The Impact of Tax Exemptions on Labor Registration: The Case of Brazilian Domestic Workers

Abstract

Labor informality has long been a subject of public concern in Brazil, and across different occupations, domestic workers are the epitome of informal workers. In 2006, the Brazilian President approved a law to encourage employers to formally register their domestic employees this specific occupation. The present study uses various statistical approaches to investigate the effectiveness of this new law. Using different techniques, our results show that the law had no relevant impact on the formalization rates of domestic workers. Explanations for this result suggest that uncoordinated public policy initiatives may emphasize mixed goals, which prevents the achievement of any of the goals. On one hand, there continues to be a need for policy-level incentives that allow workers to deduct labor social security contributions from their personal income taxes, while on the other hand, other public policy initiatives, such as increases in the real minimum wage, provide disincentives to formalization.