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Enforcement of labor regulation and informality

  • Rita Almeida

    (Institute for Fiscal Studies)

  • Pedro Carneiro

    ()

    (Institute for Fiscal Studies and University College London)

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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File URL: http://cemmap.ifs.org.uk/wps/cwp2911.pdf
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Paper provided by Centre for Microdata Methods and Practice, Institute for Fiscal Studies in its series CeMMAP working papers with number CWP29/11.

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Date of creation: Sep 2011
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Handle: RePEc:ifs:cemmap:29/11
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