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Enforcement of regulation, informal labor and firm performance

Authors: Rita Almeida and Pedro Carneiro
Date: 01 March 2009
Type: Journal article, Journal of Comparative Economics, Vol. 37, No. 1
DOI: 10.1596/1813-9450-3756


This paper investigates how enforcement of labor regulation affects the firm's use of informal labor and 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 is also associated with lower labor productivity. We control for different regional and firm characteristics, and we instrument enforcement with a measure of the access of labor inspectors to firms. Taken together, our findings suggest that increased access to labor flexibility significantly improves firm performance.

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Previous version:
Rita Almeida and Pedro Carneiro January 2006, Enforcement of regulation, informal labor and firm performance, cemmap Working Paper, CWP02/06

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