Research Insights: How Does the Enforcement of Labor Market Regulations Affect Informality and Firms?

Labor inspections reduce informality but slow firm growth: inspections mandate formalization and impose fines, causing immediate compliance but long-term stagnation in growth for audited firms in Brazil. Informality is pervasive: both large and small firms hire informal workers, and informal workers are similar to formal employees in age, education, and gender but earn slightly less. Inspections dampen innovation and dynamism: firms subjected to audits innovate less, with declines in trademark registrations and organizational complexity.