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Institutions, Informality, and Wage Flexibility: Evidence From Brazil

  • Irineu E. Carvalho Filho
  • Marcello M. Estevão

Even though institutions are created to protect workers, they may interfere with labor market functioning, raise unemployment, and end up being circumvented by informal contracts. This paper uses Brazilian microeconomic data to show that the institutional changes introduced by the 1988 Constitution lowered the sensitivity of real wages to changes in labor market slack and could have contributed to the ensuing higher rates of unemployment in the country. Moreover, the paper shows that states that faced higher increases in informality (i.e., illegal work contracts) following the introduction of the new Constitution tended to have smaller drops in wage responsiveness to macroeconomic conditions, thus suggesting that informality serves as a escape valve to an over-regulated environment.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/84.

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Length: 27
Date of creation: 01 Mar 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/84
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  1. Aureo de Paula & Jose A Sheinkman, 2007. "The Informal Sector," Levine's Bibliography 122247000000001663, UCLA Department of Economics.
  2. Irineu E. Carvalho Filho & Marcos Chamon, 2008. "The Myth of Post-Reform Income Stagnation: Evidence from Brazil and Mexico," IMF Working Papers 08/197, International Monetary Fund.
  3. Pedro Cavalcanti Ferreira & Roberto Ellery Jr & Victor Gomes, 2005. "Produtividade Agregada Brasileira (1970-2000): Declínio Robusto E Fraca Recuperação," Anais do XXXIII Encontro Nacional de Economia [Proceedings of the 33th Brazilian Economics Meeting] 062, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  4. Ricardo Paes de Barros & Carlos Henrique Corseuil, 2004. "The Impact of Regulations on Brazilian Labor Market Performance," NBER Chapters, in: Law and Employment: Lessons from Latin America and the Caribbean, pages 273-350 National Bureau of Economic Research, Inc.
  5. David Card, 1995. "The Wage Curve: A Review," Journal of Economic Literature, American Economic Association, vol. 33(2), pages 285-299, June.
  6. Goldberg, Pinelopi Koujianou & Pavcnik, Nina, 2003. "The Response of the Informal Sector to Trade Liberalization," CEPR Discussion Papers 3874, C.E.P.R. Discussion Papers.
  7. Alm, James & Bahl, Roy & Murray, Matthew N, 1991. "Tax Base Erosion in Developing Countries," Economic Development and Cultural Change, University of Chicago Press, vol. 39(4), pages 849-72, July.
  8. Badi H. Baltagi & Uwe Blien & Katja Wolf, 2008. "New Evidence on the Dynamic Wage Curve for Western Germany: 1980-2004," Center for Policy Research Working Papers 103, Center for Policy Research, Maxwell School, Syracuse University.
  9. Moulton, Brent R., 1986. "Random group effects and the precision of regression estimates," Journal of Econometrics, Elsevier, vol. 32(3), pages 385-397, August.
  10. 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.
  11. Sanz de Galdeano, Anna & Turunen, Jarkko, 2005. "Real wages and local unemployment in the euro area," Working Paper Series 0471, European Central Bank.
  12. Pedro Cavalcanti Ferreira & JosÈ Luiz Rossi, 2003. "New Evidence from Brazil on Trade Liberalization and Productivity Growth," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(4), pages 1383-1405, November.
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