How to combat informality in the labor market?

Responsible researcher: Viviane Pires Ribeiro

Article title: INFORMALITY IN THE LABOR MARKET AND THE IMPACT OF INSTITUTIONS: AN ANALYSIS FROM THE PERSPECTIVE OF GAME THEORY

Article authors: Fernando B. Meneguin and Maurício S. Bugarin

Location of intervention: Brazil

Sample size: Brazilian population

Sector: Job market

Type of Intervention : Analysis of informality from the perspective of game theory

Variable of main interest: Informality

Assessment method: Others - Game Theory

Assessment Context

There are imperfections in the labor market that have been taking up more and more space in national debates. These are issues related to high levels of unemployment, high rate of informality, frequency of litigation in labor courts, high income inequality, limited scope of labor laws and government interventions to provide assistance to workers.

Regarding informality, between 1991 and 2002, the Monthly Employment Survey (PME) of the Brazilian Institute of Geography and Statistics (IBGE) identified a growth in informal work relationships in metropolitan regions of almost ten percentage points on average. Informal employment relationships include salaried workers without a work permit and those who work on their own.

Some authors share the idea that the informal sector is one of the segments that most contributes to Brazilian poverty, even more than metropolitan unemployment, as workers who are in the informal sector are those who do not have a signed work card, and do not have the right to labor benefits, such as maternity leave, unemployment insurance and social security contributions.

Intervention Details

Meneguin and Bugarin (2008) carry out an analysis with a different approach to informal work relations, through Game Theory, seeking to understand the behavior of the agents involved – workers and employers and the effect of institutions on the functioning of the labor market. More specifically, the authors emphasize the interaction between informality and Labor Justice. To this end, data from the Brazilian Institute of Geography and Statistics, the World Bank and IPEA were used.

Methodology Details

In order to understand the relationships between agents in the labor market, Meneguin and Bugarin (2008) constructed a dynamic and infinite game, with complete information, with two players: workers and bosses. In the modeling, the worker will initially have two options, either he chooses to be self-employed and, in this situation, earns income Y or he prefers to be employed in company E. If he chooses to be salaried, the company's decision is then made. It will be able to register the employee, signing the work card, and pay, in addition to the remuneration, all labor charges that correspond to the benefits owed to the worker plus the employer contributions that the company collects from the government. Or, the firm may decide not to register the employee and keep him informal, paying only the remuneration r.

If the company registers the worker, the employment becomes formal and persists, without there being any opportunity for future strategic behavior. On the other hand, if the worker remains informal, he can settle down, receiving only his remuneration, or report the company to the Labor Court. If you do so, you will receive your remuneration plus a percentage of the employment benefits to which you would be entitled. In the model, it is adopted for simplicity that the employee reports the company and is fired simultaneously. Furthermore, if you are fired, you will remain self-employed.

If the employee is fired, the company will also have the option of hiring a new worker in the vacant position, as long as there is demand for work. Therefore, the firm's decision is restricted to keeping the informal worker, at the minimum cost of his salary r, or formalizing him, adding charges to the cost. The worker, in addition to deciding whether to become self-employed or look for a job, if he looks for a job and is hired informally, decides whether to report the company to court, and be fired, or remain silent in the face of informality, keeping his job.

Labor Justice is represented in the model by a parameter that increases or decreases employers' costs in terms of labor charges when there is a dispute and it is triggered. Intending to explain, with the game's Nash equilibria, how the time of informality to which the worker is subjected is determined, as well as a possible cause for the high labor turnover.

Results

The results found by Meneguin and Bugarin (2008) show that there is an equilibrium in which the employee is hired informally and, after a certain period, he has his work card signed. Thus, the model solution used by the authors allows us to conclude that, the more efficient the institutional framework, that is, the more the Labor Court forces employers to pay the full benefits to which employees would be entitled, the faster formalization will occur. of the employment contract in this balance in which the employer formalizes the work after an initial period without a formal contract.

The model confirms what appears to be the reality in certain labor markets in which, under certain conditions, the employer prefers to keep employees informal, even knowing that this will result in labor costs in court. That is, firms adopt the system of hiring informally and firing frequently, contributing to high labor turnover. Highlighting a sad convergence of the labor market towards a situation of stable informality at high levels. Despite the negative result, the study points out that the balance without registration does not exist if the Court can guarantee the worker a high percentage of recovery of benefits not paid by the firm during the period of informality. In this case, the firm prefers to sign the worker's card before he reports it to court.

Therefore, the main message of the balances found is that the more agile the Court is in judging labor actions, the shorter the time a worker will be kept in an informal situation before being formally hired by a company. The second important message says that the slower the courts are in judging labor claims, the greater the turnover of workers in jobs that are not formalized will be. On the other hand, the more agile the Labor Court is, the less likely it is that there will be an equilibrium in which employees never have their contracts signed.

Public Policy Lessons

To combat informality, the analysis carried out by Meneguin and Bugarin (2008) suggests adopting public policies such as reforming the Labor Court, making it more agile, with judgments that reflect the real rights of workers, or, perhaps, creating other instances conciliation between employees and employers not linked to the Judiciary, which guarantee speed and justice in labor disputes. According to this analysis, this reform has two important effects. Firstly, it makes firms sign the employment card more quickly, in the case of equilibrium with delayed registration, reducing the time of informality in the economy. Secondly, it can put an end to the disastrous balance in which the firm never signs the worker's card, replacing him with another informal worker when he takes legal action.

References

MENEGUIN, Fernando B.; BUGARIN, Maurício S. Informality in the labor market and the impact of institutions: an analysis from the perspective of game theory. Applied Economics, v. 12, no. 3, p. 341-363, 2008.