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.
Authors
![Pedro Carneiro](/sites/default/files/styles/square_desktop/public/2022-07/Pedro_Carneiro.jpg?itok=jj8qq067)
Research Fellow University College London
Pedro is a Professor of Economics at University College London and an economist in the IFS' Centre for Microdata Methods and Practice (cemmap).
![Person graphic](/sites/default/files/styles/square_desktop/public/2022-06/IFS-person-graphic.png?itok=hWCtTSrz)
Rita Almeida
Journal article details
- Publisher
- American Economic Journal
- JEL
- J31; J63; J88; K31; O15
- Issue
- July 2012
Suggested citation
Almeida, R and Carneiro, P. (2012). 'Enforcement of Labour Regulation and Informality' (2012)
More from IFS
Understand this issue
![Isabel Stockton](/sites/default/files/styles/square_desktop/public/2024-06/Isabel-public-finances.jpg?itok=JfdJNN7F)
What are the challenges in getting debt on a falling path?
28 June 2024
![Microphone](/sites/default/files/styles/square_desktop/public/2024-06/Microphone.jpg?itok=soM7Wvbz)
Election Special: Your questions answered
27 June 2024
![Tom Waters](/sites/default/files/styles/square_desktop/public/2024-06/tom%20waters.jpg?itok=faDtwS3F)
What is the two-child limit in benefits?
27 June 2024
Policy analysis
![Welsh town with mountains behind](/sites/default/files/styles/square_desktop/public/2024-06/Welsh-town-feature.jpg?itok=5axb5wZn)
How would the parties’ tax and spending plans affect Scotland and Wales?
28 June 2024
![Breakfast club](/sites/default/files/styles/square_desktop/public/2024-06/Breakfast-club.jpg?itok=dEyGgrwT)
Free breakfast clubs in schools: what Labour’s plans would mean for pupils and families
25 June 2024
![Polling station](/sites/default/files/styles/square_desktop/public/2024-06/Polling-station-school.jpg?itok=uS-l6b-1)
What are the parties’ plans for benefits and taxes?
24 June 2024
Academic research
![Fiscal Studies - 2024 - June cover](/sites/default/files/styles/portrait/public/2024-06/Fiscal%20Studies%20-%202024%20-%20-%20June%20cover.jpg?itok=mQEwRc_w)
Components of the evolution of income inequality in Sweden, 1990–2021
28 June 2024
![Fiscal Studies - 2024 - June cover](/sites/default/files/styles/portrait/public/2024-06/Fiscal%20Studies%20-%202024%20-%20-%20June%20cover.jpg?itok=mQEwRc_w)
Fiscal Studies: Volume 45, Issue 2
28 June 2024
![Fiscal Studies - 2024 - June cover](/sites/default/files/styles/portrait/public/2024-06/Fiscal%20Studies%20-%202024%20-%20-%20June%20cover.jpg?itok=mQEwRc_w)
Income inequality in Ireland, 1987–2019
28 June 2024