Abstract
Abstract How does enforcement of labour regulations shape the labour market effects of trade? We combine local economic shocks generated by the unilateral trade liberalisation in Brazil and enforcement variation across regions to show that regions with stricter enforcement observed: (i) lower informality; (ii) larger losses in overall employment; (iii) greater reductions in the number of formal plants. Regions with weaker enforcement experienced opposite effects. All these effects are concentrated on low-skill workers. Our results indicate that greater flexibility introduced by informality allows both formal firms and low-skill workers to cope better with adverse labour market shocks.
Highlights
EDN Many developing countries, most notably in Latin America, underwent major trade liberalisationU episodes in the 1980s and early 1990s (Goldberg and Pavcnik, 2007)
The results show that regions with higher enforcement capacity observe lower informality but greater non-employment effects as a response to the trade shock
Our results indicate that greater de facto labour market flexibility introduced by informality allows both formal firms and low-skill workers to cope better with adverse labour market shocks
Summary
N Many developing countries, most notably in Latin America, underwent major trade liberalisation. The results show that regions with higher enforcement capacity observe lower informality but greater non-employment effects as a response to the trade shock. The opposite is observed in regions where enforcement capacity is weak and de facto labour market flexibility is high: there are strong informality effects, but no statistically significant effects on employment and greater survival of formal firms These effects are completely driven by low-skill workers. SC Again, considering a high intensity local trade shock (tariff reduction of 0.1 log points), low-skill workers U in a region with weak enforcement – 0.9 inspections per 100 firms (the 10th percentile) – would experience N an increase of 12.1 percentage points in informality but no disemployment effects.
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