The Roots of Informal Responses to Regulatory Change: Non‐compliant Small Firms and the National Living Wage
| Author | Trevor Jones,Sabina Doldor,Guglielmo Meardi,Paul Edwards,Monder Ram |
| Published date | 01 October 2020 |
| DOI | http://doi.org/10.1111/1467-8551.12363 |
| Date | 01 October 2020 |
British Journal of Management, Vol. 31, 856–871 (2020)
DOI: 10.1111/1467-8551.12363
The Roots of Informal Responses to
Regulatory Change: Non-compliant Small
Firms and the National Living Wage
Monder Ram, Paul Edwards,1Guglielmo Meardi,2Trevor Jones
and Sabina Doldor1
Aston Business School, Birmingham B4 7ET, UK, 1Birmingham Business School, Birmingham B15 2TT, UK,
and 2Warwick Business School, Coventry CV4 7AL, UK
Corresponding author email: m.ram1@aston.ac.uk
How do small ‘non-compliant’ firms (those evading existing regulations) react to further
regulatory change? The impact of the National Living Wage in the UK in 2016 is anal-
ysed through 22 mostly longitudinal case studies of small non-compliant firms. The varied
responses, endurance of non-compliance, and blurred and dynamic nature of transitions
to compliance are discussed through the lens of institutional approaches to informality.
The analysis sheds new light on the relative autonomy of microprocesses and the condi-
tions under which external forces aect these processes. Non-compliant informality, as
a persisting feature of small business, is unlikely to be transformed by legal regulation
alone.
Introduction
The understanding of the ‘informal economy’ has
improved substantially since Webb et al.’s (2009)
seminal contribution. In particular, informality is
multidimensional. Firms may not comply with
formal legal regulations and yet be seen as le-
gitimate by their stakeholders and thus be dis-
tinct from both the formal and the renegade (il-
legal and illegitimate) sectors. Webb et al. (2009)
distinguished between the two axes of business
‘ends’ and ‘means’, and between formal institu-
tions, defining legality,and informal ones, defining
legitimacy. Darbi, Hall and Knott (2018) added
another axis, the degree of organizational infras-
tructure. These distinctions have important im-
plications for policy and practice, as Webb et al.
We aregrateful to Professors Pawan Budhwar, Stephanie
Decker and Paul Godfrey, Dr Hongqin Li and Dr Robert
Wapshott for their helpful comments on an earlier draft
of this paper.Thank you also to Professor Georey Wood
and the reviewers for their helpful comments. This re-
search was funded by the Low PayCommission (UK).
(2009) propose that businesses combining legal
ends (products or services) with illegal (but per-
ceived as legitimate) means are those most likely
to transition to the formal economy, in contrast to
those with the aim of providing legal products in
forms,such as untaxed or counterfeited, that are il-
legal. Businesses with legal ends and illegal means,
which we describe as practising ‘non-compliant in-
formality’, provide a key way of examining the
boundaries between formality and informality and
the conditions necessary for formalization.
A key limitation of institutional views such as
Web b et al.’s is the presentation of the informal
economy as the direct outcome of a gap between
the macro (laws and regulations) and the meso
(sets of norms that prescribe what is acceptable in
a given context). If businesses sharing the same
formal and informal contexts behave dierently,
additional factors and processes need to be con-
sidered. We focus on such processes in our study
of how non-compliant firms respond to a major
labour market intervention in the UK, namely the
introduction of the National Living Wage (NLW)
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The Roots of Informal Responses to Regulatory Change 857
in 2016. Our conceptual approach extends the pre-
vailing emphasis on meso-level studies of the infor-
mal economy (that is,the norms, values and beliefs
of informal institutions; North, 1991). We iden-
tify a broader set of meso-level institutions that
matter to non-compliant firms, notably sectoral es-
tablished practices and networks (such as associa-
tions and agencies providing advice and support),
and non-institutional factors, namely the chang-
ing power relations in the market and in the work-
place. These relations are in turn shaped but not
determined by conditions in the product and the
labour markets (Edwards and Ram, 2006; Kloost-
erman, 2010). We pay particular attention to the
dynamics within firms at the micro levelthat create
and sustain informal practices, including the so-
cial relations between owners, workers and other
relevant actors (that is, the ‘labour process’). It is
the relative autonomy of the labour process from
external pressures that is key, as long stressed in
the fields of industrial relations and sociology of
work (Burawoy, 1979; Edwards et al., 2006; Ram,
1994; Ram and Edwards, 2003, 2010). Wetherefore
advance an integrated approach comprising social
relations within the workplace, a wider range of
meso-institutions that encompass the sectoral con-
text of firms, and macro-level regulatory change.
Using this approach, we ask ‘how do managers in
non-compliant small firms react to major regula-
tory change?’ We cast light on neglected issues, in-
cluding the durability of the ‘informal economy’,
selective compliance, and why and how some firms
move into formality (Darbi, Hall and Knott, 2018;
Webb and Ireland, 2016).
The terms ‘informal economy’ and ‘informality’
need clarification, not least because the latter is a
widely noted feature of small firms per se (Edwards
et al., 2006), but is sometimes mistakenly conflated
with the evasion of statutory regulations. The ‘in-
formal economy’ is an imprecise term with a vari-
ety of meanings. We view it as the paid production
and sale of goods and services that are unregistered
by, or hidden from, the state for tax and welfare
purposes, but which are legal in all other respects
(Williams, 2004). This definition distinguishes the
informal economy from, on the one hand, the for-
mal sector and, on the other hand, unpaid work
and monetary transactions involving illicit goods
and services. We define ‘informality’ as a pro-
cess of workforce engagement, collective and/or
individual, based mainly on unwritten customs
and the tacit understandings that arise out of the
interaction of the parties at work (Ram et al.,
2001). As such, informality is a dynamic rather
than a fixed characteristic, and is highly con-
text specific. This definition embraces firms that
are compliant with regulations, as well as those
that are non-compliant. Our interest is in ‘non-
compliant informality’, that is, firms in breach of
formal regulations (in particular, the NLW).
We draw on 22 (mainly longitudinal) case stud-
ies of non-compliant small firms to examine how
managers handle the major regulatory change of
the NLW.Such a change in regulatory institutions,
involving both an increased cost of compliance
(higher minimum wage rates) and increased risk
(new enforcement mechanism), could lead to
dierent outcomes, from increased compliance
to increased illegality. At the same time, we keep
relatively constant the meso-level institutions
that explain the perceived legitimacy of informal
practices, by focusing on one geographic area
and on a narrow cultural and ethnic setting,
while we construct a sample with a wide variation
of sectoral economic and workplace dynamics,
as well as changing economic conditions over
time. The findings reveal considerable variety of
practice, a blurred and fluid relationship between
formal and informal institutions, and tensions
within firms belying the meso-level emphasis on
shared norms: a more complex pattern than the
idea of meso-institutions reproducing shared
norms based on the legitimacy of non-compliance
would suggest. Where compliance has occurred,
dynamics within the firm, as well as shifts in the
macro and meso-environment, are an important
part of the explanation. For most non-compliers
there is striking heterogeneity, including surpris-
ingly many successful and dynamic performers.
Only a tiny minority conform to the stereotypical
depiction of the hidden struggler.
The opportunity to examine firms studied 10
and/or 20 years previously allows us to identify
the roots of both enduring non-compliance and
transitions to formality. The inclusion of workers
is theoretically significant as well as methodologi-
cally distinctive because,despite no claim of work-
force representativeness, it allows for an examina-
tion of both parties’ values and norms (meso-level
normative institutions), and the dynamics of con-
sent and conflict in the workplace; in other words,
it shows how managers and employees ‘co-create
and enact their contexts, draw on their cognitions
and individual interpretations of contexts and
C2019 The Authors.British Journal of Management published by John Wiley & Sons Ltd on behalf of British
Academy of Management.
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