Trade liberalization, labor reforms and formal–informal employment dynamics

This paper studies gross worker flows to explain the rise in informality in Brazilian metropolitan labor markets from 1983 to 2002. In particular, we examine the impact of trade and constitutional reforms (that include increased firing costs, tighter restrictions on overtime work, and fewer restrictions on union activity) occurring during the period. We find aggregate sectoral movements to be driven largely by changes in the hiring rates which, in turn are driven largely by the constitutional reforms. Trade liberalization accounts for roughly 1–2.5% of the increase in informality, while the constitutional reforms account for 30–40%.

► We study the 10 percentage point increase in informality in Brazil during the 1990s.
► We study two explanations, trade liberalization and the constitutional reform.
► Trade liberalization accounts for roughly 1–2.5% of the increase in informality.
► The constitutional reforms account for 30–40% of the increase in informality.