Informality in an economy with active labour courts

Abstract

Job regulations and the justice branch interfere on several aspects of labour contracts. We build a model which explores the role of labour courts on the wage distribution in both formal and informal sectors. We obtain that the presence of active labour courts produces a negative relation between the wage gap and the productivity of the worker, a regularity documented in the empirical literature. Active labour courts also reduce informality of unskilled workers but do not have an impact on informality of skilled workers. Some elements and implications of our model are tested using Brazilian data.