Informality, Minimum Wages and Enforcement in Brazil

Transcrição

1 FOURTH IZA-WORLD BANK CONFERENCE ON EMPLOYMENT AND DEVELOPMENT Bonn, May 5-6, 2009 Informality, Minimum Wages and Enforcement in Brazil Brooke Helppie, University of Michigan Katherine Terrell, University of Michigan and IZA

2 Research Questions, Motivation, Contribution To what extent is informality due to more rigid labor market regulation? Brazil is a good case study since highly regulated and much informality But de jure regulation may not have an effect if not enforced Hence, we ask to what extent is informality affected by greater enforcement of labor regulations (and Minimum Wages in particular)? Brazil - Enforcement of labor legislation varies across states Large literature on MWs in Brazil and one new paper on enforcement (Almeida and Carneiro, 2008) but no paper there (or elsewhere) combines the two enforcement often used as a residual explanation

3 Research Questions, Motivation, Contribution Majority of MW literature identifies impact on employment in formal and informal sector without individual panel data shortcoming as measure it indirectly/net effect We ask to what extent do higher MWs and greater enforcement: Increase flows out of the formal (informal) sector (layoffs? change in status?) Reduce flows (hiring) into the formal (or informal) sector Does the structure of MWs make a difference? Brazil recently reinstated new higher state minimum wages (MWs) in several states

4 What do we mean by Informality? In Brazil workers who have a signed work card enjoy A minimum of 25 days of vacation; Maximum work week of 44 hours; Overtime premium of 50%; 13 th month pay; 4 months of maternity leave; 5 days paternity leave MW set a level necessary to pay for necessities of a worker and his or her family (including housing, food, education. Leisure, clothing, hygiene, transportation and social security) One month notice for firing Some UI, Fund for Unemployment

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6 What to expect in terms of informality? We might expect Increase in MW, holding Enforcement constant decline in E F (increase in flows out of E F ; decrease in flows in ) Increase in E INF, if this sector does not pay the MW decline in E INF, if this sector pays the MW Increase in Enforcement, holding MW constant increase or decrease in E F decline in E INF

7 What do we know about impact of MW? Informal Sector: Found to have a spike at the MW, But not clear whether E responds to changes in MW Elasticity of E w.r.t. MW <0 (Faynzylber, 2001; Lemos 2004) >0 (Carneiro, 2000; Carneiro et al., 2001) Formal Sector: Found to have a spike at the MW Elasticity of W w.r.t. MW ranges from 0 to large: (Veloso, 1990); N.S. (Soares, 2002) Elasticity of E w.r.t. MW typically small neg. or not. signif. : in long run (Carneiro et al., 2001; Lemos, 2004)

8 All Full-Time Workers : Formal v. Informal

9 Minimum Wages Today some states have one MW while others have multiple MWs Return to State level MWs : One National MW 2000-present: State wage floors allowed* 2000 Rio de Janeiro (3-tiered occupation-specific MW) 2001 Rio Grande do Sul (4-tiered Industry-specific MW) 2006 Parana 2007 Sao Paulo *Constitution only allows one MW but Article 7, para. 5 mandates wage floors commensurate with the level and difficulty of a job.

10 Table 3: Rio Grande do Sul (Porto Alegre) - Industrial Categories Covered by Each Minimum Wage Level ( ) Wage Level 1 a) na agricultura e na pecuária; b) nas indústrias extrativas; c) em empresas de pesca; d) empregados domésticos; e) em turismo e hospitalidade; f) nas indústrias da construção civil; g) nas indústrias de instrumentos musicais e brinquedos; h) em estabelecimentos hípicos. Wage Level 2 a) nas indústrias do vestuário e do calçado; b) nas indústrias de fiação e tecelagem; c) nas indústrias de artefatos de couro; d) nas indústrias do papel, papelão e cortiça; e) em empresas distribuidoras e vendedoras de jornais e revistas e empregados em bancas, vendedores ambulantes de jornais e revistas; f) empregados da administração das empresas proprietárias de jornais e revistas; g) empregados em estabelecimentos de serviços de saúde. Wage Level 3 a) nas indústrias do mobiliário; b) nas indústrias químicas e farmacêuticas; c) nas indústrias cinematográficas; d) nas indústrias da alimentação; e) empregados no comércio em geral; f) empregados de agentes autônomos do comércio. Wage Level 4 a) nas indústrias metalúrgicas, mecânicas e de material elétrico; b) nas indústrias gráficas; c) nas indústrias de vidros, cristais, espelhos, cerâmica de louça e porcelana; d) nas indústrias de artefatos de borracha; e) em empresas de seguros privados e capitalização e de agentes autônomos de seguros privados e de crédito; f) em edifícios e condomínios residenciais, comerciais e similares; g) nas indústrias de joalheria e lapidação de pedras preciosas; h) auxiliares em administração escolar (empregados de estabelecimentos de ensino).

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12 Rio de Janeiro MW Classification is by Occupations (movement from one wage level to another)

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14 Nominal Minimum Wage Increases (% Change from previous minimum wage) Year Month Federal Minimum 2002 May 11.11% 13.04% 13.19% 13.33% 13.20% Rio Grande do Sul Rio de Janeiro March 10.42% 15.00% 14.40% 13.85% 13.33% 12.86% May 20.00% 20.00% 20.00% 20.00% 20.00% 2004 January 9.43% 10.51% 10.49% 10.47% 10.46% 10.44% May 8.33% 8.33% 8.33% 8.33% June 8.33% 2005 January 6.90% 6.89% 6.96% 7.03% 7.10% 6.88% May 10.85% 10.85% 10.85% 10.85% June 15.38% 2006 January 13.33% 13.33% 13.33% 13.33% 13.33% 13.33% May 8.35% 8.35% 8.35% 8.35% June 16.67% 2007 January 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% May 8.57% 5.98% 5.98% 5.98% 5.98% 2008 January 10.70% 10.70% 10.70% 10.70% 10.70% 10.70% April 9.21%

15 Enforcement 1943 CLT (Consolidação das Leis do Trabalho) Gave system of labor courts a pre-eminent role in enforcement of contracts and dispute resolution. Three tiers: local (varas), regional, and superior Varas are the courts where individual workers or unions file their cases employer notified and invited to provide documents proving innocence. Employer bears full burden of proof. Biased toward workers. (80% of cases in Minas Gerais decided in favor of the worker Camargo, 2000) Lengthy process (average time 700 days from time of filing to resolution) Costly to employer (average - R$1,000 plus 2% for court; employees pay nothing)

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17 Pesquisa Mensal de Emprego (PME) January 2002 April 2008 ( new methodology data ) Six largest metropolitan areas Bahia (Salvador) Rio de Janeiro Pernambuco (Recife) Sao Paulo (Sao Paulo) Minas Gerais (Belo Horizonte) Random sample within each but relative size is proportional to population Between 12,000 to 20,000 observations per city in a given month Rotating panel

18 Impact of Minimum Wages and Enforcement Begin by seeing if an effect on wages

19 Estimation Strategy Analytical sample: Men, ages 15-70, first two observation Estimate wage effects On those who stay in the same job in t=0 and t=1 Separate estimates for those in formal and informal jobs Separate estimates for all, less educated, more educated Nominal wages and minimum wages, holding city specific inflation constant Base Regressions: W + is = α MWS + β EnfS + φ( MWS * EnfS ) + λ InfS µ is W is = α OMW + φ ( MMW 2 1 S S * Enf + α MMW S 2 ) + λ Inf S S + β Enf + µ is S + φ ( OMW 1 S * Enf S )

20 Preliminary findings using only Federal MW Individual First Difference Wage regression for workers who have a formal sector job at time t=0. without Enforcement with Enforcement All More Educ Less Educ All More Educ Less Educ ln(mw) [0.012]*** [0.015]*** [0.019]*** [0.059]** [0.075] [0.092]** Enforcement [0.063]* [0.081]** [0.102] Enforcement x ln(mw) [0.089]*** [0.115]*** [0.139]*** Observations Number of individuals Note: Panel data on individuals includes only first two observations for each individual. *significant at 10%; ** significant at 5%; *** significant at 1%. Marginal Effects with Enforcement: W/ MW - at mean Enforcement W/ Enforcement - at mean MW

21 Estimation Strategy Flow Analysis Effect of MW and Enforcement on flows 1. From formal jobs to other labor market states (firing) 2. From other labor market states into formal (hiring) Other states: informal, self-employed, unemployed, out of the labor force Things to consider: Need to control for business cycles, age, education, tenure, city specific effects Use nominal or real MW? Use lagged change in MW given inflexibility in firing Use OLS and not Probit

22 Table 7 Monthly Transition Matrix T=1 Employment Status T=0 Employment Statu FE IE SE UE OLF PB EM Total Fo rmal Employees 246,017 8,035 2,645 2,120 3,811 3, ,808 (FE) 92.21% 3.01% 0.99% 0.79% 1.43% 1.25% 0.32% % Informal Employees 10,020 67,276 8,138 3,311 5, ,099 96,028 (IE) 10.43% 70.06% 8.47% 3.45% 5.42% 1.02% 1.14% % Self Employed 2,849 8,562 99,516 2,449 5, , ,309 (SE) 2.29% 6.89% 80.06% 1.97% 4.08% 0.31% 4.40% % Unemployed 2,229 4,435 2,940 34,236 14, ,700 (UE) 3.80% 7.56% 5.01% 58.32% 24.64% 0.40% 0.27% % Out of Labor Force 2,947 5,906 5,477 15, , ,352 (OLF) 1.33% 2.66% 2.46% 6.90% 86.10% 0.36% 0.20% % Public 3, , ,898 (PB) 6.25% 1.73% 0.56% 0.39% 1.37% 89.49% 0.21% % Employer 898 1,205 5, ,180 35,427 (EM) 2.53% 3.40% 15.32% 0.45% 1.23% 0.35% 76.72% % Total 268,516 96, ,466 57, ,200 56,787 35, , % 11.20% 14.46% 6.72% 25.71% 6.60% 4.10% %

23 Flows from Formal Employment into Other States (Probit Analysis) From Formal Employment at time t-1 into the following states in time t: Informal Employees (IE) VERY Preliminary findings using FEDMW only Unemployed (U) Self-Employed (SE) Out of the Labor Force (OLF) Informal Employees (IE) Unemployed (U) Self-Employed (SE) Out of the Labor Force (OLF) ln(hourly MW)_t [0.240] [0.407] [0.386] [0.302] [0.496] [0.682] [0.635]* [0.781] Enforcement_t [0.399] [1.095] [0.787] [0.621] [Enforcement x ln(mw)_]t [0.638] [0.858] [0.995] [0.507] Observations Flows into Formal Employment - New Hires (Probit Analysis) Informal Employees (IE) Unemployed (U) From the following states in time t-1 into formal employment at time t: Self-Employed (SE) Out of the Labor Force (OLF) Informal Employees (IE) Unemployed (U) Self-Employed (SE) Out of the Labor Force (OLF) ln(mw)_t [0.254] [0.505] [0.405] [0.300]*** [0.527]*** [1.395] [0.841]*** [0.492]*** Enforcement_t [0.418]*** [0.813]* [1.069]*** [0.776]** [Enforce x ln(mw)] _t Standard errors in bracket, * significant at 10%; ** significant at 5%; *** significant at 1% [0.681]*** [1.068] [0.671]*** [0.614] Notes: Regression includes, Exper and Exper2, dummies for completed years of education, city, year and month fixed effects. The hourly minimum wage is the National minimum in 1997 Reais. Recife is the base city and "no education" the base for the education variables.

24 Preliminary Findings and Next Steps Findings: MWs increase Ws in formal, especially less educated Higher enforcement raises W of less educated; no effect on W of more educated MW alone has no effect on flows out of or into formal; When interacted with enforcement may dampen flows into formal Next Steps: Implement what we propose: Estimate flows for informal Debug the Rio de Janeiro data so as to estimate MMW Incorporate leads and lags of MWs Collect more enforcement data Consider instruments for MWs (political variables) to explain endogeneity of MMW choice