Enforcement of Labor Regulation and Informality

79 Pages Posted: 15 Aug 2011

See all articles by Rita Almeida

Rita Almeida

World Bank; IZA Institute of Labor Economics

Pedro Manuel Carneiro

University College London - Department of Economics; IZA Institute of Labor Economics

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: informality, labor regulation

JEL Classification: J2, J3

Suggested Citation

Almeida, Rita and Carneiro, Pedro Manuel, Enforcement of Labor Regulation and Informality. IZA Discussion Paper No. 5902, Available at SSRN: https://ssrn.com/abstract=1909382 or http://dx.doi.org/10.2139/ssrn.1909382

Rita Almeida (Contact Author)

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Pedro Manuel Carneiro

University College London - Department of Economics ( email )

Gower Street
London WC1E 6BT, WC1E 6BT
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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