Enforcement of Labor Regulation and Informality

Rita Almeida () and Pedro Carneiro

No 5902, IZA Discussion Papers from Institute of Labor Economics (IZA)

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.

Keywords: labor regulation; informality (search for similar items in EconPapers)
JEL-codes: J2 J3 (search for similar items in EconPapers)
Pages: 79 pages
Date: 2011-08
New Economics Papers: this item is included in nep-iue, nep-lab, nep-lma, nep-ltv and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Published - published in: American Economic Journal: Applied Economics, 2012, 4 (3), 64-89

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Related works:
Journal Article: Enforcement of Labor Regulation and Informality (2012)
Working Paper: Enforcement of labor regulation and informality (2011)
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