Informal and small: How Labor Market Institutions Affect Inequality, Income Volatility and Labor Productivity in Brazil

Mar 30, 2021

This paper outlines the main labor market regulations, social protection programs and tax regimes and how they affect formalization, inequality, income volatility, and firm size and productivity in Brazil. We argue that the current social protection system creates incentives for low-skilled workers to remain informal, increase turnover, and may contribute to the large income volatility. Moreover, special tax regimes and special contributory systems for poor independent workers may subsidize small and less productive firms, thus resulting in misallocation of labor and capital, as well as increasing inequality. Overall, the social protection system in Brazil is redistributive, but its progressive features could be enhanced, especially regarding the pension system. Reforms in the whole system could increase efficiency and reduce inequality at the same time.

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