Can Weakened Unions Fuel Formal Work? Lessons from Brazil's Labor Reform. Guest post by Nikita Kohli

This is the 9th in this year’s series of posts by PhD students on the job market.

Unions play a crucial role in shaping labor market outcomes; recent work shows that they reduce inequality (Farber et al., 2021), improve working conditions (Corradini et al., 2023), and counteract monopsony power (Dodini et al., 2024). However, most of our understanding of unions comes from labor markets in developed economies, which are extremely different from markets in developing countries. One key difference is the prominence of labor informality; 60% of the global workforce is informally employed, with 93% of that share concentrated in developing nations (ILO). How do unions affect employment outcomes in such contexts?

I study this question in Brazil, where labor informality is widespread with 31% of wage workers being informally employed (Census 2010), and labor law enforcement is incomplete. In 2017, a labor reform made previously mandatory worker contributions to unions optional, leading to a dramatic decline in union resources. My job market paper explores the impact of this policy on local labor market wages and employment, looking at formal and informal labor market outcomes separately.

Labor Market Institutions in Brazil

Unions

Every formally contracted worker in Brazil is unionized; each worker is represented by a union in their sector/occupation. Unions play a crucial role in negotiating wages and benefits through Collective Bargaining Agreements (CBAs), which typically last 1-2 years (Lagos, 2024). Prior to 2017, each formally employed worker contributed one day's pay annually as a mandatory union tax, deducted in March. This system, in place since the 1940s, ensured stable funding for unions to maintain offices and staff. Although there were approximately 12,700 registered unions between 2012 and 2021, only about half actively engaged in CBA negotiations, leading to variations in union effectiveness across local labor markets.

Enforcement of labor laws

Brazil has some of the strictest labor regulations in the developing world, generating substantial benefits for formally hired workers, pensions, insurance, severance pay, but also high costs for employers. These costs, combined with complex compliance requirements, create strong incentives for firms to hire workers informally. Unlike in many developing countries where informality is mostly limited to small, unregistered businesses, formal firms in Brazil often employ both formal and informal workers side by side, performing similar tasks (Brotherhood et al., 2023, Ulyssea, 2018). In this paper, I focus on the activities of urban formal firms in the private sector which bargain with unions and are subject to labor regulations.

The extent to which formal firms can hire workers informally depends on level of labor law enforcement. Each state has local labor offices, and inspectors drive from these offices to firms to conduct audits. The intensity of inspections is influenced by distance to these offices - labor markets close to offices are inspected more (Almeida and Carneiro, 2012) - and by the influence of unions (Cardoso and Lage, 2005). Union officials sit in on planning committee meetings, where labor inspectors draw up plans of which firms to inspect.

2017 labor reform

In March 2017, Brazil announced a labor reform aimed at making formal hiring more attractive by reducing labor market rigidities. The primary change was to make union dues optional; workers could now choose whether to contribute, but they would still benefit from CBAs regardless of their decision. When the policy took effect in November 2017, the impact was immediate and severe - union revenues dropped by over 95% in the following years (see figure 1). This financial hit forced many unions to reduce staff, close offices, and as a consequence, negotiate fewer CBAs and play less of a role in facilitating inspections.

Figure 1: Actual and Projected union revenues

Studying the impacts of the policy

I use two main data sources to examine effects on employment outcomes: Relação Anual de Informações Sociais (RAIS), an administrative dataset covering the universe of formal employment, and the Pesquisa Nacional por Amostra de Domicílios Contínua (PNADC), a nationally representative household survey capturing informal employment. RAIS data were aggregated at the microregion level, a common proxy for local labor markets in Brazil. The PNADC offers higher-level geographic identifiers, I aggregate these data to a larger spatial unit than the microregion. I also incorporated administrative data on labor inspections, union activities, and CBAs from 2012.

To study the reform's impacts, I employ a difference-in-differences design, leveraging spatial variation in pre-reform union strength across local labor markets. I measure the fraction of each local labor market's formal workforce covered by collective bargaining agreements before the reform. This creates a continuous measure of "union effectiveness" that varies substantially across Brazil's microregions. The empirical strategy compares labor markets that had more effective unions before the reform (top 25% of union coverage) to those with less effective unions. I use a synthetic difference-in-differences approach that constructs an appropriate control group by matching pre-reform trends. This method combines elements of synthetic control methods with traditional difference-in-differences, allowing for a more robust analysis of the reform's effects.

Results and discussion

When unions weakened, monthly wages for formally employed workers fell by 0.9%, and formal employment decreased by 2.5% (see figure 2), even though formal workers became cheaper to hire. While overall employment levels remained stable, I find suggestive evidence of a 6.7% increase in informal hiring (the estimates for informality are noisier, owing to the larger spatial unit aggregation in PNADC).

Figure 2: Impact of weakening unions on the number of formally employed workers (logged)

The key mechanism explaining these results is the enforcement channel. Although the reform did not directly impact the capacity or resources for inspections, it altered their spatial distribution. Union staff previously assisted labor inspectors in identifying firms that hired workers informally, helping target inspections effectively. Unions have reason to try to keep informal hiring low; first, formally hired workers pay union taxes and informally hired workers are not unionized, and second, when firms are able to hire informally, it weakens unions' bargaining power over wages and amenities for unionized, formally hired workers. With fewer resources post-reform, unions could no longer participate as actively in these efforts. Inspections became more concentrated near labor offices, decreasing in more distant areas and making them more "distance-dependent."

The declines in formal employment and increases in informal employment were most pronounced in labor markets far from inspection offices, where enforcement weakened without union involvement. This suggests that firms substitute formally contracted workers with informal hires, a shift especially evident among low-skill workers who are easier to employ informally. This substitution pattern is consistent with recent research showing that workers on formal and informal contracts within the same firm often perform similar tasks. When inspections are effective, firms tend to formalize these informally hired workers (Samaniego de la Parra and Fernandez Bujanda, 2024, Brotherhood et al., 2023). Without union guidance in inspection planning, formal firms in areas with weaker enforcement increasingly turned to informal hiring.

Policy implications

The 2017 labor reform aimed to expand formal employment by weakening union power. While unions can make formal hiring more expensive, they also deter informal hiring by increasing the likelihood of inspections and penalties for non-compliance. Reducing union influence inadvertently lowered the expected cost of informal hiring for firms, shifting employment patterns.

These findings highlight the importance of considering the broader roles unions play in labor markets, particularly in developing economies where informality is prevalent, and regulation is imperfectly enforced. Policymakers should be cautious when designing labor market reforms that may weaken labor institutions, as these can have unintended consequences.

Nikita Kohli is a PhD student at the Sanford School of Public Policy at Duke University.