Enforcement of labor regulation, firm dynamics and financial frictions

• Grant number: 22/06950-0
• Support Opportunities: Scholarships in Brazil - Doctorate (Direct)
• Effective date (Start): June 01, 2023
• Effective date (End): August 28, 2025
• Field of knowledge: Applied Social Sciences - Economics - Growth, Fluctuations and Economic Planning
• Principal Investigator: Marcelo Rodrigues dos Santos
• Grantee: Thaline do Prado
• Host Institution: Instituto de Ensino e Pesquisa (Insper). São Paulo , SP, Brazil
• Associated scholarship(s): 23/08746-3 - Enforcement of labor regulation, firm dynamics and financial frictions, BE.EP.DD

Abstract

In this research, we propose to study the enforcement of labor regulation in an economy with imperfect credit market. Our goal is twofold. First, we will assess how enforcement of labor regulation affects firm dynamics and firms' relationship with the credit market. Second, we will investigate the role of financial frictions in driving the effects of stricter enforcement of labor regulation on firms and aggregate outcomes. For the first objective, we will use Brazilian firm-level data to estimate the effect of labor inspections on firm dynamics and firm credit outcomes. For the second goal, we will develop a general equilibrium model of firm dynamics with the following ingredients: informal labor employment, labor inspections, labor matching frictions, asymmetric information on entrepreneurs' productivity and default endogenous decision. The latter is key in our model and makes financial frictions sensitive to informality costs. The model will be calibrated to match the Brazilian economy. Then, we will conduct counterfactual exercises to understand how financial frictions shape the impacts of policies that increase the costs of informality. Our main contribution in this research is to investigate how enforcement of labor regulation affects firm dynamics and aggregate outcomes in an economy with an underdeveloped financial market. (AU)