Do labor inspections make a difference? An analysis of establishments in Brazil

Abstract

Establishments worldwide experience a trade-off between following the law and incurring higher labor costs or evading regulations and running the risk of being punished. In this context, labor inspection is the main public policy that aims to reduce the gap between laws on paper and compliance by society. This paper studies how inspections affect firms’ outcomes in Brazil. We explore the fact that firms are not warned about the inspection act, which makes the timing exogenous. We combine data of firms inspected between 2007 and 2017 with employer-employee administrative data (RAIS). Using a sample with companies inspected only once in the period or never inspected that had between 10 and 500 employees on the baseline (first quarter in the dataset) and event study/difference-in-difference approaches, we find that receiving the inspection negatively affects the establishment. There is a decline in all eight quarters after the inspection in employment, hiring, separation and wages. The average effect is 16.47%, 17.39%, 11.31% and 4.26% respectively. We also document a little change in labor composition due to inspection, more flexible contracts and fewer hours contracted. Moreover, establishments in the construction and services sector are most affected, as are companies with 50 to 100 employees. We argue that the main channel can be through increasing labor costs.