When the Inspector Knocks at the Door: Effects of Labor Inspections in Brazil

This paper estimates the effects of labor inspections in Brazil. Inspections reduce es-tablishment employment by about 8% within three years, driven mainly by lower hiring, with modest wage declines. Both deterrence and punishment shape these responses: even non-penalized firms contract, while penalties amplify effects, especially on wages. At the worker level, inspections do not reduce long-term employment. Stayers experience slower wage growth, whereas leavers gain wages by moving to higher–wage-premium firms. Inspections thus foster compliance but induce establishment contraction, with worker reallocation mitigating costs and highlighting the dual effects of enforcement.