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Enforcement of labor regulation, informal labor, and firm performance

  • Almeida, Rita
  • Carneiro, Pedro

This paper investigates how enforcement of labor regulation affects the firm's use of informal employment and its impact on firm performance. Using firm level data on informal employment and firm performance, and administrative data on enforcement of regulation at the city level, the authors show that in areas where law enforcement is stricter firms employ a smaller amount of informal employment. Furthermore, by reducing the firm's access to unregulated labor, stricter enforcement also decreases average wages, productivity, and investment. The results are robust to several specification changes, and to instrumenting enforcement with (1) measures of access of labor inspectors to firms, and (2) measures of general law enforcement in the area where the firm is located.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3756.

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Date of creation: 01 Oct 2005
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Handle: RePEc:wbk:wbrwps:3756
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  1. Ricardo Paes de Barros & Carlos Henrique Corseuil, 2001. "The Impact of Regulations on Brazilian Labor Market Performance," Research Department Publications 3124, Inter-American Development Bank, Research Department.
  2. Maloney, William F., 2004. "Informality Revisited," World Development, Elsevier, vol. 32(7), pages 1159-1178, July.
  3. Loayza, Norman V., 1996. "The economics of the informal sector: a simple model and some empirical evidence from Latin America," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 45(1), pages 129-162, December.
  4. James Heckman & Carmen Pages, 2003. "Law and Employment: Lessons from Latin America and the Caribbean," NBER Working Papers 10129, National Bureau of Economic Research, Inc.
  5. Kugler, Adriana & Kugler, Maurice, 2003. "The Labor Market Effects of Payroll Taxes in a Middle-Income Country: Evidence from Colombia," IZA Discussion Papers 852, Institute for the Study of Labor (IZA).
  6. Besley, Timothy J. & Burgess, Robin, 2002. "Can Labour Regulation Hinder Economic Performance? Evidence from India," CEPR Discussion Papers 3260, C.E.P.R. Discussion Papers.
  7. Richard Layard & Stephen Nickell, 1998. "Labour Market Institutions and Economic Performance," CEP Discussion Papers dp0407, Centre for Economic Performance, LSE.
  8. Juan Botero & Simeon Djankov & Rafael Porta & Florencio C. Lopez-De-Silanes, 2004. "The Regulation of Labor," The Quarterly Journal of Economics, MIT Press, vol. 119(4), pages 1339-1382, November.
  9. Scarpetta, Stefano & Tressel, Thierry, 2004. "Boosting productivity via innovation and adoption of new technologies : any role for labor market institutions?," Policy Research Working Paper Series 3273, The World Bank.
  10. Francine D. Blau & Lawrence M. Kahn, 1994. "International Differences in Male Wage Inequality: Institutions versus Market Forces," NBER Working Papers 4678, National Bureau of Economic Research, Inc.
  11. Jonathan Gruber, 1995. "The Incidence of Payroll Taxation: Evidence from Chile," NBER Working Papers 5053, National Bureau of Economic Research, Inc.
  12. Loayza, Norman V. & Oviedo, Ana Maria & Serven, Luis, 2005. "The impact of regulation on growth and informality - cross-country evidence," Policy Research Working Paper Series 3623, The World Bank.
  13. Giuseppe Nicoletti & Stefano Scarpetta, 2003. "Regulation, productivity and growth: OECD evidence," Economic Policy, CEPR;CES;MSH, vol. 18(36), pages 9-72, 04.
  14. Johnson, Simon & Kaufmann, Daniel & Zoido-Lobaton, Pablo, 1998. "Regulatory Discretion and the Unofficial Economy," American Economic Review, American Economic Association, vol. 88(2), pages 387-92, May.
  15. Steven D. Levitt, 1995. "Using Electoral Cycles in Police Hiring to Estimate the Effect of Policeon Crime," NBER Working Papers 4991, National Bureau of Economic Research, Inc.
  16. Steven D. Levitt, 1997. "Juvenile Crime and Punishment," NBER Working Papers 6191, National Bureau of Economic Research, Inc.
  17. Svensson, Jakob, 2002. "Who Must Pay Bribes and How Much? Evidence from a cross-section of firms," Seminar Papers 713, Stockholm University, Institute for International Economic Studies.
  18. Thomas J. Holmes, 1998. "The Effect of State Policies on the Location of Manufacturing: Evidence from State Borders," Journal of Political Economy, University of Chicago Press, vol. 106(4), pages 667-705, August.
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