Working Paper: CEPR ID: DP15960
Authors: Gabriel Ulyssea; Vladimir Ponczek
Abstract: How does enforcement of labor regulations shape the labor market effects of trade? Does the informal sector introduce greater de facto flexibility, reducing employment losses during bad times? To tackle these questions, we exploit local economic shocks generated by trade liberalization and variation in enforcement capacity across local labor markets in Brazil. In the aftermath of the trade opening, regions with stricter enforcement observed: (i) lower informality effects; (ii) larger losses in overall employment; and (iii) greater reductions in the number of formal plants. Regions with weaker enforcement observed opposite effects. All these effects are concentrated on low-skill workers. Our results indicate that greater de facto labor market flexibility introduced by informality allows both formal firms and low-skill workers to cope better with adverse labor market shocks.
Keywords: Trade; Informality; Labor Market Flexibility
JEL Codes: F16; J46; J32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| stricter enforcement of labor regulations (J88) | lower levels of informality (J46) |
| stricter enforcement of labor regulations (J88) | larger losses in overall employment (F66) |
| stricter enforcement of labor regulations (J88) | greater reductions in the number of formal plants (Q52) |
| weaker enforcement (P14) | higher informality (J46) |
| weaker enforcement (P14) | lower employment losses (J65) |
| greater de facto labor market flexibility provided by informality (J46) | better coping with adverse labor market shocks (J68) |
| strict enforcement (K40) | greater employment losses (J65) |
| weaker enforcement (P14) | informal employment as a buffer (J46) |
| low enforcement capacity (K40) | stronger increase in self-employment (J23) |
| low enforcement capacity (K40) | shift from formal to informal employment (J46) |