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American Economic Journal: Applied Economics: Vol. 4 No. 3 (July 2012)

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Enforcement of Labor Regulation and Informality

Article Citation

Almeida, Rita, and Pedro Carneiro. 2012. "Enforcement of Labor Regulation and Informality." American Economic Journal: Applied Economics, 4(3): 64-89.

DOI: 10.1257/app.4.3.64

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. (JEL J31, J63, J88, K31, O15)

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Authors

Almeida, Rita (IZA, Bonn and World Bank)
Carneiro, Pedro (U College London and Institute for Fiscal Studies, London)

JEL Classifications

J31: Wage Level and Structure; Wage Differentials
J63: Labor Turnover; Vacancies; Layoffs
J88: Labor Standards: Public Policy
K31: Labor Law
O15: Economic Development: Human Resources; Human Development; Income Distribution; Migration

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