Working Paper: CEPR ID: DP5976
Authors: Rita Almeida; Pedro Carneiro
Abstract: This paper investigates how enforcement of labour regulation affects the firm's use of informal labour, firm size and firm performance. Using firm level data on employment, capita, and output, census data on informal employment at the city level, 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 proportion of informal workers. Furthermore, by reducing the firm's access to unregulated labour stricter enforcement is also associated with smaller firms, less fluid labour markets, and (possibly) lower labour productivity. We control for different regional and firm characteristics, and we instrument enforcement with the distance between firm location and the location of an enforcement office, a measure of access of labour inspectors to firms. Taken together, our findings suggest that increased access to labour flexibility frees the firm from growth constraints, and it is likely to contribute to an improvement in productivity.
Keywords: employment; informal sector; labour demand; labour markets; productivity; regulation
JEL Codes: H00; H10; J50; K20; L50; L60; O17; O40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increased costs associated with hiring informal workers (J46) | Firm size (L25) |
| Increased costs associated with hiring informal workers (J46) | Firm productivity (D21) |
| Enforcement of labour regulation (J88) | Proportion of informal workers employed by firms (J46) |
| Each additional inspection per 100 firms in a city (R38) | Average employment (J20) |
| Each additional inspection per 100 firms in a city (R38) | Output (Y10) |
| Each additional inspection per 100 firms in a city (R38) | Capital stock (E22) |
| Enforcement of labour regulation (J88) | Firm size (L25) |
| Enforcement of labour regulation (J88) | Firm productivity (D21) |