Informal Economy, Government Intervention and Labor Market in Algeria: An Analysis by Structural Models

Literature on the informal economy can mainly be divided into two different contrasting theories. On one hand, the dualists argue that the informal sector is considered to be the lower segment of a dual labor market, with no direct link to the formal economy, which provides income for the poor and a safety net in times of crisis. On the other hand, the legalists argue that hostile government intervention leads to excessive and costly regulation, such as taxes or direct contributions. This drives rent-seeking firms towards the informal economy. In this paper, we do consider that these two theories are complementary rather than substitutable. This is why we use structural models (PLS-PM) to deal simultaneously with the role of government intervention and labor market to estimate the informal economy in Algeria for the period 2000-2018. Our results show an upward trend in the informal economy between 2000 and 2009 from 34.1% to 45.86% of GDP, and a global decline until 2018 to 32.83%. Moreover, our findings show the direct responsibility of government intervention in the expansion of the informal economy besides the labor market conditions. It turns out that efforts to absorb the informal economy in Algeria should simultaneously involve variables linked to the labor market and to the government intervention. Finally, we provide an index of the size of the informal economy and compare it to other studies.