Informality and Productivity: Do Firms Escape EPL through Shadow Employment? Evidence from a Regression Discontinuity Design

Abstract

Compliance with labour law has costs and bene\u85ts which may depend on the institutional environment in which \u85rms operate. Although several studies have documented a negative e\ua4ect of informality on \u85rms\u92productivity and growth it is a fact that \u85rms may resort to undeclared employment to escape excessive tax or regulatory burden. We argue that \u85rms may respond to strict employment protection legislation through accrued informality thus (partially) o\ua4setting the negative e\ua4ect of informality on productivity. We exploit the Italian dismissal legislation imposing higher \u85ring costs for \u85rms with more than 15 workers and show that informality reduces the turnover of formal jobs for \u85rms above the 15 workers threshold; furthermore, while the overall e\ua4ect of informality on \u85rms\u92productivity is negative, the di\ua4erential e\ua4ect for \u85rms above the threshold as compared to smaller \u85rms is positive and signi\u85cant