Mandated Benefits, Employment, and Inequality in a Dual Economy
This paper studies the effect of enforcing labor regulation in an economy with a dual labor market. The analysis uses data from Brazil, a country with a large informal sector and strict labor law, where enforcement affects mainly the degree of comp...
| Main Authors: | , |
|---|---|
| Format: | Policy Research Working Paper |
| Language: | English |
| Published: |
2012
|
| Subjects: | |
| Online Access: | http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20091109160938 http://hdl.handle.net/10986/4311 |
| Summary: | This paper studies the effect of
enforcing labor regulation in an economy with a dual labor
market. The analysis uses data from Brazil, a country with a
large informal sector and strict labor law, where
enforcement affects mainly the degree of compliance with
mandated benefits (severance pay and health and safety
conditions) in the formal sector, and the registration of
informal workers. The authors find that stricter enforcement
leads to higher unemployment but lower income inequality.
They also show that, at the top of the formal wage
distribution, workers bear the cost of mandated benefits by
receiving lower wages. Wage rigidity (due, say, to the
minimum wage) prevents this downward adjustment at the
bottom of the income distribution. As a result, formal
sector jobs at the bottom of the wage distribution become
more attractive, inducing the low-skilled self-employed to
search for formal jobs. |
|---|