In 2007, the Latin America division of the World Bank brought out a publication entitled Informality: Exit and Exclusion co-authored by Guillermo Perry, William F. Maloney, Omar Arias, Pablo Fajnzylber, and Jaime Saavedra. In this publication, the co-authors presented a holistic framework of the composition and causes of informality, as follows:
Composition: “Three Pairs” of Economic Agents
- Labour:
- insufficient human capital to get formal job
- quit formal job in order to: be their own boss + make more money + avoid taxes + enjoy flexibility
- Micro-firms:
- no intention or potential for growth, hence no intention of engaging with state
- stymied by high barriers to entry
- Firms:
- avoiding taxation and other regulations
- partially registering their workers and sales
Causal Theory # 1: Different Forms of Exit
- Opportunistic evasion
- tax-evasion
- illegal activities
- avoidance of labour codes:
- unprotected workforce
- subcontracted production
- Defensive evasion in response to…
- burdensome state
- captured state
- weak state
- Passive evasion and state irrelevance
- pre-modern or bazaar economy
- informal or non-state institutions
Causal Theory # 2: Different Forms of Exclusion
- Labour market segmentation - prevents workers from getting formal jobs
- Burdensome entry regulations – prevents enterprises from formalizing (a la de Soto)
- Hiring practices of firms - in response to excessive tax and regulatory burdens
Informal Economy Topic
Language
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