Explaining cross-country variations in the prevalence of informal sector competitors: lessons from the World Bank Enterprise Survey

To advance understanding of informal sector entrepreneurship, the aim of this paper is to evaluate and explain the cross-country variations in the prevalence of informal sector competitors. To do so, World Bank Enterprise Survey (WBES) data is reported from 142 countries. This reveals that 27% of formal enterprises view competition from the informal sector as a major constraint on their operations, although this varies from 72% of formal enterprises in Chad to no formal enterprises in El Salvador. To explain these cross-country variations, four competing theories are evaluated which variously view informal sector entrepreneurship and enterprise to be more prevalent when there is either: economic under-development (modernisation theory); high taxes and state over-interference (neo-liberal theory); too little state intervention (political economy theory), or an asymmetry between the laws and regulations of formal institutions and the unwritten socially shared rules of informal institutions (institutional theory). A multilevel probit regression analysis confirms the modernisation and institutional theories, but not the neo-liberal and political theories. Beyond economic under-development, therefore, it is not too much or too little state intervention that is associated with the prevalence of informal sector competition but rather, whether the laws and regulations developed by governments are in symmetry with the norms, values and beliefs of entrepreneurs. The paper concludes by discussing the theoretical and policy implications of these findings.

     

Informality in developing economies: Regulation and fiscal policies

This paper proposes a unified theoretical framework where formal and informal firms coexist and face the same type of product and labor market imperfections: they have monopoly power in the goods market, they are subject to matching frictions in the labor market, and wages are determined by bargaining between large firms and their workers, through either individual or collective bargaining. Our model matches the main stylized facts on informality for developing countries and appears to be a good candidate for policy analysis. In this framework, we study the impact on informality, wages and unemployment of policies that may be used to reduce informality. We consider changes in product market regulation (PMR) and in two types of fiscal policies, labor taxes and formality enforcement. We find that lessening PMR decreases informality and unemployment simultaneously, indicating that there is not necessarily a tradeoff between informality and unemployment. The tradeoff appears when fiscal policies are used, though. Moreover, the impacts of PMR on unemployment and on wages are larger under collective than individual bargaining. With respect to wage inequality, lessening PMR reduces it, while lower taxes tend to increase the formal sector wage premium.     

THE IMPACT OF LABOR MARKET REGULATION ON EMPLOYMENT IN LOW‐INCOME COUNTRIES: A META‐ANALYSIS

Controversy over labor market policy often centers on achieving a balance between preventing worker exploitation, and avoiding loss of productivity or employment through excessive regulation. Although the literature documenting the impact of labor market regulation on employment is extensive, there is a dearth of evidence on the impact of such policies in low‐income countries (LICs). Since it is easier for workers, especially women, to slip into the informal sector in LICs, regulations are likely to have stronger impacts on formal employment in these countries (but lower impacts on unemployment). We systematically reviewed available research from countries that are, or were until recently, LICs. Most studies document that more stringent labor regulations are associated with lower formal sector employment and higher informal sector employment. We also conducted a metaregression analysis of the impact of minimum wages on formal and informal employment. After controlling for publication bias, higher minimum wages are associated with lower formal employment and a higher share of informal workers.     

Pollution and informal economy

In this study, we investigate the relationship between the size of the informal economy and the level of environmental pollution/energy use. To this end, we first use different indicators of environmental pollution along with a measure of energy use intensity in a panel dataset consisting of 152 countries over the period 1999–2009 and empirically examine the relationship between pollution and the shadow economy. The estimation results show that there is an inverse-U relationship between the size of the informal economy and environmental pollution, that is, small and large sizes of the informal economy are associated with lower environmental pollution and medium levels of informality are associated with higher levels of environmental pollution. Next, we build a two sector dynamic general equilibrium model to suggest an economic mechanism for this observation. Our model identifies two channels through which informality might affect environmental pollution: The scale effect, whereby a larger (smaller) informal economy size is associated with a lower (higher) level of environmental pollution, and the deregulation effect, whereby a larger (smaller) informal economy is associated with higher (lower) pollution levels. As these two effects work in opposite directions, the changing relative strength of one with respect to the informal sector size creates the inverted-U relationship between pollution indicators and informality.     

Explaining the Normality of Informal Employment in Ukraine: A Product of Exit or Exclusion?

This article evaluates critically the competing explanations for the persistence and growth of informal employment in contemporary societies. These interpret the normality of informality either through a structuralist lens as arising out of “exclusion” from state benefits and the circuits of the modern economy or through a neo‐liberal and/or post‐structuralist lens as driven by the voluntary “exit” of workers out of formal institutions and into this alternative realm. To evaluate critically the validity of these competing explanations, this article reports a 2005/6 survey of informal employment in post‐socialist Ukraine. Analyzing the results of 600 face‐to‐face interviews, the finding is that either/or explanations need to be transcended. Informal employment is neither universally driven by exclusion nor exit. Instead, some participate mostly due to exclusion, others mostly for exit rationales, and some for a combination of the two, with different mixtures across different populations and types of informal employment. The outcome is a call to move towards more context‐bound understandings of the pervasiveness of informality through greater appreciation of the heterogeneity of this sphere and how both exit and exclusion are variously entwined in different settings.     

Writing Across Contexts: Urban Informality and the State in Tallinn,Bafatá and Berlin

Urban research has long related informality to a lack of state capacity or a failure of institutions. This assumption not only fails to account for the heterogeneous institutional relations in which informality is embedded, but has also created a dividing line between states. Whereas some states are understood to manage urban development through functioning institutions, others, in this view, fail to regulate. To deconstruct such understandings, this article explores informal practices through a multi‐sited individualizing comparison between three case studies of water governance, parking regulation and dwelling regimes in Bafatá (Guinea‐Bissau), Tallinn (Estonia) and Berlin (Germany), respectively. Our approach to understanding informality starts from the negotiation and contestation of order between differently positioned actors in the continuous making of states. From this point of view, informality is inherent in the architecture of states––emerging through legal systems, embedded in negotiations between and within institutions, and based on conflicts between state regulations and prevailing norms. Tracing how order takes shape though negotiation, improvisation, co‐production and translation not only highlights how informality constitutes a modus operandi in the everyday workings of the state in all three cases, but also provides a way to talk across these cases, i.e. to bring them together in one frame of analysis and overcome their presumed incommensurability.     

Misallocation,informality, and human capital: Understanding the role of institutions

The aim of this paper is to quantify the role of formal-sector institutions in shaping the demand for human capital and the level of informality. We propose a firm dynamics model where firms face capital market imperfections and costs of operating in the formal sector. Formal firms have a larger set of production opportunities and the ability to employ skilled workers, but informal firms can avoid the costs of formalization. These firm-level distortions give rise to endogenous formal and informal sectors and, more importantly, affect the demand for skilled workers. The model predicts that countries with a low degree of debt enforcement and high costs of formalization are characterized by relatively lower stocks of skilled workers, larger informal sectors, low allocative efficiency, and measured TFP. Moreover, we find that the interaction between entry costs and financial frictions (as opposed to the sum of their individual effects) is the main driver of these differences. This complementarity effect derives from the introduction of skilled workers, which prevents firms from substituting labor for capital and in turn moves them closer to the financial constraint.     

Informal Housing in the United States

Research on informal housing tends to focus overwhelmingly on less developed countries, downplaying or ignoring entirely the presence of informality in United States housing markets. In actuality, a longstanding and widespread tradition of informal housing exists in the United States but is typically disregarded by scholars. In this article we draw on three definitions of informality—as non‐compliant, non‐enforced, or deregulated economic activity—to characterize examples of informality in US housing markets, focusing in particular on five institutions that govern housing market activity in this country: property rights law, property transfer law, land‐use and zoning, subdivision regulations, and building codes. The cases presented here challenge the notion that informality is absent from US housing markets and highlight the unique nature of informal housing, US style—namely, that informal housing in the US is geographically uneven, largely hidden and typically interwoven within formal markets. We conclude with a discussion of how research on informal housing in the US can inform research in the global South.     

Institutional isomorphism and whistle-blowing intentions in public sector institutions

Over the years the new institutionalism in public sector analysis has contributed significantly to our understanding of the dynamics of public sector institutions. While it has moved research away from behavioural explanations to recognizing political and cultural contexts, the focus on public sector institutions has been minimal. This research examines, by self-report questionnaire from employees in two government organizations, how institutional mechanisms shape whistle-blowing intentions within the context of a developing country. Despite the country context, findings from this study are encouraging in that participants’ intentions to blow the whistle were found, generally, to be strong.     

Promoting the informal sector as a source of gainful employment in developing countries: insights from Ghana

Although the informal sector continues to be the main source of employment in developing countries, little empirical research has been conducted into the human resource management (HRM) issues surrounding this sector in sub-Saharan Africa. Against this background, this study seeks to highlight the HRM issues, such as training and employment strategy, which are assuming increasing importance in the informal sector in developing countries. After reviewing the marginalist and structuralist debates on the informal sector, the paper looks at the Ghanaian government's attempt to transform the sector into a source of national economic development, entrepreneurship and self-employment. As part of this examination, the paper explores the question of whether the government's strategies can provide jobs for all who need them.

Based on the evidence of the empirical research, the paper argues that although the current Ghanaian government's informal employment strategy is a product of political expediency and, therefore, prone to pitfalls, it nevertheless constitutes a worthwhile attempt to combat unemployment in the long term. The paper also contends that in environments of perpetual economic crisis, which undermine the ability of sub-Saharan African (SSA) governments to generate adequate growth, it makes good socio-economic sense to promote the informal sector as a significant source of employment. The government's strategy should, therefore, be seen as an attempt to help the informal sector generate a level of employment above the marginal and survival. In this respect, the Ghanaian experience provides useful lessons for other SSA countries grappling with similar unemployment problems.     

The Dark Side of Urban Informality in the Global North: Housing Illegality and Organized Crime in Northern Italy

This article deals with housing illegality/informality in Italy, where it represents an established aspect of urban development. It presents a case study focused on Desio, a town close to Milan in northern Italy. Here housing illegality occurs by virtue of the well‐established presence of a mafia‐type criminal organization (the ‘Ndrangheta). Three examples of illegal construction in Desio are analysed, forming the basis for a discussion on the distinctive features of illegal house‐building in Italy. In particular, institutional incentives encouraging illegal housing are investigated, with reference to both formal institutions (e.g. planning laws, rules preventing unauthorized housing and building amnesties) and informal institutions (e.g. organized crime). The case of illegal housing in Italy contributes significantly to the wider international debate on urban informality, highlighting the critical need for research along avenues as yet only partially explored (e.g. informal housing in Western countries and the role of criminal activities and actors in the spread of informality) and challenging some common assumptions such as the geographical dualism (‘global North’ versus ‘global South’) which, implicitly, results from the international literature.     

Judicial regimes for employment rights disputes: comparing Germany,Great Britain and Japan

This article compares the judicial regimes for resolving individual employment rights disputes in Germany, Great Britain and Japan. First, we consider the form of institutional change; second, we examine the lay judge's role; and third, we assess the effectiveness of the three judicial regimes. We find that Japan made the least institutional change, layering a new procedure on top of an existing one. Paradoxically, however, its lay judges have a more extensive role than their counterparts in Germany and Britain, which established new institutions. As to effectiveness, there are several criteria. British labour courts are currently the least informal and speedy, but the cheapest. In both Britain and Germany, legal norms are publicised as adjudicatory hearings are open to the public and judgments are available for public scrutiny, unlike in Japan.     

Informal entrepreneurship and institutional theory: explaining the varying degrees of (in)formalization of entrepreneurs in Pakistan

In recent years, scholars adopting institutional theory have explained the tendency of entrepreneurs to operate in the informal sector to be a result of the asymmetry between formal institutions (the codified laws and regulations) and informal institutions (norms, values and codes of conduct). The aim of this article is to further advance this institutional approach by evaluating the varying degrees of informalization of entrepreneurs and then analysing whether lower levels of formalization are associated with higher levels of institutional asymmetry. To do this, a 2012 survey of the varying degrees of informalization of 300 entrepreneurs in Pakistan is reported. The finding is that 62% of entrepreneurs operate wholly informal enterprises, 31% largely informal and 7% largely formal enterprises. None operate wholly formal enterprises. Those displaying lower levels of formalization are shown to be significantly more likely to display higher levels of institutional asymmetry, exhibiting greater concerns about public sector corruption, possessing lower tax morality and being more concerned about high tax rates and the procedural and distributive injustice and unfairness of the authorities. These entrepreneurs tend to be lower-income, younger and less-educated entrepreneurs. The article concludes by discussing the theoretical and policy implications of these findings.     

Employment relations in small- and medium-sized enterprises: insights from Ghana

This study examines employment relations in small- and medium-sized enterprises (SMEs) in Ghana. This is done through in-depth case studies of three private firms in the service sector. A review of the extant literature on SMEs revealed a dearth of knowledge on employment relations in SMEs in Africa. Previous research into SMEs in developing countries – and Africa in particular – has focused on economic policy initiatives, problems in raising capital and obstacles to the development of SMEs. In an attempt to fill the gap in the literature, this study uses recruitment, selection and retention, remuneration, discipline and welfare practices to explore the nature of employment relations, the factors that influence and shape them, and the extent of informality involved. The findings cast doubt on the stereotype: small implies/equals informal employment relations in SMEs in Ghana. The study also identifies the factors that influence employment relations and, in addition, reveals that under competitive pressures, SMEs have developed employment relations systems that enable them to have a competitive advantage in their product market/service delivery.     

Governmentality and Spatial Strategies: Towards Formalization of Street Vendors in Guangzhou,China

A new policy approach that seeks to formalize street vendors by immobilizing them in designated places has been taken as an alternative to exclusion in Guangzhou, China. This article develops an analytical framework for understanding this spatial formalization by drawing upon Foucault's concept of governmentality. Formalization can be understood as a form of spatial governmentality that seeks to guide the behaviour of informal economic individuals towards officially desired norms by creating bounded spaces. While the formalization programme reflects a moral form of political rationality that directs modern governments towards principles of social justice, it is fundamentally founded on a dispositional spatial rationality that imagines the dependence of social control on the ordering of space. However, this spatial rationality entails a tension between the goal of formalization and its practical effects, resulting in a failure to respect vital attributes of street vending and vendors’ counter‐responses to it. The article concludes by questioning the government's formalization approach, given its ignorance of the reality of informality, and opens up the question of what might be good formalization.     

Social Capital Across European Countries: Individual and Aggregate Determinants of Group Membership

Social capital refers to norms and networks of reciprocity, trust, and cooperation that facilitate coordinated action for a mutual benefit. Theoretical and empirical studies have documented the positive contribution of social capital in social welfare and development. This study empirically explores the determinants of social capital, in the form of group membership, across European countries. Data is derived from the European Community Household Panel, which covers a large sample of individuals from a set of European countries. Binary logistic regression models are applied to regress an index of individuals' group membership on a set of individual characteristics (income, education, gender, age, marital status, employment), as well as aggregate characteristics of countries (GDP per capita, income inequality, social trust, trust in public institutions, corruption, unemployment, and violation of political and civil rights). Results provide evidence of the impact of both individual and aggregate factors on group membership. These factors constitute a possible means to rebuilding patterns of social capital, especially in Southern European countries, where special‐interest groups and patron‐client relations prevail over generalized norms and networks of reciprocity, trust, and cooperation that promote wider social welfare and development objectives.     

最低工资对正规部门、非正规部门工资和就业的影响

本文根据是否遵守最低工资标准,将劳动部门分为正规部门和非正规部门。利用中国健康与营养调查（CHNS）微观数据,运用固定效应模型和Multinomial Logit模型,本文实证研究了2004年以来,最低工资对正规部门和非正规部门工资和就业的影响。研究发现：最低工资每提高1%,正规部门工资会增加0.5%,非正规部门平均工资下降统计不显著,而处于最低工资线附近的非正规部门劳动者工资下降0.77%;最低工资提高使得失业者向非正规部门流动,而非正规部门劳动者向正规部门流动,最终将有利于劳动者在正规部门就业。因此,政府在制定最低工资制度时应全面考虑最低工资标准作用效果的部门差异。     

Distributional implications of informal economy in the EU countries: Accounting for the spread of tax evasion benefits and cultural characteristics

This study provides evidence about the impact of informal economy on income inequality by using annual cross-country panel data from 28 European Union countries observed during the period 2005–2017. Particular attention is dedicated to the cultural setting which is expected to impact taxpayers’ behaviour and thereby income distribution. The study reveals a relationship between the size of the underground economy and income inequality, which is negative when approaching domestic informality and positive when international tax evasion by individuals is related to the top-bottom income disparity. Moreover, a delay of one-year is needed for these effects to occur, sustaining the hypothesis of secondary consequences of the informality. The study also shows that a set of cultural peculiarities are relevant for the nexus of international tax evasion by individuals and income polarisation. The inequality enhancing effect of the offshore activities is larger in countries with high degree of uncertainty avoidance and power distance, and low level of indulgence and long-term orientation respectively.     

Formalization by the State,Re‐Informalization by the People: A Gecekondu Transformation Housing Estate as Site of Multiple Discrepancies

This article demonstrates residents' transformative practices and discusses attendant outcomes to contribute to an understanding of state‐built housing estates for people affected by urban transformation projects. It draws upon ethnographic fieldwork conducted in a social housing estate (K‐TOKI) in the Northern Ankara Entrance Urban Transformation Project (NAEUTP). It addresses questions on why formalization of informal housing takes place today, under what conditions it is countered by re‐informalization practices, and what the outcomes of this process are. As informal housing became formalized by NAEUTP, gecekondu dwellers were forced into formalized spaces and lives within K‐TOKI, which was based on a middle‐class lifestyle in its design and its legally required central management. Informality re‐emerged in K‐TOKI when the state's housing institution, in response to the estate's poor marketability, moved out, allowing residents to reappropriate spaces to meet their needs and form their own management system. When cultural norms that are inscribed in the built environment and financial norms that treat residents as clients conflict with everyday practices and financial capabilities, the urban poor increasingly engage in acts of informality. I argue that the outcome of this informality in a formal context is a site of multiple discrepancies.     

Formal sector job growth and women’s labor sector participation : The case of Mexico

This paper looks at the effects of demand and supply on the determinants of labor sector (school, home work, informal, and formal) participation between Torreon and Tijuana, Mexico for married and single women. Comparisons between the two cities are used to capture differences in labor demand. Torreon is a traditional city with an agri-industrial base and Tijuana is a border city with large export processing (maquiladora) and tourism sectors, both of which demand female labor. Factors influencing labor supply include both individual and household characteristics. Married women, given the strong cultural tradition of working in the home, do not significantly increase their paid labor participation with higher labor demand or changing characteristics of the household. Personal characteristics have the greatest impact on labor sector participation. Single women do, however, increase their formal sector participation with additional employment opportunities and respond to household needs by moving in and out of the paid labor market. Results indicate that increases in labor demand in Mexico from the NAFTA could expand formal sector labor force participation of single women.