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How do firms respond to enforcement of labour regulations? The role of nonwage compensation

Abstract

There is an open debate on how governments can help the creation of higher quality jobs. One of the instruments that policymakers can use to foster job quality is the enforcement of mandated benefits in the labor code. Stricter enforcement increases job quality through a direct effect on compliance with the mandatory benefits. However, as enforcement of mandated benefits leads to higher labour costs, firms may choose to decrease the demand for labor, decrease wages or adjust nonwage benefits. The main aim of this project is to determine whether stricter enforcement of labour regulations leads to improved job quality measures. Specifically, this proposal aims to address three main questions (i) How much of the decrease in informality and increase in wages in Brazil in the 2000s is due to more labor inspections?, (ii) How firms when adjusting to increased labor costs due to stricter enforcement may circumvent downward wage rigidities by reducing nonwage benefits of formal jobs? And (iii) What are the welfare impacts of increases in labor inspections in the presence of nonwage compensation? We will examine these questions by first providing reduced-form evidence for the impacts of enforcement of labor market regulations on several labor market outcomes, including wage and nonwage benefits. We will explore unique administrative data on the enforcement of labor market regulations across Brazilian cities between 1996 and 2006. Next, to complement our empirical analysis, we will develop and estimate a structural labor market model that will allow studying counterfactual scenarios and performing a welfare analysis. (AU)

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