the proportion of the adult population in each employment category.<sup>22</sup> Registered and unregistered wage earners, self-employed, and non-employed individuals, together account for 87% of the adult population.<sup>23</sup> Therefore, in the empirical work we focus on these four groups. Informal employment and self-employment are considered two separate categories, as emphasized in the recent literature (Maloney, 2004, Fields, 1990, 2005). Finally, we have also computed some measures of past informality, poverty and inequality in the city using the 1980 Brazilian census.<sup>24</sup> In 2002, there are 5,513 cities in Brazil.

Third, we use detailed information on other city level characteristics from two statistical and research institutes in Brazil - _Instituto de Pesquisa Economica Aplicada_ (IPEA), and _Instituto Brasileiro de Geografia e Estatistica_ (IBGE).<sup>25</sup> In particular, we collect information on the city‟s GDP per capita (2000), total number of firms (2000), average firm size (2000), share of agriculture in GDP (2000), share of manufacturing in GDP (2000), share of services in GDP (2000), geographical city characteristics (including geographical area, altitude, longitude and latitude), city transportation costs (1995), total federal transfers to each city (1990), the city head count poverty index and the city Theil inequality index. The total number of firms (2002) in each city comes from the _Cadastro Central de Empresas_ , collected by _IBGE_ , which only includes formal firms. We also use past city level variables published by IPEA for the years 1970, 1980, and 1991, including city population, per capita income, average years of schooling and share of population in urban areas. Because some of the cities in 2000 did not exist in the 70‟s, 80‟s or even 1991, we use the more aggregate definition of minimum comparable unit (MCU), published by the IPEA, to obtain an estimate of these city variables in previous years.<sup>26</sup> For all cities in a given year, we know to which MCU each city was previously mapped into. Then, we computed

> 22 In the 2000 Census, each individual is classified into one of the following 10 categories: registered domestic worker, unregistered domestic workers, registered wage earner, unregistered wage earner, employer, self-employed, unpaid apprentice, unpaid employee (usually in family business), working for self-consumption, and without status (or not employed).

> 23 The remaining 13% are formal and informal domestic employees (0.8% and 2.5% respectively), employers (1.5%), interns or apprentices (0.1%), unpaid employees (3.5%), and individuals working only for self-consumption (4.6%). These individuals are excluded from our analysis. These are small groups of the population and unlikely to be too much affected by changes in enforcement.

> 24 In the 1980 Census there is no information on the whether the worker has an official work permit. Instead, the survey collects information on whether the worker makes social security contributions. Hence, in 1980 the definition of informal worker differs from the one used in 2000. In 1980 a worker is considered informal if he/she do not make any social security contributions. We expect the two definitions to be correlated, since almost no unregistered workers pay social security contributions.

> 25 These statistics are publically available at http://www.ipeadata.gov.br and http://www.sidra.ibge.gov.br/.

> 26 In 1970 and 1980 there existed 71% and 72% of the cities that existed in 2000, while in 1991 there existed 82% of the cities in 2000.  A MCU is an area (set of cities) which is defined in such a way that can be compared over time.

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