Labor Market Institutions and Restructuring: Evidence from Regulated and Unregulated Labor Markets in Brazil

Abstract

This paper compares patterns of hiring and separations in regulated and unregulated labor markets over the last two decades in Brazil, with an eye toward gauging the effects of employment protection on employment adjustment over the business cycle. Since the difference between the sectors is stark and well-defined, the consequences of employment protection on flows through the labor market are relatively easy to discern. Employment protection causes adjustment to demand fluctuations to come at the expense of the unemployed. A reduction in employment in the regulated labor market is achieved by lowering the rate at which the unemployed get jobs. In the unregulated market, the same reduction is achieved by raising the separation rate. In principle, the restructuring mechanisms of both sectors could be compatible with similar contributions to unemployment. In practice, contributions from the regulated sector are more persistent and erratic. The contribution of the unregulated sector is stable and countercyclical.

Keywords: Labor market institutions, incomplete contracts, informal sector, severance pay, business cycle fluctutations

JEL Classification: J64, J65, E24