We develop a search model of informal labour markets with realistic labour regulations, including minimum wage, and heterogeneous workers and firms. Smaller firms and lower wages in the informal sector emerge endogenously as firms and workers decide whether to comply with regulations. Because skilled and unskilled workers are imperfect substitutes in production, the model uniquely captures the informality consequences of shocks that affect returns to skill, such as rising educational levels. The model also reproduces empirical patterns incompatible with other frameworks: the presence of skilled and unskilled workers in the formal and informal sectors, the rising share of skilled workers by firm size, and formal and firm-size wage premiums that vary by skill level. We estimate the model using 2003 data from Brazil and show that it successfully predicts labour market changes observed between 2003 and 2012. Under a range of different assumptions, changes in workforce composition appear as the main drivers of the reduction in informality over this period. Policy simulations using the estimated model suggest that progressive payroll taxes are a cost-effective way to reduce informality.

This paper documents an externality from the agricultural use of the most widely applied herbicide in the world—glyphosate—on birth outcomes of surrounding populations. We focus on the subclinical effects of water contamination in areas distant from the original locations of application. Our identification relies on: (i) the regulation allowing the introduction of genetically modified seeds in Brazil; (ii) the potential gain in municipality-level productivity from adoption of genetically modified soybean seeds and the strong complementary between these seeds and glyphosate; and (iii) the direction of water flow within water basins. We document a significant deterioration in birth outcomes for populations downstream from locations that are likely to have increased relatively more the use of glyphosate. According to our preferred specification, the average increase in glyphosate use in the sample during 2000–10 period led to an increase of 5% of the average in infant mortality rate.