The Efficiency-Equity Trade-off of Labor Market Regulations: Evidence from Brazilian Cities. PRELIMINARY. PLEASE DO NOT CITE

This paper investigates whether labor market regulations involve a trade-off between efficiency and equity. We use city level data on efficiency and equity outcomes, and we explore the regional variation in the enforcement of labor regulation across 5,513 Brazilian cities. Although not all of the variation in enforcement can be considered exogenous, we control for pre determined regional characteristics and instrument enforcement of regulation with the distance between each city and the location of an enforcement office, a measure of how costly is enforcement of labor regulations. Our findings suggest that a stricter enforcement of labor regulations is associated with a lower city level income inequality and/or poverty rates, although not with significantly lower labor productivity. The evidence also supports that stricter enforcement of labor regulation reduces the use of labor informality at the city level.