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

DOIhttps://doi.org/10.1108/ER-10-2018-0285
Publication Date07 October 2019
Pages1434-1450
AuthorColin Charles Williams,Adrian Vasile Horodnic
SubjectHr & organizational behaviour,Industrial/labour relations,Employment law
Why is informal employment
more common in some countries?
An exploratory analysis
of 112 countries
Colin Charles Williams
Management School, University of Sheffield, Sheffield, UK, and
Adrian Vasile Horodnic
Faculty of Medicine,
Grigore T. Popa University of Medicine and Pharmacy, Iasi, Romania
Abstract
Purpose The purpose of this paper is to evaluate 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
(modernisationtheory), higher taxes and too much state intervention (neo-liberaltheory) or inadequate
government intervention to protect workers from poverty (political economytheory).
Design/methodology/approach 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 per cent of total employment in
Burkina Faso to 1.2 per cent 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-modernisationtheory 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 data set 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.
Keywords Labour market, Informal sector, Employee relations, Labour, Taxes
Paper type Research paper
Introduction
Why is informal employment more prevalent in some countries and smaller in others?
For much of the last century, there was a clear consensus in scholarship. The belief was
that informal employment was a developing country phenomenon resulting from
economic under-development and a lack of modernisation of governance, which would
naturally and inevitably disappear with economic development and modernisation
(Geertz, 1963; Gilbert, 1998; Lewis, 1959). In recent decades, however, it has been revealed
that informal employment prevails in developed as well as developing economies
(Slavnic, 2010; Webb et al., 2009; Williams and Lansky, 2013; Williams and Schneider,
2016) and appears to be growing in many nations (Dibben and Williams, 2012; ILO,
2013). This paper advances the resultant scholarship. The aim is to evaluate the competing
theories that have emerged to explain the cross-country variations in the prevalence of
informal employment.
Employee Relations: The
International Journal
Vol. 41 No. 6, 2019
pp. 1434-1450
© Emerald PublishingLimited
0142-5455
DOI 10.1108/ER-10-2018-0285
Received 31 October 2018
Revised 17 December 2018
Accepted 17 December 2018
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/0142-5455.htm
1434
ER
41,6
To achieve this, the first section briefly reviews how informal employment can be defined
and measured, and how the cross-country variations have been variously explained as
resulting from either economic under-development and the lack of modernisation of
governance (modernisation theory), too much state interference (neo-liberal theory) or
inadequate state intervention to protect workers from poverty (political economy theory).
Revealing that few attempts have been made to evaluate these contrasting explanations
using a harmonised data set, this paper fills this lacuna. To do so, the second section
introduces the data, namely the International Labour Organisations (ILO) harmonised data
on the share of informal employment in total employment and in the informal sector across
112 developed and developing economies comprising 90 per cent of global employment,
along with the indicators that can be used to evaluate the validity of the competing theories.
The third section then reports the results followed in the fourth and final section by a
discussion of the implications for theory and policy.
Defining, measuring and explaining informal employment
Defining informal employment
In this paper, the definition of informal employment agreed by the International Conference
of Labour Statisticians (ICLS) is used (Hussmanns, 2005; ILO, 2011, 2012, 2018). This
recognises that the informal realm can be defined using either the enterprise or the
employment relationship as the unit of observation. As Table I reveals, if the enterprise is
used as the unit of observation, then informality is viewed in terms of employment in the
informal sector(A and B) whilst if the employment relationship is the unit of observation,
informality is viewed in terms of informal employment(A and C). In this paper, the
employment relationship is used as the unit of analysis by examining those engaged in
informal employment (A+C).
In 1993, the 15th ICLS defined an informal sector enterprise as a private unincorporated
enterprise that is unregistered or small in terms of the number of employed persons.
An unincorporated enterprise is defined as a production unit not constituted as a separate
legal entity independent of the individual (or group of individuals) who owns it, and for
which no complete set of accounts is kept. Meanwhile, an enterprise is defined as
unregistered if it is not registered under specific forms of national legislation (e.g. factories
or commercial acts, tax or social security law and professional groupsregulatory acts). An
enterprise is defined as small if its number of employees is below a specific threshold (e.g.
five employees) determined by national circumstances (Hussmanns, 2005; ILO, 2011, 2012,
2018). Here, therefore, informality was defined using the enterprise as the unit of analysis.
However, the recognition that informal jobs exist in formal and informal enterprises, and
that defining informality as informal enterprise missed a considerable amount of
informality, in 2003, the 17th ILCS adopted the employment relationship as the unit of
analysis and defined those in informal employment as persons whose main jobs lack basic
social or legal protections or employment benefits and recognised that they may be found in
the formal sector, informal sector or households. Persons in informal employment were seen
to include: (a) own-account workers self-employed in their own informal sector enterprises;
(b) employers self-employed in their own informal sector enterprises; (c) contributing family
workers; (d) members of informal producerscooperatives; (e) employees with informal jobs
Economic units Informal jobs Formal jobs
Informal economic units A B
Formal economic units C D
Source: ILO (2012)
Table I.
Conceptualisations of
the informal sphere by
the unit of observation
1435
Informal
employment

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