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Enforcement of Labor Regulation and Informality

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Author Info

  • Almeida, Rita K.

    ()
    (World Bank)

  • Carneiro, Pedro

    ()
    (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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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5902.

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Length: 79 pages
Date of creation: Aug 2011
Date of revision:
Publication status: published in: American Economic Journal: Applied Economics, 2012, 4 (3), 64-89
Handle: RePEc:iza:izadps:dp5902

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Keywords: labor regulation; informality;

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References

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  1. Lars Ljungqvist, 2002. "How Do Lay--off Costs Affect Employment?," Economic Journal, Royal Economic Society, vol. 112(482), pages 829-853, October.
  2. Alvarez, Fernando & Veracierto, Marcelo, 2001. "Severance payments in an economy with frictions," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 477-498, June.
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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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