This paper investigates how enforcement of labor regulation affects the firm’s use of informal labor, firm size and firm performance. Using firm level data on employment, capita, and output, census data on informal employment at the city level, and administrative data on enforcement of regulation at the city level, we show that in areas where law enforcement is stricter firms employ a smaller proportion of informal workers. Furthermore, by reducing the firm’s access to unregulated labor stricter enforcement is also associated with smaller firms, less fluid labor markets, and (possibly) lower labor productivity. We control for different regional and firm characteristics, and we instrument enforcement with the distance between firm location and the location of an enforcement office, a measure of access of labor inspectors to firms. Taken together, our findings suggest that increased access to labor flexibility frees the firm from growth constraints, and it is likely to contribute to an improvement in productivity.