The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

This paper studies gross worker flows to explain the rising informality in Brazilian metropolitan labor markets from 1983-2002. This period covers two economic cycles, several stabilization plans, a farreaching trade liberalization, and changes in labor legislation through the Constitutional reform of 1988. Focusing first on cyclical patterns, we confirm Bosch and Maloney's (2006) findings for Mexico that the patterns of worker transitions between formality and informality correspond primarily to the job-to-job dynamics observed in the US and not to the traditional idea of informality constituting the inferior sector of a segmented market. However, we also confirm distinct cyclical patterns of job finding and separation rates that lead to the informal sector absorbing more labor during downturns. Second, focusing on secular movements in gross flows and the volatility of flows, we find the rise in formality to be driven primarily by a reduction in job finding rates in the formal sector. A small fraction of this is driven by trade liberalization, and the remainder seems driven by the rising labor costs and reduced flexibility arising from Constitutional reform.

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The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.