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Enforcement of Labour Regulation and Informality

Authors: Pedro Carneiro and Rita Almeida
Date: 02 July 2012
Type: Journal article, American Economic Journal: Applied Economics, vol. 4(3); pp. 64-89


Enforcement of labour regulations in the formal sector may drive workers to informality because they increase the costs of formal labour. 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.

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Previous version:
Rita Almeida and Pedro Carneiro September 2011, Enforcement of labor regulation and informality, cemmap Working Paper, CWP29/11

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