Their use of social security ensures a heterogeneous relationship between informal economics built on exploitation
(Canelas and Niño-Zarazúa, 22 Université Paris 1 Panthèon-Sorbonne Habilitation à Diriger de Recherches (HDR) in Economics Paris School of Economics, Université Paris 1 Panthéon-Sorbonne Ph.D. in Economics Paris School of Economics, Université Paris 1 Panthéon-Sorbonne Master Research Models and Methods of Quantitative Economics (ETE-QEM) Universidad San Francisco de Quito B.A. in Economics and B.A. in Finance, Miguel Niño-Zarazúa is a development economist and Non-Resident Senior Research Fellow at UNU-WIDER. Miguel’s research interests are in the areas of poverty, inequality, tax policy, welfare–benefit systems and the social effects that these policies generate. He is also interested in political economy considerations of state capacity and the functioning and efficacy of governments., Social protection and the informal economy: What do we know?, October 22, 7-9//ATW)
The scale and persistence of the informal economy in low- and middle-income countries is a concern that has been at the centre of research and development policy debates since the pioneering work by Lewis (1954), which underscores the dual nature of labour markets and economic systems in developing countries. Subsequent work by Fields (1975), Hart (1973), Stiglitz (1976), among others, pinpoint this duality as catalytic of the ‘informal’ economy, which is characterised by low-productivity sectors and tradeable goods and services that are produced at the margin of regulations, and without direct link to tax and social protection systems (N. V. Loayza 2016; Maloney 2004; La Porta and Shleifer 2014). 2 Consequently, workers and firms operating in the informal economy have limited access to social protection benefits, tax credits and financial markets.
Economic considerations such as the burden of taxes and social security contributions, barriers to entry markets as well as discriminatory norms against ethnic and religious minorities, women and other vulnerable groups can exacerbate the dualism of economic systems, making informal work a strategy of last resort for large shares of vulnerable populations (Chen et al. 2006; Gulyani and Talukdar 2010). Institutional factors such as corruption and a weak state capacity may also affect the incentives for workers and firms to participate in the formal economy (Schneider, Buehn, and Montenegro 2010, Perry etal 2007).
The complexity and multiple roots of the informal economy underscores its heterogenous nature (Fields 2018; Marcouiller et al. 1997; Tokman 1989). Indeed, a growing literature emphasizes the intrinsic dualism of the informal economy, in which a lower-tier segment, with the least-endowed workers and low marginal productivity of labour, engages in the informal economy as a survival strategy, whereas for an upper-tier segment of the market, the entry to the informal economy may reflect strategic decisions to avoid the burden of taxes and social security contributions (Canelas 2019; Cunningham and Maloney 2001; Günther and Launov 2012¸ La Porta and Shleifer 2014; Loayza 2018). Other studies underscore the costs that corruption and the red tape of bureaucracy cause to formal firms, as a significant cause of informality (Gajigo and Hallward-Driemeier 2012a). Evidence also shows that the informal economy can coexist with ‘formal’ enterprises and households hiring workers off-the-books often gravitating between formal and informal arrangements (Ulyssea 2020).