Using information from all International Monetary Fund conditionality programmes from 1990 to 2018, we implement a dynamic Augmented Inverse Probability Weighting Regression Adjustment approach to enquire whether public-sector employment retrenchment may be incompatible with the goal of shrinking the informal economy. The estimated effect 5 years after the policy intervention indicates an increase in the share of the shadow economy to GDP by about 1.3 percentage points. More importantly, this change involves a sizable reallocation of private economic activity from its formal to its informal part; that is, the size of the formal private sector relative to the size of the informal sector decreases by seven percentage points. We interpret these findings through a two-sector model in which there is interdependence between worker incomes and the allocation of product demand across the formal and informal sectors.

This article uses empirical evidence, based on labour market indicators, to analyse the factors influencing the incidence of child labour in Pakistan, from both supply and demand sides. The level of demand for child labour is shown to be linked mainly to adult wage levels, the adult unemployment rate in an area, and the size of the informal and agriculture sectors. The supply of child labour is seen to be positively linked to the proportion of adult unemployment in the household. Unlike previous studies, the article analyses both demand and supply side factors in a context of poverty and takes account of the co-existence of formal and informal labour markets. Furthermore, to generalise the issue for a longer span of time (which previous studies fail to do), it adopts the methodology of a pseudo-panel approach based on that proposed by Deaton. This approach makes it possible to pinpoint more accurately the factors, and their interaction, that need to be considered in any effective policy approach to the issue of child labour. To prevent unintended consequences, a multi-faceted development approach is required.

The vulnerability of small firms to price shocks may partly explain why fossil fuel subsidy removals in developing countries are so difficult to implement. This paper analyzes the effects of fuel and electricity price increases on profits of micro- and small-sized enterprises in Mexico. Using representative cross-sectional data, simulations of profit losses hint at potentially large short-term effects. First-order profit losses of a 1 per cent price increase are 0.2 per cent for fuels and 0.07 per cent for electricity, but are higher than 1 per cent for fuels in the transport sector. These effects are larger for formal than for informal firms, with energy-using low-profit firms being most vulnerable. Second-order impacts – predicted using estimated input-demand elasticities – indicate that firms react to price shocks by substituting labor for energy, while the self-employed appear to increase their own labor input. Reduced-form regressions show that some firms pass on higher fuel costs to customers.

Product design is a key aspect of human intelligence and creativity, attracting not only experts but also workers and self-employed without any formal design training. Although numerous people in developing countries design and manufacture simple products in metalworking microenterprises, there is very little systematic knowledge about their design process. This paper aims to fill this gap in design knowledge. We aim at investigating some aspects of design process in the metalworking microenterprises in Tanzania. The findings reveal how they identify needs, and generate and evaluate concepts.

Conventional wisdom among scholars of Latin American politics holds that informal workers are less participatory and less left-leaning than formal workers. Relevant empirical findings, however, are mixed and in need of synthesis. This article provides that synthesis by conducting meta-analyses on the universe of previous quantitative studies of informality and the vote. It finds that informal workers are indeed less likely to vote than formal workers, but the effect of informality is small—just four to seven percentage points. It further finds that informal workers are more likely to vote for the left, not the right, but here the effect size is even smaller. Meta-regression analyses reveal that in countries where organized professional activity among informal workers is high, gaps in turnout between the two sectors are minimal. The article concludes that the conventional wisdom over-states the individual-level political consequences of labor informality in Latin America.

In many Latin American countries, social policy preferences among economically vulnerable citizens seem largely unpolarized. However, current studies rarely confront citizens with realistic policy options and often lack the required detail to capture the heterogeneity of economic vulnerability. Drawing on the dualization debate, we expect individuals facing different degrees of vulnerability to show distinct social policy preferences. Using original survey data from Mexico and a conjoint experiment, our findings reveal a complex divide, where the most economically vulnerable are least supportive of public solutions. Sharing the home with a formal labor market participant does not seem to mitigate social policy skepticism among the vulnerable. In contrast, magnified vulnerability via household composition reduces support for welfare policy expansion. Social policy preferences become much less distinct when policy design alternatives are introduced, suggesting reduced expectations about the state’s role and a lack of clarity about the tangible benefits of social policy reform.

The informal sector challenges economic growth and hinders the abatement of income disparities in developing countries. This study argues that a weak and poorly governed welfare state can cause the informal sector to increase when individuals use it as an exit option from an unsatisfying welfare system. The article explores how the welfare state’s benefit structure and citizens’ trust in institutions to deliver public goods affect the likelihood of informality. A logistic hierarchical model, based on cross-sectional survey data from Latin America and the Caribbean and descriptive panel data from Brazil, is used to test the hypothesis. Findings reveal that social policy discontent, low trust, an elitist distribution of welfare benefits, and dysfunctional institutions increase the likelihood of being informally employed. However, workers with greater agency—the better-educated—seem notably less likely to informalize when social policy benefits are targeted toward their own socioeconomic group.

A significant proportion of the population in Latin America depends on the informal economy and lacks adequate protection against a variety of economic risks. This article suggests that economic vulnerability affects the way individuals relate to political parties. Given the truncated structure of welfare states in the region, citizens in the informal sector receive lower levels of social security benefits and face higher economic uncertainty. This vulnerability makes it difficult for voters to establish strong programmatic linkages with political parties because partisan platforms and policies do not necessarily represent their interests and needs. Using cross-national microlevel data, this study shows that individuals living in informality are skeptical about state social policy efforts and exhibit weaker partisan attachments. The findings suggest that effective political representation of disadvantaged groups remains a challenge in Latin American democracies.

Official histories suggest that the International Labour Organization (ILO) adopted the term ‘informal sector’ as a replacement for ‘traditional sector’, which, in its pairing with the ‘modern sector’, had fallen out of favour. This article argues that the adoption of the informal sector concept is better understood as arising out of a different context: the ILO’s post-war efforts to generate a globally operational concept of unemployment for use in the ‘developing world’. ILO officials abandoned this project in the late 1960s when they realized that, where work for wages did not constitute a widespread social norm, an accurate measure of what they called ‘disguised unemployment’ was impossible to construct. That led the ILO to develop alternative constructs, including ‘employment in the informal sector’. However, it proved difficult for the agency to operationalize those, too, and it soon found itself losing control of the policy implications of the measures that it was producing.

A quantitative framework of firm dynamics is developed where the size of the informal sector is determined by financial constraints and the burden of taxation. Improving access to credit for formal sector firms increases aggregate total factor productivity and output while reducing the size of the informal sector. Introducing size-dependent taxes reduces the gains from financial development as they incentivize firms to produce at a relatively limited scale. The aggregate effects of eliminating formal sector registration costs are positive but modest relative to previous theoretical models and the gains generated by financial development, and consistent with empirical evidence based on micro-level data.

I develop a dynamic political economy model with an informal sector and two political parties alternating in office. In equilibrium, if the incumbent political party faces a higher probability of staying in office, it sets a higher tax rate on the formal economy to invest more in productive public capital, while spending less for current office rent. Moreover, I argue that public capital is mainly utilized by the formal sector, and this implies that countries in which incumbent parties are more likely to stay in power have a higher tax burden but a smaller informal sector. I also present some empirical evidence that supports the main results of the model.

This paper analyzes the optimal inflation tax in economies with structural imperfections in labor, commodity, and currency markets. The Friedman rule is a classic result in economics that claims that the optimal monetary policy is to set a zero nominal interest rate. This Ramsey equilibrium is robust in a wide range of environments without imperfections in input, output, or financial markets. In many developing countries, however, a large fraction of activity takes place in the “informal” sector. Roughly speaking, the informal sector is the untaxed and unregulated market sometimes referred to as the underground economy. We obtain three results. First, we show that when structural imperfections such as an informal sector exist, the optimal inflation tax is positive. Second, we show that structural imperfections introduce an important asymmetry in the welfare cost function. Third, we provide quantitative results.