Informality: Why is it so Widespread and How Can it Be Reduced?

4 Pages Posted: 26 Mar 2019 Last revised: 29 Mar 2019

See all articles by Norman Loayza

Norman Loayza

World Bank - Research Department

Date Written: December 19, 2018

Abstract

In a typical developing country, about 70 percent of workers and 30 percent of production are informal. Informality is a cause and a consequence of the lack of economic and institutional development. It implies productive inefficiency and a culture of evasion and noncompliance. Informality, however, exists because it offers the advantages of flexibility and employment in economies with low labor productivity and an excessive regulatory burden. Under these conditions, if there were no informality, there would be greater unemployment, poverty, and crime. A well-conceived formalization strategy should seek to make formality more attractive. As the causes of informality are complex and interrelated, the reforms to reduce it must include all relevant areas. A formalization strategy should consist of making labor markets flexible, reforming social protection, increasing labor productivity, making the regulatory framework and the justice system efficient, and rationalizing the tax system.

Keywords: Labor Markets, Social Protections & Assistance, Employment and Unemployment

Suggested Citation

Loayza, Norman, Informality: Why is it so Widespread and How Can it Be Reduced? (December 19, 2018). World Bank Research and Policy Briefs No. 133110. Available at SSRN: https://ssrn.com/abstract=3360124

Norman Loayza (Contact Author)

World Bank - Research Department ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

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