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Heterogeneous Returns of Informality: Evidence From Brazil

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  • Andrea Otero-Cortés

Abstract

This paper estimates the marginal treatment effect of informality on wages for Brazil at the individual level using regional data on labor inspectors for identification. The results show that there is significant essential heterogeneity among otherwise identical workers that lead them to self-select into the type of jobs, formal or informal, that better reward their skills. The Average Treatment Effect (ATE) is 22%, but not statistically different from zero. But there are individuals with very low non-observed costs of formality that in fact earn premiums of up to 100% of their wage rate from being formal and workers who would be hurt from switching to formality as they experience very high non-observed costs of being formal. Two policy experiments in which we tighten enforcement of the labor law via hiring more labor inspectors increases the likelihood of workers being formal, but it has, on average, a negative effect on wages for the workers who are induced to switch from informality to formality. **** RESUMEN: Este documento estima para Brasil el efecto marginal de la formalidad laboral en los salarios a nivel individual utilizando una combinación de datos regionales sobre inspecciones laborales y actividad económica. Los resultados muestran que existe una heterogeneidad esencial significativa entre trabajadores que son idénticos en sus características observadas, que los lleva a auto-seleccionarse en el tipo de trabajos, formales o informales, que recompensan mejor sus habilidades. El efecto promedio del tratamiento (ATE) es del 22%, pero no es estadísticamente diferente de cero. Sin embargo, hay individuos con costos de formalidad no observados muy bajos que de hecho ganan primas de hasta el 100% de su salario por ser formales y trabajadores que se verían perjudicados por cambiar a la formalidad ya que experimentan costos no observados muy altos de ser formales. Dos experimentos de políticas en los que imponemos una aplicación más estricta de la ley laboral mediante la contratación de más inspectores laborales aumenta la probabilidad de que los trabajadores sean formales, pero tiene, en promedio, un efecto negativo en los salarios de los trabajadores que son inducidos a pasar de la informalidad a la formalidad.

Suggested Citation

  • Andrea Otero-Cortés, 2022. "Heterogeneous Returns of Informality: Evidence From Brazil," Documentos de Trabajo Sobre Economía Regional y Urbana 20176, Banco de la República, Economía Regional.
    • Handle: RePEc:col:000102:020176
    DOI: 10.32468/dtseru.310
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    1. Maloney, William F., 2004. "Informality Revisited," World Development, Elsevier, vol. 32(7), pages 1159-1178, July.
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    More about this item

    Keywords

    Labor informality; labor regulation; enforcement; marginal treatment effects; Informalidad laboral; regulación laboral; aplicación; efectos marginales de tratamiento;
    All these keywords.

    JEL classification:

    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
    • J46 - Labor and Demographic Economics - - Particular Labor Markets - - - Informal Labor Market
    • K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law

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