Juridical and Functional Informality: From Theory to Practical Policy

The purpose of this article is to deepen the understanding of informality, and related efforts governments must take to cope with large and persistent informal sectors. Is the informal sector a source of growth and employment or a drain on the fiscus that undermines social safety nets? This article questions the ‘formal sector bias’ present in much of the policy discussions surrounding informality. A theoretically grounded distinction between ‘functional’ and ‘juridical’ informality is drawn and applied to subcontracting as an illustrative case. The broad conclusion of the paper is not supportive of public intervention to formalise the informal sector but rather suggests that tolerating the informal sector might well improve economic performance as measured by output and employment. JEL Classification: O17, E17