Labor Market Regulation and Informality (Discussion Paper)

Developing countries are characterized by a high share of informal workers and several types of labor market regulation. We study the effects of the enforcement of this type of regulation on firm dynamics in Brazil, using different linked administrative data sets. Using a difference-in-differences design, we show that firms caught with informal workers experience a slowdown in their growth rates that last several years. Informal workers are present in firms of all sizes. Formal and informal workers exhibit almost identical observable characteristics.