Large Firms and the Intensive Margin of Labor Informality Evidence from an Enforcement Intervention in Peru

Mariano Bosch (), Guillermo Cruces (), Stephanie González and María Teresa Silva-Porto
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Mariano Bosch: Inter American Development Bank
Guillermo Cruces: Universidad de San Andrés-CONICET, University of Nottingham
Stephanie González: CEDLAS-FCE-UNLP
María Teresa Silva-Porto: Inter American Development Bank

No 172, Working Papers from Universidad de San Andres, Departamento de Economia

Abstract: In developing countries, informal labor is not only employed by illegal or unregistered firms but also by legal firms that hire workers informally, known as the intensive margin of labor informality. Reducing this type of work may have ambiguous effects on formal employment, depending on factors such as firm size and productivity. In collaboration with Peru’s labor inspection authority, we conducted a randomized mailing experiment targeting large firms with a high propensity for employing workers informally. The authority sent letters with either deterrence messages detailing fines for non-compliance or social norms messages highlighting the positive impacts of formality. We analyzed the impact of this intervention on formal employment levels over the following two years using monthly administrative data. The treated firms (particularly those in the deterrence treatment arm) and larger firms increased their formal employment levels. However, these increases followed a seasonal pattern coinciding with the high labor demand during the tourist season, suggesting that prior to the intervention, firms were employing temporary workers informally. The higher perceived cost of non-compliance led them to formalize some of these workers. The informal hiring of seasonal workers by these firms appears to have been motivated by basic tax evasion, and the absence of a negative effect on firm-level formal employment indicates that the firms were exploiting rents from low enforcement of regulations.

Keywords: Randomized Controlled Trial; Social Security; Tax Audit; Tax Evasion; Mailing; Informality; Labor formalization (search for similar items in EconPapers)
JEL-codes: C93 D91 H55 J46 O17 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2025-09, Revised 2025-09
New Economics Papers: this item is included in nep-bec, nep-dev, nep-exp, nep-iue, nep-lam, nep-lma and nep-sbm
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