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The authors provide an analysis of enforcement policies applicable to informal labor market in a framework with heterogeneous firms, endogenous determination of informal wage and politically dictated strategies. The authors argue that firms which operate both in the formal and informal sectors do very little to increase employment when faced with the opportunity of hiring workers in the informal labor market. Thus enforcement of labor laws and other regulations should not have aggregate employment effects. For firms operating exclusively in the informal sector, the outcome is different. Such features determine the stringency of enforcement in a market characterized by firms with varying levels of productivity.
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