Keywords: Economic models; Labor markets; Unemployment; wage; wages; unemployment rate; employment; unemployed; unemployment rates; local unemployment; benefits; worker; labor income; total employment; wage adjustment; equilibrium unemployment; rate of unemployment; high unemployment; labor demand; payroll; wage adjustments; equilibrium unemployment rate; national unemployment rate; unemployment benefits; employment arrangements; self-employment; rates of unemployment; high unemployment rates; measuring unemployment; informal employment; unemployment levels; regional unemployment; equilibrium unemployment rates; wage bargaining; labor policy; employment effects; national unemployment; compensation; formal ? employment; minimum wages; employment protection; wage rate; unemployed individuals; employment levels; informal employment arrangements; minimum wage; natural rate of unemployment; maternity leave;

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References

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  1. Jose Scheinkman & Aureo de Paula, 2007. "The Informal Sector," 2007 Meeting Papers 117, Society for Economic Dynamics.
  2. Moulton, Brent R., 1986. "Random group effects and the precision of regression estimates," Journal of Econometrics, Elsevier, vol. 32(3), pages 385-397, August.
  3. Baltagi, Badi H. & Blien, Uwe & Wolf, Katja, 2008. "New Evidence on the Dynamic Wage Curve for Western Germany: 1980–2004," IZA Discussion Papers 3433, Institute for the Study of Labor (IZA).
  4. Pinelopi K. Goldberg & Nina Pavcnik, 2003. "The Response of the Informal Sector to Trade Liberalization," NBER Working Papers 9443, National Bureau of Economic Research, Inc.
  5. Ricardo Paes de Barros & Carlos Henrique Corseuil, 2001. "The Impact of Regulations on Brazilian Labor Market Performance," Research Department Publications 3124, Inter-American Development Bank, Research Department.
  6. Pedro Cavalcanti Ferreira & Roberto Ellery Jr & Victor Gomes, 2005. "Produtividade Agregada Brasileira (1970-2000): Declínio Robusto E Fraca Recuperação," Anais do XXXIII Encontro Nacional de Economia [Proceedings of the 33th Brazilian Economics Meeting] 062, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  7. Sanz de Galdeano, Anna & Turunen, Jarkko, 2005. "Real wages and local unemployment in the euro area," Working Paper Series 0471, European Central Bank.
  8. de Carvalho Filho, Irineu & Chamon, Marcos, 2011. "The myth of post-reform income stagnation: Evidence from Brazil and Mexico," MPRA Paper 28532, University Library of Munich, Germany.
  9. Ulyssea, Gabriel, 2010. "Regulation of entry, labor market institutions and the informal sector," Journal of Development Economics, Elsevier, vol. 91(1), pages 87-99, January.
  10. David Card, 1995. "The Wage Curve: A Review," Working Papers 722, Princeton University, Department of Economics, Industrial Relations Section..
  11. Irineu E. Carvalho Filho & Marcos Chamon, 2008. "The Myth of Post-Reform Income Stagnation," IMF Working Papers 08/197, International Monetary Fund.
  12. Alm, James & Bahl, Roy & Murray, Matthew N, 1991. "Tax Base Erosion in Developing Countries," Economic Development and Cultural Change, University of Chicago Press, vol. 39(4), pages 849-72, July.
  13. Pedro Cavalcanti Ferreira & JosÈ Luiz Rossi, 2003. "New Evidence from Brazil on Trade Liberalization and Productivity Growth," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(4), pages 1383-1405, November.
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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Institutions, Informality, and Wage Flexibility: Evidence from Brazil
    by Maximo Rossi in Wikiprogress América Latina on 2012-04-25 20:05:00
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Cited by:
  1. Ahmed, Waqas & Choudhary, M. Ali & Khan, Sajawal & Naeem, Saima & Zoega, Gylfi, 2014. "Determinants of wage stickiness in a developing economy," Economic Modelling, Elsevier, vol. 38(C), pages 296-304.
  2. M. Ali Choudhary & Saima Mahmood & Sajawal Khan & Waqas Ahmed & Gylfi Zoega, 2013. "Sticky Wages in a Developing Country: Lessons from Structured Interviews in Pakistan," School of Economics Discussion Papers 0213, School of Economics, University of Surrey.

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