Why is informal employment more common in some countries? an exploratory analysis of 112 countries

Purpose: This paper evaluates competing explanations for the greater prevalence of informal employment in some countries rather than others. These variously explain informal employment to be a result of either economic under-development and the lack of modernisation of governance (‘modernisation’ theory), higher taxes and too much state intervention (‘neo-liberal’ theory) or inadequate government intervention to protect workers from poverty (‘political economy’ theory).

Methodology: To do this, an International Labour Organisation data base produced in 2018 on the prevalence of informal employment in 112 countries (comprising 90 per cent of the global workforce) is analysed, and macro-level economic and social conditions reflecting each of these theories tested using bivariate regressions.

Findings: The prevalence of informal employment ranges from 94.6% of total employment in Burkina Faso to 1.2% in Luxembourg. Evaluating the validity of the competing theories, neo-liberal theory is refuted, and a call made to synthesise the modernisation and political economy perspectives in a new ‘neo-modernisation’ theory that tentatively associates the greater prevalence of informal employment with lower economic under-development, greater levels of public sector corruption, smaller government and lower levels of state intervention to protect workers from poverty.

Practical implications: This paper tentatively reveals the structural economic and social conditions that need to be addressed globally to reduce informal employment.

Originality/value: This is the first paper to report the results of a harmonised dataset based on common criteria to measure the varying prevalence of informal employment globally (across 112 countries representing 90 per cent of global employment) in order to determine the structural economic and social conditions associated with higher levels of informal employment.