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