Tackling informal employment in developing and transition economies: a critical evaluation of the neo-liberal approach

This paper evaluates critically the argument of neo-liberals that informal employment is a result of high taxes, public sector corruption and too much state interference in the free market and that the consequent solution is to reduce taxes, public sector corruption and the regulatory burden via minimal state intervention. Comparing International Labour Organization data on the cross-national variations in the prevalence of informal employment with the variables levels of tax rates, corruption and state intervention across 41 developing and transition economies, little support is found for the neo-liberal approach. Instead, lower (not higher) levels of informal employment are found to be associated with higher levels of regulation and state intervention, resulting in a call for more, rather than less, regulation and state intervention to protect workers in developing and transition economies. The theoretical and policy implications are discussed.