Precarization or Protection? The Role of Trade and Labour Policies on Informality

Several episodes of market-oriented reforms in developing countries have been accompanied by a significant rise in work outside of the formal economy. This paper investigates whether the impact of trade on formal employment is mediated by the strength of labour regulations. We rely on data from the Brazilian Census that provides information on workers' demographics and employment, including job formality status. Our estimation strategy exploits quasi-exogenous changes in industry-level real exchange rates to explore the likelihood of informality across employers exposed to varying degrees of de facto labour regulations. We further utilize two key features of Brazilian labour institutions – budgetary decisions about the availability of resources occur at the federal level, while decisions about where to inspect occur at the local level – to instrument for labour enforcement. Our results suggest that strict labour regulations may lead to a precarization of employment, rather than offering protection for workers.