Enforcement of Regulation, Informal Labor and Firm Performance

47 Pages Posted: 15 Oct 2005

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

Date Written: September 2005

Abstract

This paper investigates how enforcement of labor regulation affects the firm's use of informal employment and its impact on firm performance. Using firm level data on informal employment and firm performance, and administrative data on enforcement of regulation at the city level, we show that in areas where law enforcement is stricter firms employ a smaller amount of informal employment. Furthermore, by reducing the firm's access to unregulated labor, stricter enforcement also decreases average wages, productivity and investment. Our results are robust to several specification changes, and to instrumenting enforcement with 1) measures of access of labor inspectors to firms and 2) measures of general law enforcement in the area where the firm is located.

Keywords: informal sector, labor market regulation, labor demand, flexibility, productivity

JEL Classification: J3, J6, O17

Suggested Citation

Almeida, Rita and Carneiro, Pedro Manuel, Enforcement of Regulation, Informal Labor and Firm Performance (September 2005). IZA Discussion Paper No. 1759, Available at SSRN: https://ssrn.com/abstract=822868 or http://dx.doi.org/10.2139/ssrn.822868

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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