The Elasticity of Formal Work in African Countries

A key policy problem in most developing countries is the size of the informal sector and its persistence over time. At the same time, these countries also need to increase their tax take. However, this may slow down the formalization of the economy. Evidence on the wages and characteristics of jobs in different sectors and on the impact of tax changes on the size of the informal sector in developing countries is, however, very limited. This paper therefore estimates the tax responsiveness of the extensive margin of formality, i.e. the propensity to participate in formal work as opposed to working as an informal worker,for four Sub-Saharan African countries. Using repeated cross-sections of household data and applying grouping estimator techniques, this paper finds only very small or statistically insignificant effects of taxes on the extent of formal work.