Institutions, Informality, and Wage Flexibility: Evidence From Brazil

Author/Editor:

Irineu E de Carvalho Filho ; Marcello M. Estevão

Publication Date:

March 1, 2012

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

Even though institutions are created to protect workers, they may interfere with labor market functioning, raise unemployment, and end up being circumvented by informal contracts. This paper uses Brazilian microeconomic data to show that the institutional changes introduced by the 1988 Constitution lowered the sensitivity of real wages to changes in labor market slack and could have contributed to the ensuing higher rates of unemployment in the country. Moreover, the paper shows that states that faced higher increases in informality (i.e., illegal work contracts) following the introduction of the new Constitution tended to have smaller drops in wage responsiveness to macroeconomic conditions, thus suggesting that informality serves as a escape valve to an over-regulated environment.

Series:

Working Paper No. 2012/084

Subject:

Labor Labor markets Unemployment Unemployment rate Wages

English

Publication Date:

March 1, 2012

ISBN/ISSN:

9781475502367/1018-5941

Stock No:

WPIEA2012084

Pages:

27

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