Enforcement of labor regulations in the formal sector may drive workers to informality because they increase the costs of formal labor. 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
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).
Rita Almeida
Working Paper details
- DOI
- 10.1920/wp.cem.2011.2911
- Publisher
- IFS
Suggested citation
Almeida, R and Carneiro, P. (2011). Enforcement of labor regulation and informality. London: IFS. Available at: https://ifs.org.uk/publications/enforcement-labor-regulation-and-informality (accessed: 30 June 2024).
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