What Sustains Informality?

Reducing poverty and improving equity
Sep 27, 2022 | Journal of Development Studies

The special issue by the Journal of Development Studies contributes to critical issues related to the nature of informal employment and its determinants, how informal firms can grow their business and productivity, and the effects of labour market regulations and social insurance policies on informality.  The findings by Kunal Sen, Michael Danquah, and Simone Schotte have three broad implications for our understanding of what causes informality. Firstly, the factors that explain the presence of informality or the limited movement into formal jobs are not only economic in nature, such as lack of human capital, but also encompass social factors such as levels of trust and division of work in the household. Secondly, greater access to credit and reducing taxes and fees for the smaller formal firms may allow for higher growth of informal firms or make it more likely that they will formalize. Finally, well-intentioned public policies such as strict labour regulations for formal firms and non-contributory social insurance policies can contain or exacerbate existing pervasive incentives for informal employment, leading to unintended consequences.

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