Domestic Outsourcing And Young-Worker Entry Into The Formal Sector

We provide evidence that domestic outsourcing increases young-worker entry into the formal sector. Leveraging a pair of 1993–1994 Brazilian reforms that reduced the relative cost of outsourcing security guards, a triple-differences design shows that the reforms increased formal guard employment by 4% and hiring from unemployment or informality by 7%, while reallocating formal employment from older to younger workers and leaving demographic-adjusted wages unchanged. Census data corroborate the rise in formality, driven by the youngest cohorts. The compositional shift mirrors a general pattern in Brazil’s matched employer–employee records: conditional on total firm size, employers with greater occupation-specific scale hire younger workers, paid less at entry and more likely to be entering formal employment for the first time. The evidence is most consistent with contract firms supplying at scale the capabilities needed to hire productive workers from outside the formal sector—a demand-side channel for increasing formal sector employment.