Out of the margins: Evaluating the scale of employment in informal enterprises in developing and transition economies

Purpose — This chapter evaluates the cross-national variations in the proportion of employment that is in informal sector enterprises and evaluates competing theories which view these cross-national variations to result from either economic underdevelopment (modernisation explanation), high taxes, public sector corruption and over-regulation of work and welfare (neo-liberal explanation) or conversely, a lack of intervention in the realm of social protection (political economy explanation). Methodology/approach — To evaluate these competing explanations, the International Labour Organisation’s (ILO) country surveys that investigate the scale of employment in informal sector enterprise in 43 developing and transition economies, along with the World Bank database of development indicators, are analysed here. Findings — The finding is that lower levels of employment in informal sector enterprises are closely associated with economic development, lower levels of public sector corruption and state intervention in the form of higher tax rates and social transfers to protect workers from poverty. Research implications — This chapter reveals the need to move beyond treating these contrasting representations as competing explanations and to recognise how all are required to more fully explain the prevalence of informal sector entrepreneurship. Practical/social implications — Tackling employment in informal sector enterprise is shown to require broader economic and social policies associated with the modernisation of economies, tax rates, social protection and poverty alleviation. Originality/value — One of the first evaluations of the competing explanations for why some countries have higher levels of employment in informal sector enterprises.