Discussion Paper Details

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Title: Enforcement of Regulation, Informal Labour, Firm Size and Firm Performance

Author(s): Rita Almeida and Pedro Carneiro

Publication Date: December 2006

Keyword(s): employment, informal sector, labour demand, labour markets, productivity and regulation

Programme Area(s): Development Economics and Labour Economics

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.

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Bibliographic Reference

Almeida, R and Carneiro, P. 2006. 'Enforcement of Regulation, Informal Labour, Firm Size and Firm Performance'. London, Centre for Economic Policy Research.