Labour Deregulation, Formal Employment, and Informality in Low- and Middle-Income Economies A critical synthesis of causal evidence from Latin America and comparative economies
Year: 2026
Type: article
Abstract: The claim that weaker employment protection reliably increases formal employment remains contested in economies characterised by extensive informality and limited enforcement. This critical review distinguishes dismissal legislation, fixed-term contracts, payroll contributions, minimum-wage rules, registration assistance and labour inspection, drawing on 66 substantive publications covering Latin America and other low- and middle-income settings. Quantitative findings are presented with theiroutcomes and populations: Colombia’s 2012 payroll-tax financing reform raised employment by 4.3% in the average formal firm, with gains concentrated in smaller employers; a randomized programme in Benin increased business registration by 9.6–16.3 percentage points without significant average profit or sales gains; and an inspection experiment in Brazil reported a 21–27 percentage-point local effect on business registration. Peru’s 88% informality rate among workers in firms eligible for a low-cost microenterprise regime illustrates that low formal hiring charges alone do not guarantee compliance, but is not a causal reform estimate. Results from enforcement and national deregulation studies differ across establishments, workers and time horizons. Study designs are evaluated against the relevant ROBINS-I, RoB 2 and GRADE principles, with the strength of inference distinguished from the economic size of an estimate. The evidence does not support a universal formal-employment dividend from reduced worker protection; it supports more specific, context-dependent effects of tax design, contract regulation and enforcement.
Institution: Universidad de Huelva
Language: English
Subfield: Economics and Econometrics
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W7225628624
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