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)
"Enforcement of Labor Regulation and Informality."
American Economic Journal: Applied Economics,
Wage Level and Structure; Wage Differentials
Labor Turnover; Vacancies; Layoffs
Labor Standards: Public Policy
Economic Development: Human Resources; Human Development; Income Distribution; Migration