Violation and Enforcement of Workplace Regulations: Evidence from Mexican Firm Inspections

With Agustina Colonna and Lukas Rodrian

This paper studies the characteristics of large formal firms that violate workplace regulations and analyzes how regulatory enforcement affects firms and workers. A stylized model of monopsonistic firms - in which employers set both wages and working conditions - shows that high levels of labor market power can lead to violations in workplace regulations, and that the enforcement of such regulations can raise firm employment through an expansion of labor supply. To test the model’s predictions, we use administrative records of stratified random firm inspections in Mexico, which enforce compliance with workplace safety, health regulations, and mandatory worker training. We link these records to panel surveys and administrative employer-employee data for large manufacturing firms. We find that firms are more likely to be found violating regulations if they invest less in worker training, have lower productivity, employ a smaller share of women, and employ a larger share of the local labor market. Furthermore, inspections tend to increase regulatory compliance, reflected in greater investment in worker training, fewer workplace accidents, and a lower likelihood of future violations. Using a staggered difference-in-differences design, we estimate that inspections increase firm employment by 4 to 7% within one year. Average firm wages decrease by less than 2%, driven by changes in worker composition rather than changes in individual wage setting. Our results indicate that enforcing workplace regulations in large manufacturing firms can be an effective policy tool for improving working conditions, mitigating labor market power, and simultaneously increasing firm employment.