Labour Deregulation, Formal Employment, and Informality in Low- and Middle-Income Economies A critical synthesis of causal evidence from Latin America and comparative economies

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.