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Labor Market Regulation and Informality

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Abstract

This paper investigates informal employment in Brazil’s highly regulated labor market, focusing on the intensive margin of informality within formal firms. Using a comprehensive dataset of labor audits conducted from 1997 to 2012, we find that formal firms caught with informal workers face sustained slower growth. Informal workers are found across firms of all sizes, and their characteristics closely resemble those of formal employees. Building on these empirical findings, we develop a dynamic general equilibrium model where firms balance the flexibility of informality against potential costs. Our framework can be used to explore government policy implications and to examine the impact of audit strategies on informality, output, and workers’ welfare.

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  • Luiz Brotherhood & Daniel Da Mata & Nezih Guner & Philipp Kircher & Cezar Santos, 2023. "Labor Market Regulation and Informality," Working Papers wp2023_2308, CEMFI.
    • Handle: RePEc:cmf:wpaper:wp2023_2308
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    References listed on IDEAS

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    1. 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.
    2. Suresh de Mel & David McKenzie & Christopher Woodruff, 2013. "The Demand for, and Consequences of, Formalization among Informal Firms in Sri Lanka," American Economic Journal: Applied Economics, American Economic Association, vol. 5(2), pages 122-150, April.
    3. Slemrod, Joel & Yitzhaki, Shlomo, 2002. "Tax avoidance, evasion, and administration," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 22, pages 1423-1470, Elsevier.
    4. Erosa, Andrés & Fuster, Luisa & Martinez, Tomás R., 2023. "Public financing with financial frictions and underground economy," Journal of Monetary Economics, Elsevier, vol. 135(C), pages 20-36.
    5. Gordon, Roger & Li, Wei, 2009. "Tax structures in developing countries: Many puzzles and a possible explanation," Journal of Public Economics, Elsevier, vol. 93(7-8), pages 855-866, August.
    6. Sun, Liyang & Abraham, Sarah, 2021. "Estimating dynamic treatment effects in event studies with heterogeneous treatment effects," Journal of Econometrics, Elsevier, vol. 225(2), pages 175-199.
    7. Allen, Jeffrey & Nataraj, Shanthi & Schipper, Tyler C., 2018. "Strict duality and overlapping productivity distributions between formal and informal firms," Journal of Development Economics, Elsevier, vol. 135(C), pages 534-554.
    8. 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.
    9. Imbens,Guido W. & Rubin,Donald B., 2015. "Causal Inference for Statistics, Social, and Biomedical Sciences," Cambridge Books, Cambridge University Press, number 9780521885881, November.
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    Keywords

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    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • J1 - Labor and Demographic Economics - - Demographic Economics
    • J2 - Labor and Demographic Economics - - Demand and Supply of Labor
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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