Enforcement Of Regulation, Informal Labor, Firm Size, And Firm Performance

This paper investigates how enforcement of labor regulation affects the firm's use of informal labor, firm size and firm performance. Using firm level data on employment, capita, and output, census data on informal employment at the city level, and administrative data on enforcement of regulation at the city level, it is shown that in areas where law enforcement is stricter firms employ a smaller proportion of informal workers. Furthermore, by reducing the firm's access to unregulated labor stricter enforcement is also associated with smaller firms, less fluid labor markets, and (possibly) lower labor productivity.