Institutions, Informality, and Wage Flexibility: Evidence from Brazil

27 Pages Posted: 10 May 2012

See all articles by Marcello M. Estevão

Marcello M. Estevão

affiliation not provided to SSRN

Irineu E. Carvalho Filho

affiliation not provided to SSRN

Date Written: March 2012

Abstract

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.

Keywords: Wage Flexibility, Informal Work, Regulations, Economic Models, Labor Markets, Unemployment

JEL Classification: E26, J30, J50

Suggested Citation

Estevão, Marcello M. and Carvalho Filho, Irineu E., Institutions, Informality, and Wage Flexibility: Evidence from Brazil (March 2012). IMF Working Paper No. NO.12/84, Available at SSRN: https://ssrn.com/abstract=2055584

Marcello M. Estevão (Contact Author)

affiliation not provided to SSRN

No Address Available

Irineu E. Carvalho Filho

affiliation not provided to SSRN

No Address Available

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