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Inequality and Employment in a Dual Economy: Enforcement of Labor Regulation in Brazil

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Author Info
Rita Almeida () (World Bank and IZA)
Pedro Carneiro () (University College London, IFS, cemmap and IZA)

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Abstract

This paper studies the impact of an increase in the enforcement of labor regulations on unemployment and inequality, using city level data from Brazil. We find that stricter enforcement (affecting the payment of mandated benefits to formal workers) leads to: higher unemployment, less income inequality, a higher proportion of formal employment, and a lower formal wage premium. Our results are consistent with a model where stricter enforcement causes a contraction in labor demand in the formal sector; and where workers value mandated benefits highly, so that there is an increase in the formal sector labor supply, an increase in the willingness to become unemployed to search for a formal sector job, and a decrease in labor supply to the informal sector.

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Publisher Info
Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3094.

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Length: 49 pages
Date of creation: Oct 2007
Date of revision:
Handle: RePEc:iza:izadps:dp3094

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Related research
Keywords: enforcement; labor regulations; inequality; unemployment; informal sector;

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Find related papers by JEL classification:
J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law
D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  2. Loayza, Norman V. & Oviedo, Ana Maria & Serven, Luis, 2005. "The impact of regulation on growth and informality - cross-country evidence," Policy Research Working Paper Series 3623, The World Bank. [Downloadable!]
  3. Ricardo J. Caballero & Eduardo M.R.A. Engel & Alejandro Micco, 2004. "Microeconomic Flexibility in Latin America," Working Papers 884, Economic Growth Center, Yale University. [Downloadable!]
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  4. Amaral, Pedro S. & Quintin, Erwan, 2006. "A competitive model of the informal sector," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1541-1553, October. [Downloadable!] (restricted)
  5. Ricardo J. Caballero & Kevin N. Cowan & Eduardo M.R.A. Engel & Alejandro Micco, 2004. "Effective Labor Regulation and Microeconomic Flexibility," Cowles Foundation Discussion Papers 1480, Cowles Foundation, Yale University, revised Oct 2006. [Downloadable!]
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  6. Rajan, Raghuram G & Zingales, Luigi, 1998. "Financial Dependence and Growth," American Economic Review, American Economic Association, vol. 88(3), pages 559-86, June. [Downloadable!] (restricted)
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  7. James Albrecht & Lucas Navarro & Susan Vroman, 2006. "The Effects of Labor Market Policies in an Economy with an Informal Sector," IZA Discussion Papers 2141, Institute for the Study of Labor (IZA). [Downloadable!]
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  8. Sebastian Galiani & Federico Weinschelbaum, 2007. "Modeling Informality Formally: Households and Firms," Working Papers 0047, CEDLAS, Universidad Nacional de La Plata. [Downloadable!]
  9. Alejandro Micco - Carmen Pages, 2004. "Employment Protection and Gross Job Flows1," Econometric Society 2004 Latin American Meetings 295, Econometric Society. [Downloadable!]
  10. Fields, Gary S., 1975. "Rural-urban migration, urban unemployment and underemployment, and job-search activity in LDCs," Journal of Development Economics, Elsevier, vol. 2(2), pages 165-187, June. [Downloadable!] (restricted)
  11. Lars Ljungqvist & Thomas J. Sargent, 1998. "The European Unemployment Dilemma," Journal of Political Economy, University of Chicago Press, vol. 106(3), pages 514-550, June. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Kaplan, David S. & Sadka, Joyce, 2008. "Enforceability of labor law : evidence from a labor court in Mexico," Policy Research Working Paper Series 4483, The World Bank. [Downloadable!]
  2. Bruhn, Miriam & Gallego, Francisco A., 2008. "Good, bad, and ugly colonial activities : studying development across the Americas," Policy Research Working Paper Series 4641, The World Bank. [Downloadable!]
    Other versions:
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