Labor Regulations and the Cost of Corruption: Evidence from the Indian Firm Size Distribution

Amrit Amirapu (The University of Kent)
Michael Gechter (The Pennsylvania State University)

Abstract : In this paper, we estimate the costs associated with a suite of labor regulations in India whose components have gone largely unstudied in developing countries. We take advantage of the fact that these regulations only apply to firms above a size threshold. Using distortions in the firm size distribution at the threshold together with a structural model of firm size choice, we estimate that the regulations increase firms’ unit labor costs by 35%. We document a robust positive association between regulatory costs and exposure to corruption, which may explain why regulations appear to be so costly in developing countries.

Tax Evasion and Productivity: Do Firms Escape Epl Through Informality? Evidence from a Regression Discontinuity Design

Giovanna Vallanti (LUISS "Guido Carli")
Giuseppina Gianfreda (Università della Tuscia)

Abstract : Tax compliance has costs and benefits which may depend on the institutional environment in which firms operate. The relationship between tax evasion and productivity is not always unambiguous and firm size can be a crucial issue whenever firms are constrained by the institutional framework in a measure that depends on their size. We argue that firms may respond to string employment protection legislation through accrued informality thus (partially) offsetting the negative effect of tax evasion on productivity. We exploit the Italian dismissal legislation imposing higher firing costs for firms with more than 15 workers and show that tax evasion reduces job turnover for firms above the 15 workers threshold; furthermore, while the overall effect of tax evasion on firms' productivity is negative, the differential effect for firms above the threshold as compared to smaller firms is positive and significant.

Unemployment Insurance with Informal Labor Markets: Evidence from Brazil

Bernardus van Doornik (Central Bank of Brazil)
David Schoenherr (Princeton University)
Janis Skrastins (Washington University in St. Louis)

Abstract : Recent years have seen a rapid expansion of unemployment insurance (UI) programs to mid-income and developing countries with large informal labor markets. Using the universe of formal labor contracts in Brazil and an unexpected UI reform, this paper examines how UI affects workers' incentives in the presence of informal labor markets. Exploiting a sharp discontinuity in the reform's effect, we find that eligibility for UI benefits increases formal unemployment inflow by nine percent. This effect is mainly driven by workers in labor markets with a high degree of informality. Collusion between workers and their employers accounts for at least 16-17 percent of strategic unemployment; firms hire workers informally while they are eligible for UI benefits and rehire them formally when benefits are exhausted. Additionally, making it easier to qualify for UI benefits leads to a shift in labor supply from informal to formal labor markets and a decrease in wages for formal relative to informal jobs within the same local industry.