Explaining the Informal Economy: an Exploratory Evaluation of Competing Perspectives

Abstract

This paper evaluates critically whether the cross-national variations in the size of the informal economy are the result of: under-development (a modernization perspective); high taxes, corruption and state interference (neo-liberal perspective); or inadequate state intervention to protect workers (political economy perspective). Analyzing the varying size of the informal economy across 33 developed and transition economies, elements of all three perspectives are found to be valid with larger informal economies associated with under-development, public sector corruption and over-regulation in some spheres (e.g., temporary employment and temporary work agencies) but too little intervention in others (e.g., social protection, labour market interventions to protect vulnerable groups). The implications for theory and policy are then discussed.