Institutions and human development in the Latin American informal economy

The aim of this study is to assess the causes of the Informal Economy (IE) in Latin American countries. By including indicators of institutional framework such as human development, marginal tax rate, public social spending, and unemployment rate in panel regressions, we find empirical evidence that the institutional background is a key indicator of the size of the IE in these countries. We observe that the correlation between the size of the IE and the human development index follows an inverted U shaped curve. Suggestions are offered for policies that may be adopted.