Labor Flows in Formal and Informal Labor Markets in Brazil

This paper compares hiring and separations over the business cycle in formal and informal labor markets in Brazil. Using a simple model with specificity in employment relationships, the paper shows that the consequences of employment protection can be described by an inverse relationship between the incidence and duration of employment. Employment protection moves labor markets along this curve, and formal and informal labor markets turn out to lie at opposite ends of it. In the formal sector, a reduction in employment is achieved by lowering the rate at which the unemployed get jobs. In the informal sector, the same reduction is achieved by raising the separation rate of workers in jobs. In principle, the restructuring mechanisms of each sector could be compatible with similar contributions to unemployment. In practice, contributions from the formal sector are more persistent. The contribution of the informal sector is stable and countercyclical.