In-Person Labor Inspection and Enforcement
RCTReview
Informal firms gain an unfair cost advantage over tax-paying formal businesses because low enforcement levels reduce the perceived likelihood and financial penalty of operating informally [2, 11].
Picture this
Think of speed limits on a highway. If drivers know there are no police cruisers monitoring the road, many will speed without fear. Stationing physical police cruisers along the highway dramatically increases the visible probability of getting caught, forcing drivers to slow down and follow the law.
What the evidence says
In-person labor inspections increased worker formalization in Brazil and Mexico, but increased worker dismissal rates in Mexico and reduced overall job creation due to higher informal employment costs [11, 12].
- Who was studied
- Informal firms and workers in Brazil [11] and Mexico [12].
- How
- Randomized Controlled Trial and quasi-experimental enforcement evaluation [11, 12].
What to do
Conduct targeted physical in-person labor inspections to increase the perceived risk and cost of non-compliance among informal employers.
From the source
"In Brazil, researchers found that in-person inspections increased formalization [11]."
JOI_Brazil_Evidence_in_Labor_Market_Policies_and_Implications_for.pdf