A Modern Guide to the Informal Economy 178897560X, 9781788975605

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A Modern Guide to the Informal Economy

ELGAR MODERN GUIDES Elgar Modern Guides offer a carefully curated review of a selected topic, edited or authored by a leading scholar in the field. They survey the significant trends and issues of contemporary research for both advanced students and academic researchers. The books provide an invaluable appraisal and stimulating guide to the current research landscape, offering state-of-the-art discussions and selective overviews covering the critical matters of interest alongside recent developments. Combining incisive insight with a rigorous and thoughtful perspective on the essential issues, the books are designed to offer an inspiring introduction and unique guide to the diversity of modern debates. Elgar Modern Guides will become an essential go-to companion for researchers and graduate students but will also prove stimulating for a wider academic audience interested in the subject matter. They will be invaluable to anyone who wants to understand as well as simply learn. Titles in the series include: A Modern Guide to Food Economics Edited by Jutta Roosen and Jill E. Hobbs A Modern Guide to Post-Keynesian Institutional Economics Edited by Charles J. Whalen A Modern Guide to Creative Economies Edited by Roberta Comunian, Alessandra Faggian, Jarna Heinonen and Nick Wilson A Modern Guide to Tourism Economics Edited by Robertico Croes and Yang Yang A Modern Guide to Austrian Economics Edited by Per L. Bylund A Modern Guide to the Economics of Crime Edited by Paolo Buonanno, Paolo Vanin and Juan Vargas A Modern Guide to Knowledge Francisco Javier Carrillo A Modern Guide to Uneven Economic Development Edited by Erik S. Reinert and Ingrid Harvold Kvangraven A Modern Guide to the Informal Economy Colin C. Williams

A Modern Guide to the Informal Economy Colin C. Williams Professor of Public Policy, Sheffield University Management School (SUMS), University of Sheffield, UK

ELGAR MODERN GUIDES

Cheltenham, UK • Northampton, MA, USA

© Colin C. Williams 2023

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited The Lypiatts 15 Lansdown Road Cheltenham Glos GL50 2JA UK Edward Elgar Publishing, Inc. William Pratt House 9 Dewey Court Northampton Massachusetts 01060 USA A catalogue record for this book is available from the British Library Library of Congress Control Number: 2023930159 This book is available electronically in the Economics subject collection http://dx.doi.org/10.4337/9781788975612

ISBN 978 1 78897 560 5 (cased) ISBN 978 1 78897 561 2 (eBook)

EEP BoX

Contents List of figuresvii List of tablesviii Acknowledgementsx 1

Introduction to the informal economy

PART I

1

THEORETICAL AND METHODOLOGICAL PERSPECTIVES

2

Evolution of theories explaining the informal economy

24

3

Methods for measuring the size of the informal economy

53

PART II

MAGNITUDE AND CHARACTER OF THE INFORMAL ECONOMY

4

Prevalence of the informal economy in global perspective

66

5

Types of work in the informal economy

96

6

Who participates in the different types of informal work and why?

128

PART III POLICY APPROACHES 7

Policy options for tackling the informal economy: objectives and policy measures

160

8

Deterring participation in the informal economy

181

9

Incentives to operate in the formal economy

207

10

Education and awareness raising to encourage formalisation240

11

Reforming formal institutions to encourage formalisation

v

261

vi

12

A modern guide to the informal economy

Conclusions and a future roadmap for the transition to formality282

References304 Index383

Figures 4.1

ILO typology of jobs

69

4.2

Classification of countries by the prevalence of the informal economy

70

5.1

A typology of employment relations

vii

106

Tables 1.1

Adjectives and nouns used in title of outputs published, 1975–April 2022

2.1

Modernisation theory: determinants

28

2.2

Political economy perspective: determinants

32

2.3

Neo-liberal theory: evaluation of taxation determinant

36

4.1

World Bank Enterprise Survey estimates of the prevalence of the informal economy (unweighted means)

68

4.2

Prevalence rates of informal and formal business start-ups, measured as number of new business entries per 100 adult-age population

68

4.3

Informal employment as percentage share of total employment, by global region

71

4.4

Composition of formal and informal employment, by employment status

72

4.5

Prevalence of the informal economy: share of informal employment in total and non-agricultural employment, and distribution of informal workers by employment status

74

4.6

Prevalence and intensity of the informal economy, by country

81

4.7

Economic and social conditions associated with share of informal employment in total employment, by theoretical perspective87

4.8

Economic and social conditions associated with share of non-agricultural informal employment in total non-agricultural employment, by theoretical perspective

90

Formal institutional conditions associated with the prevalence of informal employment

92

4.9

viii

3

Tables

ix

7.1

Policy tools available for formalising the informal economy

169

8.1

Impact of perceived sanctions on participation in the informal economy: European studies

183

10.1 Neutralisation techniques used by the non-compliant to justify their actions

246

12.1 Institutionalist explanation of participation in the informal economy and policy responses

286

Acknowledgements This book is the result of a sabbatical granted by the University of Sheffield. I am grateful to my university for providing this opportunity. The content of this book is also a direct result of discussions and collaboration with many academics over the past decade or so. In alphabetical order, I would like to thank all my main co-authors in recent years who have aided the development of my understanding of the informal economy, namely Levent Altinay, Slavko Bezeredi, Adnan Efendic, Ceyhun Elgin, Josip Franić, Ardiana Gashi, Anjula Gurtoo, Adrian Horodnic, Ioana Alexandra Horodnic, Aysegul Kayaoglu, Abbi Kedir, Brunilda Kosta, Besnik Krasniqi, Alvaro Martinez-Perez, Abel Polese, Peter Rodgers, Arnis Sauka, Friedrich Schneider, Mohammad Shehryar Shahid, Domenica Urzi, Natalia Vershinina, Tim Vorley, Richard White, Nick Williams, Jan Windebank, and Gamze Oz-Yalaman. Beyond these main co-authors, there are of course many others with whom I have authored papers over the years who have contributed to my intellectual development and understanding of the informal economy. My sincere apologies for not mentioning all of you here. Beyond my peers in the academic community, there are many practitioners who need to be acknowledged in this book with whom I have cooperated recently and who have helped me develop my understanding of how the informal economy can be addressed in policy and practice. These can be divided into practitioner colleagues involved in, first, the European Platform Tackling Undeclared Work, second, the Western Balkans Network Tackling Undeclared Work, and third, the International Labour Organization (ILO). First, and since 2016 in my role as lead expert to the European Platform Tackling Undeclared Work, many government officials as well as representatives of European-level social partner organisations who are too numerous to mention by name here have helped me better understand the informal economy and the challenges involved in operationalising policy initiatives. It would be wrong of me to pick out individuals to mention, so I will not do so. Nevertheless, I will mention several officials in the European Commission’s Directorate-General for Employment, Social Affairs and Inclusion (DG EMPL) with whom since 2016 I have closely cooperated on establishing and developing the European Platform, namely Denis Genton, Lambert Kleinmann, Elodie Fazi, and Sigried Caspar. I would also like to thank colleagues in the newly established European Labour Authority (ELA), which x

Acknowledgements

xi

has been host to the European Platform since 2021, especially Krzysztof Bandasz, as well as all the ELA national liaison officers. Finally, I would like to acknowledge my colleagues in the Connect partnership, especially those in ICF, including Alex Simpson, Naomi Williamson, Lisa Schoenenberg, and Karolina Jakubowska, who have been excellent work colleagues to cooperate with daily, as have Ruslan Stefanov, Daniela Mineva, Martin Kahanec, and the 50+ other experts involved in implementing the annual work programmes of the Platform. Again, my apologies for not mentioning you all by name. Second, in the Western Balkans, I am indebted to the European Foundation for the Improvement of Living and Working Conditions (Eurofound) who funded between 2008 and 2013 three projects to improve understanding of the informal economy in Western Balkan countries seeking accession to the European Union (EU). I am also indebted to the European Commission who then funded between 2013 and 2017 the Marie Curie Industry–Academia Partnerships and Pathways (IAPP) project to develop capacities and capabilities for tackling undeclared work in Bulgaria, Croatia, and FYR Macedonia and the 15 Marie Curie post-doctoral fellows appointed under this scheme. I would also like to thank my colleagues in the German Ministry of Finance and Slovak Republic Ministry of Labour with whom I cooperated in 2016–17 on the Europe Aid twinning project to strengthen policy and capacities to reduce undeclared work in Croatia. More recently, since 2017, the Regional Cooperation Council (RCC) has taken this capacity building further forward, based on European Commission funding, by establishing the Western Balkans Network Tackling Undeclared Work, which mirrors the European Platform Tackling Undeclared Work. As the lead expert, it has enabled me to work closely with senior government officials in the EU accession and candidate countries of Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia, and Serbia, to develop the capacities and capabilities of their enforcement authorities. Again, it would be wrong of me to pick out individual senior government representatives in these economies to mention here, so I will not do so. However, I will mention by name several officials in the RCC with whom I have cooperated daily in recent years, namely Nand Shani and Sanda Topic, and latterly Amira Ramhorst, Sanjin Cengic, Admir Vranic, and Ratka Babic. Third and finally, I would like to thank my colleagues in the International Labour Organization (ILO). Over the past decade or so, I have undertaken numerous ILO missions across the world on the transition to formality, not least in Azerbaijan, Greece, Kyrgyzstan, Tajikistan, Ukraine, and Uzbekistan, as well as ILO projects on dependent self-employment, e-formalisation, and designing effective policy and coordination guidance frameworks for United Nations member states to implement Recommendation No. 204 on the transition to formality. I am indebted to many ILO colleagues for their unwavering

xii

A modern guide to the informal economy

support, not least Frederic Lapeyre, Phillipe Marcadent, Mikhail Pouchkin, Antonio Robalo dos Santos, Vicky Leung, and Juan Chacaltana. Again, my apologies for not mentioning you all by name. Last and by no means least, on a personal level, I would like to thank Jan Windebank for putting up with me all these decades and my son, Toby, for being so understanding over all these years and continuing to be so.

1. Introduction to the informal economy In this opening chapter to a Modern Guide to the Informal Economy, three key questions are addressed. What is the informal economy? Why should it be studied? What is important to know about this sphere? For readers new to this subject, a brief search for publications on the “informal economy” reveals a substantial number of items. Since the term “informal” was first introduced by Keith Hart when referring to the economic activities of migrants from northern Ghana in the capital city of Accra (Hart, 1973), and the International Labour Organization (ILO) mission in Kenya popularised the term to replace the “traditional” economy (ILO, 1972), 4826 published outputs have had the “informal economy” in their title. Between 1975 and 1979, just 12 were published with the phrase “informal economy” in their title, followed by 39 outputs between 1980 and 1984, 169 between 1985 and 1989, 248 between 1990 and 1994, 287 between 1995 and 1999, 633 between 2000 and 2004, 807 between 2005 and 2009, 1050 between 2010 and 2015, 1120 between 2015 and 2019, and 461 between 2020 and April 2022. Therefore, this is a rapidly growing literature. Over the same period, 50 times more (243 000 published outputs) had the word “economy” in their title. So just 2 per cent of the published outputs with “economy” in their title are on the “informal economy”. The remaining 98 per cent are on the formal economy. This focus upon the formal economy in scholarship does not mirror lived practice. The majority (61.2 per cent) of the world’s workers have their main employment in the informal economy (ILO, 2018a), yet only 2 per cent of the outputs on the “economy” cover these workers. Why is so little attention given to this dominant feature of the global economic landscape? One clue is that 90 per cent of workers in developing countries have their main employment in the informal economy, but just 18 per cent in the minority developed world (ILO, 2018a). A western centrism holds sway over scholarship, reflected in the dominant lived practice across most of the world being under-emphasised, disregarded, and glossed over in mainstream economic discourse. This introductory chapter begins to counteract this by setting out what is the informal economy, why it should be studied, and what is important to understand. The first section explains what is meant by the informal economy, highlighting the various nouns and adjectives used along with the different definitions. The second section then reviews the rationales for studying the 1

2

A modern guide to the informal economy

informal economy by analysing its impacts not only for informal workers and businesses, but also for formal enterprises and workers, consumers, and governments and societies. The third and closing section then outlines what is important to know about this sphere through a discussion of the structure and argument of this book.

DEFINING THE INFORMAL ECONOMY At least 38 different adjectives and no fewer than seven different nouns have been used for what is called the “informal economy” in this book. Terms include the “black”, “cash-in-hand”, “hidden”, “irregular”, “invisible”, “non-observed”, “shadow”, “subterranean”, “undeclared”, “underground”, “undocumented”, “unrecorded”, “unreported”, “unorganised”, or “unregulated” economy, sector, market, work, employment, to name just a few of the adjectives and nouns used. Casting an eye over these various adjectives used (see Table 1.1), it becomes quickly obvious that all describe in different ways what is either lacking, insufficient, or missing in the informal economy compared with the formal economy. For example, it is unorganised, hidden, precarious, irregular, unregulated, or undeclared. As Banks et al. (2020: 225) put it, these adjectives also reflect a “hierarchy of ‘formal’ as the norm and ‘informal’ as abnormal and/ or inferior”. All the adjectives used depict this economic activity as negative, inferior, abnormal, and residual. These adjectives represent such activity as negative and inferior because all have a synonym that represents the formal economy more positively (e.g., precarious compared with secure, unregulated compared with regulated, irregular compared with regular, unorganised compared with organised, undeclared compared with declared). They all represent such economic activity as abnormal and residual because it is portrayed as “the other” that is not the mainstream. Nevertheless, this recognition of the use of negative, inferior, abnormal, and residual adjectives is not a problem identified for resolution using alternative terms. Instead, it enables an appreciation of the dominant perception of the informal economy. The informal economy is not only what the formal economy is not but also deemed negative, inferior, abnormal, and a residual. Table 1.1 displays the most common adjectives used by analysing the number of published outputs since 1975 which combine the 38 adjectives and seven nouns in their title (e.g., underground economy, undeclared work). The finding is that the most common adjective used is “informal” with 16 998 outputs using this adjective in combination with one of the seven nouns. Given that the adjective “informal” is in the title of 48.3 per cent of all publications on this topic since 1975, this is the adjective used in this book. It is also doubtless one of the most accurate adjectives that captures the social relations involved

Introduction to the informal economy

Table 1.1

Adjectives

3

Adjectives and nouns used in title of outputs published, 1975– April 2022 Number of

Nouns

outputs

Number of outputs

Informal

16 998

Economy

12 871

Shadow

3 462

Sector

10 250

Black

2 394

Work

4 298

Precarious

2 228

Employment

3 430

Underground

2 054

Market

3 151

Dual

1 492

Activity

1 049

Hidden

1 086

Economic activity

173

Everyday

714

Total

35 222

Second

570

 

 

Undeclared

547

 

 

Other

547

 

 

Invisible

444

 

 

Unorganised

363

 

 

Irregular

335

 

 

Parallel

311

 

 

Grey

294

 

 

Peripheral

217

 

 

Unofficial

214

 

 

Marginal

205

 

 

Non-observed

171

 

 

Unregulated

99

 

 

Underwater

97

 

 

Unobserved

70

 

 

Unrecorded

64

 

 

Subterranean

47

 

 

Clandestine

33

 

 

Undocumented

32

 

 

Unreported

25

 

 

Cash-in-hand

20

 

 

Submerged

19

 

 

Twilight

13

 

 

Ghetto

12

 

 

Occult

9

 

 

Off-the-books

9

 

 

A modern guide to the informal economy

4

Adjectives

Number of

Nouns

outputs

Number of outputs

Concealed

8

 

 

Non-official

7

 

 

Untaxed

2

 

 

Moonlight

2

 

 

35 214

 

 

Total

Source: Author’s calculations from Google Scholar.

and how they differ from the more “formal” social relations of the formal economy. Furthermore, it is the adjective that least depicts this economic activity in negative, inferior, and abnormal terms. The second most common adjective is “shadow”, used in the title of 3462 publications (9.8 per cent of all outputs). In this book this adjective is not used, because it is far less popular than “informal” and, as will be discussed below, often includes not only legal activities not declared to the authorities but also criminal activities where the goods and services sold are illegal. The third most common term is “black”, used in the title of 2394 publications (6.8 per cent of all outputs). This adjective is not used in this book due to its racist connotations, with the negative and inferior side of the binary termed “black” and contrasted with the more positive and dominant “white” economy. This is unacceptable and, as such, the term has steadily dropped out of usage, although it is still sometimes used in combination with “market” in the term “black market”. The fourth most common adjective is “precarious”, used in the title of 2228 items (6.3 per cent of all outputs), which is usually combined with the nouns of “employment” and “work”. Its antonym is “secure”. However, the use of precarious versus secure to depict the informal and formal economies respectively is inappropriate. With the emergence of precarious non-standard forms of employment, such as part-time, fixed term, and agency employment (Eichhorst et al., 2013; Hatfield, 2015; Pedersini and Coletto, 2010) and self-employment, the so-called secure standard employment relationship of formal, full-time, and permanent waged employment is by no means any longer standard in the formal economy. The fifth most common adjective used is “underground” and is in the title of 2054 publications (5.8 per cent of all outputs), usually combined with the noun of “economy”. However, this term tends to be heavily concentrated in North American scholarship and rarely used in other contexts. It is similarly the case that other less used adjectives are geographically and/or temporally specific. The adjective “second” used in the title of 570 publications (1.6 per cent of all outputs), most commonly combined with the noun “economy”, is a term that was popular in the Soviet-period and early

Introduction to the informal economy

5

post-socialist transition economies of East-Central Europe. So too were the adjectives “everyday” (used in the title of 714 publications or 2.0 per cent of all outputs), commonly combined with the noun “work”, and “other” (used in the title of 547 or 1.6 per cent of all outputs), frequently combined with the noun “market”. Meanwhile, the adjective “hidden” (used in the title of 1086 or 3.1 per cent of all outputs) derives mostly from the UK context where the tax authority (Her Majesty’s Revenue and Customs, HMRC) uses this term, while the adjective “undeclared” (used in the title of 547 or 1.6 per cent of all outputs) is used mostly in the context of the European Union (EU). Following its adoption by the European Commission in the late twentieth century (European Commission, 1998), it is the term used by the European Platform Tackling Undeclared Work of the European Labour Authority (ELA) bringing together the 27 EU member states along with Norway and Iceland, and widely used in these European countries as the prominent adjective. It is also increasingly used by the candidate and accession economies to the EU in the Western Balkans (Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia, and Serbia). Prior to this, the adjective “grey” (used in the title of 294 or 0.8 per cent of all outputs) was often combined with the noun “economy” in these Western Balkan economies, as well as East-Central European countries. Turning to the nouns used, the most common (in the title of 12 871 or 36.5 per cent of all outputs) is “economy”. This is followed by “sector” (in 10 250 outputs or 29.1 per cent), “work” (in 4298 or 12.2 per cent of all outputs), “employment” (in 3430 outputs or 9.7 per cent), “market” (in 3151 outputs or 8.9 per cent), “activity” (in 1049 outputs or 3.0 per cent), and “economic activity” (in 173 outputs or 0.5 per cent). Given the prominence of the noun “economy” in the existent literature, this is the noun adopted in this book and is combined with the most prominent adjective of “informal” to denote the subject matter. However, the combining of the adjective “informal” with the noun “economy” for usage in this book requires a word of caution. The term “informal economy” creates an image of separate formal and informal economies. However, it is long and widely recognised that these activities are all part of one economy (Cappechi, 1989; Castells and Portes, 1989; Harding and Jenkins, 1989; Thomas, 1992). Therefore, the use of “informal economy” in this book does not mean that these activities are seen as discrete from the formal economy. Neither does it mean that the informal “economy” is a homogeneous whole. Just as there is heterogeneity in the types of work undertaken in the formal economy, so too does heterogeneity exist in the types of work conducted in the informal economy (Longo, 2020). The alternative would be to use the second most common noun of “sector”. However, this is not used in this book because in popular parlance and in the Standard Industrial

6

A modern guide to the informal economy

Classification (SIC) index it denotes a particular set of goods or services. Activities in the “informal economy” do not involve a particular set of goods or services but crosscut all sectors. Any good or service can be produced or distributed in the formal or informal economy. How, therefore, can the informal economy be defined? For over half a century, there has been an ongoing debate about how to define it and differentiate it from the formal economy. To bring order to the 102 different definitions identified by Luque (2022), this book uses the most common way of grouping definitions together, namely by whether they are enterprise-, jobs-, or activity-based. Enterprise-based definitions describe what is absent, insufficient, or lacking in informal enterprises compared with formal enterprises, jobs-based definitions what is absent, insufficient, or lacking in informal jobs relative to formal jobs, and activity-based definitions what is absent, insufficient, or lacking in informal economic activities compared with formal economic activities. Here, each is considered in turn. Starting with enterprise-based definitions, the fifteenth International Conference of Labour Statisticians (ICLS) in 1993 sought to resolve the ambiguities in meaning that had emerged in the prior two decades. It did this by defining employment in the informal sector as “all jobs in informal sector enterprises, or all persons who, during a given reference period, were employed in at least one informal sector enterprise, irrespective of their status of employment and whether it was their main or a secondary job” (Hussmanns, 2005: 3). An informal sector enterprise was defined as a small or unregistered, private unincorporated enterprise. In this context, “small” refers to the numbers employed in the enterprise being below a specific threshold, determined in a national context. “Unregistered” refers to the enterprise not being registered according to specific types of national-level legislation (e.g., tax or social security laws, factory and/or commercial acts, professional group regulatory acts). Meanwhile, a “private unincorporated” enterprise is a business owned by individuals or households and not established as a separate legal entity with a complete set of accounts available that would enable the financial separation of the production of the business from its owner’s other activities (Hussmanns, 2005; ILO, 2012, 2013a). When applied to lived practice, problems arose. On the one hand, some scholars wrongly classified all micro-enterprises as informal enterprises. On the other hand, this enterprise-centred definition failed to include informal employment in formal enterprises. Hence, the seventeenth ICLS in 2003 decided to add to this enterprise-based definition a job-based definition. This sought to include informal work not only in informal enterprises but also in formal enterprises. In this job-based definition, “informal employment” was defined as “jobs that generally lack basic social or legal protections or

Introduction to the informal economy

7

employment benefits and may be found in the formal sector, informal sector or households” (ILO, 2012: 12). This jobs-based definition usefully recognises that work in the informal economy exists in both informal and formal production units and that formal enterprises sometimes employ informal workers (Hussmanns, 2005). It also includes in the definition of informal employment both employers and own-account workers who are self-employed in their own informal sector enterprises, contributing family workers and members of informal producers’ cooperatives, and employees whose employment is, in law or in practice, neither subject to national labour legislation or income taxation nor entitled to social protection or certain employment benefits, such as severance pay, notice of dismissal, and annual paid leave or sick leave (Hussmanns, 2005; ILO, 2012, 2013a; Williams and Lansky, 2013). The outcome has been that these enterprise- and jobs-based definitions can be combined to define the informal economy. Taking the enterprise as the unit of analysis, the “informal sector” covers both formal and informal jobs in informal sector enterprises, while taking jobs as the unit of analysis, “informal employment” covers informal jobs in both informal and formal enterprises. The “informal economy” then refers to those workers who in their main job are employed in the informal sector or in informal employment, but counting those doing both only once (Hussmanns, 2005; ILO, 2012). The ninetieth International Labour Conference in 2002, as well as the ILO’s Recommendation No. 204 in 2015, thus defines the informal economy as all economic activities by workers and economic units that are – in law or in practice – not covered or insufficiently covered by formal arrangements (ILO, 2002, 2015). Although these enterprise- and job-based definitions dominate scholarship conducted in the majority world (i.e., developing economies), this has been less the case in studies of the developed economies and post-socialist transition economies. This is largely because these two definitions depict enterprises and jobs dichotomously as either informal or formal. An enterprise is either formal or informal, and a job either formal or informal. However, in developed and post-socialist transition economies, there has been recognition that enterprises and jobs are often concurrently both formal and informal (Banks et al., 2020; Chen, 2012; Potts, 2007; Williams, 2019a). On the one hand, a sizeable proportion of formal enterprises conduct a portion of their work in the informal economy, for example by not reporting transactions for tax or social contribution purposes (Small Business Council, 2004; Williams, 2006a, 2010b). On the other hand, formal employees can receive from their formal employers a portion of their salary as a declared wage and the rest as an undeclared (“envelope”) wage (Horodnic and Williams, 2021; Meriküll and Staehr, 2010; Neef, 2002; Sedlenieks, 2003; Williams, 2010a, 2012a,b,

8

A modern guide to the informal economy

2013a,b; Williams and Horodnic, 2017a; Woolfson, 2007). Given that these two prominent types of work in the informal economy work are not included in the enterprise-based definition because these are formal enterprises or in the job-based definition because the worker is in a formal job (Hussmanns, 2005), the use of an activity-based definition has come to the fore (Eurofound, 2013a; European Commission, 1998, 2007; Sepulveda and Syrett, 2007; Thomas, 1992; Vanderseypen et al., 2013; Williams, 2006a; Williams and Windebank, 1998). One prominent activity-based definition was developed in 2002 by the Organisation for Economic Co-operation and Development (OECD), International Monetary Fund (IMF), International Labour Organization (ILO), and Interstate Statistical Committee of the Commonwealth of Independent States (CIS STAT) as a supplement to the System of National Accounts (SNA) 1993. This defines the “informal economy” (or what they term “underground production”) as, all legal production activities that are deliberately concealed from public authorities … to avoid payment of income, value added or other taxes; to avoid payment of social security contributions; to avoid having to meet certain legal standards such as minimum wages, maximum hours, safety or health standards, etc. … (OECD, 2002: 139)

Although this definition mistakenly uses the term “avoid” when “evade” or “not declare” is more accurate (since avoidance is legal, but evasion or non-declaration is illegal), this activity-based definition implies that absent, insufficient, or lacking from activity in the informal economy is its declaration to, exposure to, or registration with the authorities for tax, social security, and/or labour law purposes when these are deemed necessary (Williams and Windebank, 1998). Other activity-based definitions of the informal economy are akin to this OECD definition. For example, the European Commission (2007: 2) defines what it terms “undeclared work” as “any paid activities that are lawful as regards their nature but not declared to the public authorities, taking into account the differences in the regulatory system of Member States”. Importantly, this does not mean that this activity is unregulated. As Castells and Portes (1989: 15) erroneously assert, the informal economy is “a specific form of income generating production … unregulated by the institutions of society in a legal and social environment in which similar activities are regulated”. Although their activity-based definition usefully defines the informal economy through the lens of the institutions of society, these eminent scholars fail to recognise that the informal economy is viewed differently by the formal and informal institutions in a society. From an institutional theory perspective (Baumol and Blinder, 2008; North, 1990), any society possesses both formal

Introduction to the informal economy

9

institutions in the form of laws and regulations that stipulate the legal rules of the game, and informal institutions, which are the “socially shared rules, usually unwritten, that are created, communicated and enforced outside of officially sanctioned channels” (Helmke and Levitsky, 2004: 727). The above definition does not recognise, first, that the informal economy, although unregulated by formal institutions, is regulated by the rules of informal institutions and, second, that the informal economy is perceived as “legitimate” from the perspective of informal institutions even if it is denoted as “illegal” in terms of the rules of the formal institutions (Siqueira et al., 2016; Webb et al., 2009; Williams et al., 2017a). Recognising this, a more nuanced activity-based definition is that the informal economy involves socially legitimate paid activity that is legal in all respects other than that it is not declared to, is hidden from, or is unregistered with the authorities for tax, social security, and/or labour law purposes when it should be declared (Williams, 2019a). If the economic activity is illegal in other respects and/or perceived as socially illegitimate, then it is not part of the informal economy. Instead, it is part of the wider criminal economy. The goods and/or services exchanged in the informal economy are legal. If the good and/ or service traded is illegal (e.g., forced labour, selling stolen or counterfeit goods, trafficking illegal drugs), then this is part of the wider “criminal” economy (Medina and Schneider, 2018; Rei, 2018; Remeikiene et al., 2018). Indeed, the term “shadow economy” often includes both criminal and informal economic activities (Schneider, 2005, 2013). Neither is activity that is unpaid included in the informal economy. This is the unpaid subsistence economy, not the informal economy. Nevertheless, as is always the case, there are sometimes blurred boundaries between the informal, criminal, and unpaid subsistence economies. For example, an illegal good or service in one country may be legal in others (e.g., cannabis, prostitution), meaning that in one country it might be part of the informal economy if tax, social security, or labour laws are not complied with, but part of the criminal economy in others. Meanwhile, the subsistence and informal economies sometimes blur since there is not a dichotomy between a paid and unpaid activity but a continuum. Exemplifying this is that activities can be reimbursed in-kind using reciprocal labour and/or gifts instead of money. Usually, however, only paid activities involving money are included in the definition of the informal economy (Williams, 2006a). Throughout this book, care is taken to clarify the definition of the informal economy being adopted whenever studies are reported, if it differs from the norm. However, in general, an activity-based definition is adopted. The informal economy in this book will refer to socially legitimate paid activity that is legal in all respects other than it is not declared to, is hidden from, or is unregistered with the authorities for tax, social security, and/or labour law purposes

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A modern guide to the informal economy

when it should be declared. Compared with the enterprise- and jobs-based definitions, this allows the inclusion of not only informal enterprises and informal employment, as defined by the ILO, but also formal enterprises that fully or partially engage in economic activity not declared to the authorities when it should be declared, and formal jobs in which some of the salary is paid as a declared wage and some as an undeclared (envelope) wage.

RATIONALES FOR STUDYING THE INFORMAL ECONOMY Why should the informal economy be studied? To answer this, it is necessary to appreciate the impacts of the informal economy on different stakeholder groups, namely formal businesses, informal enterprises, informal workers, formal workers, consumers of goods and services from the informal economy, the broader economy and society, and governments. Early scholarship on the impacts of the informal economy focused heavily on the negative consequences (e.g., Castells and Portes, 1989). Nevertheless, over the past few decades, there has started to emerge a more balanced perspective. This recognises that the informal economy can have potentially positive as well as negative impacts on each group affected. Consequently, each stakeholder group affected is in analysed here in turn in terms of the negative and positive impacts that the informal economy has for them. Nevertheless, and before commencing, it must be stated that the overarching consensus is that the negative impacts far outweigh the positive ones, and that the positive effects are only positive if the work in the informal economy is brought into the formal economy. Impacts on Formal Businesses The impacts of the informal economy on formal businesses can be both negative and positive. Commencing with the negative impacts, formal businesses are often hampered by the informal economy for at least three reasons: 1. Businesses operating fully in the informal economy (i.e., unregistered enterprises) and formal enterprises conducting a portion of their transactions in the informal economy possess an unfair competitive advantage over fully formal enterprises because they do not comply with labour laws and evade tax and social insurance payments (Andrews et al., 2011; Bajada and Schneider, 2005; Karlinger, 2013; OECD, 2017; Small Business Council, 2004). They consequently have lower labour and thus production costs, potentially enabling them to undercut formal enterprises on price.

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2. When businesses operating fully or partially in the informal economy have a major impact on formal enterprises, this can cause compliant formal enterprises to no longer comply with the legal rules of the game (Grabiner, 2000; Small Business Council, 2004; Williams and Windebank, 1998). 3. When businesses face unfair competition from the informal economy, this reduces the productivity of formal enterprises (Amin and Okou, 2020; Beltrán, 2020; World Bank, 2019a). Indeed, formal enterprises facing informal competition are on average only three-quarters as productive as those that do not face such competition (World Bank, 2019a), or as Amin and Okou (2020) find, informal firms lower the productivity of formal firms by 20 to 24 per cent. However, there are also potentially positive impacts of the informal economy for formal enterprises: 1. The informal economy can function as an incubator where start-ups “test-trade” the viability of their venture before deciding whether to register and become a formal business venture (Williams and Martinez-Perez, 2014a). For example, in the UK, one-fifth of existing formal businesses test-traded in the informal economy before registering (Williams and Martinez-Perez, 2014c). However, this is only positive for the wider economy if these ventures then transition to the formal economy. It is not a positive feature if they remain unregistered in the informal economy. 2. Formal enterprises which start up unregistered and then later register as formal businesses have higher subsequent rates of employment, sales, and productivity growth than businesses that register prior to the commencement of trading. This is because they initially avoid the cost of registration and instead focus resources on addressing other liabilities of newness, thus establishing a firmer foundation for future subsequent growth than businesses registering from the outset (Williams et al., 2017a). This is due to the benefits of initial registration and formalisation in the developing world often being insufficient to outweigh the costs of operating initially in the informal economy (Williams and Kedir, 2017a,b). 3. For large formal businesses in particular, subcontracting and outsourcing to informal workers and businesses is a useful cost reduction strategy (Castells and Portes, 1989; Davis, 2006; Gallin, 2001; Hudson, 2005; Ketchen et al., 2014; Meagher, 2010; Slavnic, 2010; Taiwo, 2013). Impacts on Informal Enterprises The impacts of the informal economy on informal enterprises are again both negative and positive. Commencing with the negative impacts, enterprises and

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A modern guide to the informal economy

own-account workers operating in the informal economy discover that opportunities to develop their ventures are often hampered for at least six reasons: 1. They often suffer from restricted access to formal finance and conventional bank credit to develop their business since they have no formal accounts, a lack of documentation of their assets, and inadequate financial statements (ILO, 2015; Koeda and Dabla-Norris, 2008; La Porta and Schleifer, 2014; Llanes and Barbour, 2007; Maloney, 2004; Straub, 2005; Turkson et al., 2022; World Bank, 2019a). As Ohnsorge and Yu (2021) find, in emerging market and developing economies with above-median informality, one-third of firms identify access to finance as a major constraint, which is 8 percentage points higher than in emerging market and developing economies with below-median informality. 2. They cannot engage in marketing of their business in an open manner to attract new customers due to fear of being detected by the public authorities (Williams et al., 2012a). 3. They often must keep their venture small to remain “under the radar” of the public authorities (Barbour and Llanes, 2013; World Bank, 2019a; Williams et al., 2012a). The knock-on effect can be lower physical investment, such as in innovative technologies, due to their unwillingness to scale up for fear of becoming visible to the authorities (Dabla-Norris and Inchauste, 2008; Gandelman and Rasteletti, 2017). 4. They cannot establish formal intellectual property rights for their process and product innovations (De Beer et al., 2013, 2016; Mustapha et al., 2022; Sheikh and Bhaduri, 2020). 5. They cannot establish enforceable commercial contracts or access government subsidies and incentives, public infrastructure, and public services (Rosaldo, 2021; Williams et al., 2017a). 6. Compared with formal businesses, they lack access to business support to help them develop and grow (ILO, 2002; Karjanen, 2011; Llanes and Barbour, 2007; OECD, 2017; Williams and Nadin, 2013a,b, 2014a). However, there are also potentially positive impacts of the informal economy for enterprises and own-account workers operating in this sphere: 1. It offers a means of livelihood for those finding themselves excluded from the formal economy, providing income for necessity-driven informal enterprises and entrepreneurs (Williams and Shahid, 2016). 2. It can overcome barriers to entry into work both in developing countries where work in the informal economy is labour-intensive and dependent on few skills and little start-up capital, and in developed countries where new ventures often commence with goods and services being provided to

Introduction to the informal economy

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people already known to them (Chen, 2012; Williams, 2016a; Williams and Lansky, 2013). 3. It provides a potential escape route and alternative to the formal economy when regulations are complex and hinder business development (De Soto, 1989, 2001). 4. It provides enterprises and own-account workers with a means of evading corrupt practices from public sector officials demanding bribes when the ventures operate in the formal economy (Aidis and Adachi, 2007; Berdiev and Saunoris, 2018; Choi and Thum, 2005; Dreher et al., 2009; Round et al., 2008; Tonoyan et al., 2010). 5. It can provide employers and own-account workers with flexibility in where, when, and how they work, which is especially important for women who remain responsible for childcare (Chen, 2012; Snyder, 2004). Impacts on Informal Employees For those engaged in waged employment in the informal economy, there are again both negative and positive impacts. Examining the multiple negative impacts of being in dependent waged employment in the informal economy, informal employees: 1. Do not have access to the same legal employment rights as formal employees, including annual and other leave, sickness and redundancy pay, and training (ILO, 2015; TUC, 2008; Williams and Lansky, 2013). 2. Do not have access to a range of other legal rights, such as the minimum wage, tax credits, and maximum working hours (Dellot, 2012; TUC, 2008; Vanderseypen et al., 2013; Williams and Windebank, 1998). 3. Lack the ability to build up their rights to a state pension and other contributory benefits, and to gain access to occupational pension schemes (Dellot, 2012; ILO, 2002; Williams and Lansky, 2013). 4. Have less job security compared with formal employees, with employers able to make them redundant with no redundancy pay or legal recourse from the employee (Katungi et al., 2006; Kovács, 2014; Williams, 2001). 5. Receive lower wage rates than formal workers (Kim, 2020; Liwinski, 2022; Ohnsorge et al., 2021; Tansel et al., 2020), with women informal workers witnessing a double penalty, namely informal employees are paid lower wages than formal employees, and women are paid lower wages than men (Duval-Hernández, 2021; OECD/ILO, 2019; Williams and Gashi, 2022). Informal workers are, on average, paid 19 per cent less than formal workers, and this wage differential is greater in countries with larger informal economies (World Bank, 2019a).

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A modern guide to the informal economy

6. Often lack the same access to health and safety standards in the workplace as formal employees (Benavides et al., 2022; Gallin, 2001; ILO, 2015; Montero-Moraga et al., 2020; OECD, 2017; TUC, 2008). 7. Lack the same collective bargaining rights as formal employees (Fudge, 2020; ILO, 2002, 2015). 8. Reduce their employability because of a lack of evidence of their participation in employment as an informal employee (Barbour and Llanes, 2013; Dellot, 2012). 9. Cannot get a reference from their employer when seeking a formal job (ILO, 2002; TUC, 2008). 10. Cannot gain access to credit, such as loans and mortgages, because they do not have evidence of their real income (Kempson, 1996; Williams, 2014a; World Bank, 2019a). 11. Confront a continuous worry of being detected by public officials (Grabiner, 2000). The positive impacts of working in the informal economy are that it provides informal employees with: 1. An income source in contexts where formal economy means of livelihood and/or social protection may not be available (World Bank, 2019a). 2. A degree of potential flexibility concerning when, where, and how they work. However, the negative impacts markedly outweigh the positive impacts for informal employees. Impacts on Formal Employees For formal employees, the impacts of the informal economy are negative. The informal economy: 1. Reduces formal wage rates (OECD/ILO, 2019; Williams and Gashi, 2022). 2. Reduces the ability to secure effective collective bargaining rights since employers may exit the formal economy if standards are set too high (ILO, 2002, 2015). 3. Reduces the number of formal jobs in contexts where employers rely more heavily on informal employment (ILO, 2018a). 4. Can lead to quasi-formal employment where a formal employer pays a formal employee a portion of their salary on a declared official basis and the rest as an undeclared (envelope) wage, which reduces formal employees’ access to full pension and other contributory benefits as well as loans

Introduction to the informal economy

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and mortgages due to their earnings appearing lower than they are (Franić, 2019a, 2020a; Hazans, 2005; Sedlenieks, 2003; Williams, 2008a). Expanding on this last point, when quasi-formal employment arises, the formal written contract of employment of a formal employee is often altered through a subsequent verbal contract. The most common additional conditions imposed in these verbal contracts are that they will not take their full statutory entitlement to annual leave, they will work longer hours than the formal contract states, and the tasks and responsibilities will be greater than the formal contract states (Franić, 2020a; Williams, 2014a). The employers can then withdraw the envelope wage payment to force employees to voluntarily leave without the need for formal redundancy proceedings and severance pay, and employers can also threaten to stop or reduce the envelope wage payment to force employees to undertake additional tasks beyond their formal contract (Franić, 2020a; Williams and Padmore, 2013a; Woolfson, 2007). As far as is known, no positive impacts of the informal economy have been identified for formal employees. Impacts of the Informal Economy on Consumers Another stakeholder group consists of the consumers who acquire goods and services from the informal economy. There are again both negative and positive impacts. The negative impacts for consumers who acquire goods and services from the informal economy are that: 1. They can find it challenging to pursue legal action against the informal supplier when the work undertaken is inadequate, of inferior quality, or insufficient (Eurofound, 2013a; OECD, 2017; Williams et al., 2012a). 2. Their insurance cover may be invalid (Llanes and Barbour, 2007; OECD, 2017). 3. There is a lower probability that there will be adherence to health and safety regulations (Dellot, 2012; Williams et al., 2012a). 4. Despite the widespread view that goods and services acquired in the informal economy are cheaper, this may not always the case. Informal enterprises operating in “bottom of the pyramid” (BOP) markets can be often inefficient and unproductive and therefore unable to charge lower prices for products (London et al., 2014; World Bank, 2019a). Turning to the positive impacts for consumers and reflecting how the impacts of the informal economy are debateable, other scholars claim that the informal economy provides consumers with more affordable goods and services. This is argued to be the case both in BOP markets (Ketchen et al., 2014) and

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A modern guide to the informal economy

in higher-income markets when, for example, no value added tax (VAT) is charged and payment is in cash without receipts (Williams, 2014a; Williams and Martinez-Perez, 2014b; Williams et al., 2012b). Impacts on Economies and Societies There are macro-level impacts on the economies and societies in which work in the informal economy occurs. The negative impacts for the economy and society are that: 1. Informal enterprises, despite often being low-productivity ventures lacking the scale to produce efficiently, gain substantial cost advantages by evading taxes and regulations, which compensates for their low productivity and small scale. The net impact is to reduce overall productivity levels in economies and hinder economic development and growth (La Porta and Schleifer, 2008, 2014; Williams, 2014a; World Bank, 2019a). 2. Participation in the informal economy can have knock-on effects on compliance with the formal institutions and encourage a less compliant attitude to the rule of law more widely (Grabiner, 2000; Small Business Council, 2004; Williams and Windebank, 1998). 3. Informal economies result in weakened trade union representation and collective bargaining (Gallin, 2001; Schminke and Fridell, 2021; TUC, 2008). 4. Examining countries with larger informal economies, they tend to be those with lower levels of gross domestic product (GDP) per capita, higher levels of corruption, lower levels of social protection, greater levels of inequality, and higher levels of poverty. Although this does not necessarily signify a cause–effect relationship, it does suggest that there is a significant association (see Chapter 4). Examining the positive impacts on societies and economies, it can be asserted that the informal economy: 1. Provides work and a means of livelihood, even if it is lower-paid and more precarious (Ketchen et al., 2014; World Bank, 2019a). 2. Provides a breeding ground for entrepreneurship and an enterprise culture and a testbed for business start-ups, facilitating the development of entrepreneurship and an enterprise culture (Williams, 2006a, 2017a; Williams and Martinez-Perez, 2014a). 3. Allows income generated in it to be spent in the formal economy, thus boosting demand for formal goods and services, and contributing to official economic growth (Schneider and Williams, 2013; World Bank, 2019a).

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Impacts on Governments Finally, for governments, there are again both negative and positive impacts of the informal economy. The negative impacts are that the informal economy: 1. Leads to a loss of state revenue from the non-payment of direct and indirect taxes and social contributions (Bajada and Schneider, 2005; Müller and Miggelbrink, 2014; OECD, 2017; Williams and Windebank, 1998; World Bank, 2019a). 2. Has negative effects on social cohesion by diminishing the public money available to governments to pursue social integration, social protection, and mobility initiatives (Andrews et al., 2011; Eurofound, 2013a; OECD, 2017; Vanderseypen et al., 2013). 3. Results in loss of regulatory control regarding the quality of jobs in the economy (ILO, 2013a; Vanderseypen et al., 2013; Williams and Lansky, 2013). 4. Can produce a less compliant attitude to the law more broadly (Andrews et al., 2011; Dong et al., 2012; Karjanen, 2011; Ojo et al., 2013; Sasunkevich, 2014). The positive impacts of the informal economy for governments, at least from the viewpoint of some scholars, are that: 1. It prevents governments introducing complex and burdensome regulations because businesses will exit into the informal economy to evade these regulations and their associated costs (De Soto, 1989, 2001; World Bank, 2019a). 2. “On the job” training in informal enterprises reduces pressure on state agencies and formal enterprises to provide training (Magidi and Mahiya, 2021; Williams, 2014a; World Bank, 2019a). In sum, it is important to understand and tackle the informal economy not for any single reason but for a multiplicity of reasons. It has impacts on all segments of society, with significant impacts on formal businesses, informal enterprises, informal employees, formal employees, consumers, the broader economy and society, and governments. Even if so far these impacts have not been definitively calculated and quantified, the consensus in the literature is that the informal economy has significant impacts. Moreover, there is little doubt that if the impacts were to be calculated, the negative impacts would far outweigh the positive ones. Hence, the informal economy has major impacts, with the nature of these impacts varying according to the stakeholder group considered, but the net impact (across all stakeholders) is negative.

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A modern guide to the informal economy

ISSUES COVERED IN THE BOOK What different theories have been used to explain the informal economy and how have the theoretical explanations used altered over time? What methods can be used to measure the prevalence of the informal economy and what is its prevalence across the world? What diverse types of informal work exist? Who is more likely to participate in each of these types of informal work and what are their motives for doing so? What policy choices are available regarding what should be done about the informal economy? What is the current approach most widely adopted and what policy tools are being used? This book addresses each of these questions in turn. The aim is to understand and explain the magnitude, characteristics, and drivers of the informal economy along with to understand how to tackle this realm that employs the majority of the world’s workers. Chapter 2 will review the different theories used to explain the informal economy along with how the dominant theoretical approach has changed over time. This will show that during the majority of the twentieth century, modernisation theory was dominant, which contended that the informal economy is a leftover from a pre-modern economic system and gradually fading from view with the modernisation of economies and societies. The informal economy continues to prevail only where there is economic under-development and a slow modernisation of governance. However, the realisation that the informal economy remains significant and persistent across the world has resulted in the appearance of alternative theoretical perspectives. On the one hand, political economy theory has contended that the informal economy is an inherent integrated component of modern capitalism that has grown as larger corporations outsource and subcontract production to informal workers and enterprises, and that de-regulation of work and welfare has resulted in workers being pushed into the informal economy as a survival strategy. Viewed from this perspective, the informal economy persists due to a lack of state intervention in work and welfare. On the other hand, and contrariwise, scholars adopting a neo-liberal theoretical perspective have contended that the informal economy results from over-regulation of the economy, such as high tax levels and burdensome regulations, and portray businesses and workers as choosing to exit the formal economy. However, neither of these theoretical perspectives, with their focus upon different macro-level structural explanations for the informal economy, has been able to explain why some businesses and workers engage in the informal economy in a country or global region and others do not. Chapter 2 thus concludes by examining how institutionalist theory has emerged to explain why some enterprises and workers participate in the informal economy and others operate in the formal economy.

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Chapter 3 then considers the measurement methods for enumerating the size of the informal economy. Two different methodological approaches are discussed, namely indirect and direct measurement methods. On the one hand, indirect measurement methods are reviewed that employ macro-level data collected for other purposes. On the other hand, direct measurement methods such as surveys are reviewed. The argument of this chapter will be that although all measurement methods are beset by irresolvable problems, the emergent consensus is that direct measurement methods should be used when feasible. In Chapter 4, therefore, an examination follows of a direct survey that estimates the varying size of the informal economy across the globe. Building on the theoretical perspectives discussed in Chapter 2, this chapter will also evaluate their validity by analysing whether cross-national differences in the prevalence of the informal economy are associated with economic under-development and a lack of modernisation of governance (modernisation theory), too little state intervention in work and welfare (political economy theory), and/or state over-interference in the form of high taxes and over-burdensome regulations (neo-liberal theory), as well as analysing the relevance of the tenets of institutionalist theory. Having outlined the prevalence of the informal economy and the relevance of the different theoretical explanations, attention then turns to breaking down the vast informal economy that employs the majority of the world’s workers to understand it more fully. Chapter 5 commences this process by examining the diverse types of work in the informal economy. To do so, work in the informal economy is differentiated by whether it is defined in terms of economic units or employment relationships. On the one hand, based on economic units, first, unregistered enterprises will be examined and, second, participation in the informal economy by registered formal enterprises to reveal the “degrees of informalisation” of enterprises. On the other hand, turning to employment relationships, the chapter similarly identifies them as varying from more formal to more informal. These range from bogus self-employment where formal waged employment relationships are misclassified as formal self-employment, quasi-formal employment where a formal employer employs a formal employee but pays an undeclared (envelope) wage in addition to the formal wage, through unregistered employment and informal self-employment, to paid favours at the more informal end of the spectrum. However, these are all two-way relationships between an employer and worker. Reflecting the recognition that there are also three-way relationships between an employer, worker, and an intermediary, two types of triangular relationship are then discussed in which informal work prevails. First, informal work in the collaborative economy is discussed and, second, informal relationships in temporary agency work. Finally, given that the recent COVID-19 pandemic has had an impact on the informal economy, a discussion takes place of new forms of

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A modern guide to the informal economy

informality that have arisen, to provide a contemporary analysis of how there are constantly emerging new forms of informality due to changes in the wider institutional context. Chapter 6 then turns its attention to who participates in each of these distinct types of work in the informal economy and what their motives are for doing so. Until now, most literature on who engages in the informal economy and their motives has examined the informal economy as an entirety. The starting point of this chapter is that it is necessary to answer these questions in relation to each type of informal work. This is because the characteristics of those operating registered enterprises participating in the informal economy and their reasons for doing so differ from, for example, the characteristics and reasons of those engaged in paid favours in the informal economy. Here, in consequence, each type of work in the informal economy is taken in turn to examine, first, the characteristics of those participating in each form of informal work and, second, their motives for doing so. Nevertheless, for the purposes of continuity, throughout this chapter, two key conceptualisations will be evaluated. On the one hand, in relation to the characteristics of those engaged in each type of informal work, the widely held marginalisation thesis is evaluated, which holds that it is groups marginalised from the formal economy who are more likely to participate in the informal economy. On the other hand, in relation to the rationales for engaging in each type of informal work, an evaluation will be undertaken of whether participation in each type is necessity-driven due to their exclusion from the formal economy, or whether at least some workers participate in each type of informal work due to their desire to exit the formal economy. Moreover, besides evaluating the characteristics of those supplying each type of informal work and their rationales, a review will be provided of the characteristics of those purchasing goods and services in the informal economy and their rationales for using this sphere to acquire products and services. Having sought to understand and explain the magnitude, characteristics, and drivers of the informal economy, Chapter 7 turns its attention to the policy choices and approaches for tackling the different facets of this sphere. In recent decades, there has been considerable debate about what should be done about the informal economy. Although modernisation theories predicted an inevitable and immutable transition to formality, the informal economy has shown a notable vitality and resilience. Therefore, it can no longer simply be assumed that it will gradually naturally disappear. Given this, there are five policy goals available to government. First, a decision could be made to take no action regarding the informal economy. Second, a decision could be taken to seek to eradicate the informal economy. Third, governments could decide to de-regulate the formal economy. Fourth, a decision could be taken to harness the informal economy. Fifth and finally, governments could decide

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to formalise the informal economy. This chapter will review each policy goal in turn and review the disadvantages and advantages of pursuing each policy option. Revealing that encouraging the transition to formality is the most widely accepted and most appropriate policy, the second section of this chapter will briefly introduce how this can be achieved. It will introduce the holistic integrated strategic approach that is being widely adopted by supra-national institutions as well as governments across the world, along with the full range of policy tools that can be used and how they can be combined. This will set the scene for the next four chapters which evaluate the effectiveness of each set of policy tools in turn. Chapter 8 commences this review of diverse types of policy tools by examining deterrence measures used to dissuade participation in the informal economy. These seek to increase the actual and/or perceived costs of informality for participants. The rationale is that by increasing the costs of participation in the informal economy, the net outcome will be to change the cost–benefit ratio confronting participants so that they will choose to operate in the formal economy. Two sets of deterrent policy tools are reviewed: on the one hand, tools that improve the actual and/or perceived sanctions for those caught and, on the other hand, tools that increase the perceived or actual probability of detection. Chapter 9 then turns its attention to the other side of the coin, namely policy tools that make it easier and more beneficial to operate in the formal economy. In other words, grounded in a rational economic actor view of participants as operating in the informal economy when the benefits outweigh the costs, these incentive measures complement deterrence measures that increase the costs of non-compliance (“sticks”) by making formality more beneficial and easier (“carrots”). To achieve this, two types of formalisation incentives will be reviewed. On the one hand, supply-side formalisation incentives making it easier and/or more beneficial for businesses and workers to operate in the formal economy are reviewed. On the other hand, demand-side formalisation incentives targeting customers with rewards for purchasing formal goods and services rather than informal ones are evaluated. All these policy initiatives either increase the costs and decrease the benefits of engagement in the informal economy or decrease the costs and increase the benefits of participation in the formal economy. The assumption is that participants in the informal economy are rational economic actors and that changing the cost–benefit ratio confronting potential participants can lead to a formalisation of the informal economy. However, participants in the informal economy are not always purely rational economic actors. They can be social actors, and the issue of trust in authorities and others is important in leading to an asymmetry between formal and informal institutions and thus the prevalence of the

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informal economy. To address this, changes in the informal institutions can be pursued and/or changes in the formal institutions. Chapter 10 reviews the indirect policy measures that seek to reduce the asymmetry between formal and informal institutions by changing the informal institutions through education and awareness raising. To commence, the key issues to consider when designing effective education and awareness-raising campaigns are reviewed. Following this, education and awareness-raising campaigns are evaluated. This will differentiate four different types of education and awareness-raising campaigns that have different target groups and different key messages, namely those targeted at suppliers and highlight the costs and risks of participation in the informal economy, those targeted at suppliers and convey the benefits of formality, those targeted at purchasers of informal goods and services and set out the costs and risks of participation in the informal economy, and those targeted at consumers and display the benefits of operating in the formal economy. Chapter 11 will then analyse the other side of the coin, namely the reforms of formal institutions that can be pursued to build trust and reduce this incongruence between the formal and informal institutions. Three types of change required by formal institutions will be reviewed. First, there is often a disjointed approach across the range of bodies in charge of the transition to formality and a limited incorporation of social partners. The result is a lack of joined-up governance. Therefore, greater coordination of the formal institutions is required. A second change reviewed is that in the internal processes of the formal institutions to improve the perception among businesses, employers, workers, and citizens that there is procedural and redistributive justice and fairness. And third and finally, the structural transformation at the macro-level in terms of the products of formal institutions will be reviewed by identifying the wider economic and social developments required to formalise the informal economy. The concluding chapter then synthesises the findings of the previous chapters to draw conclusions about what is known about the informal economy and outlines future avenues for research that could be usefully pursued in the coming decades to understand and address this extensive and persistent feature of the global economic landscape.

PART I

Theoretical and methodological perspectives

2. Evolution of theories explaining the informal economy The objective of this chapter is to review the major competing theories explaining the informal economy and the evolution of thought. Here, four competing theories are reviewed: modernisation theory, which posits that unmodern governance systems and economic under-development are the key drivers of the informal economy; neo-liberal theory, which contends that too much government interference (e.g., high tax rates, burdensome regulations) is the determinant; political economy theory, which contrariwise asserts that inadequate state intervention in work and welfare is the cause; and institutional theory, which states that formal institutional failures produce an asymmetry between the formal rules, on the one hand, and norms, values, and beliefs, on the other, and thus the greater prevalence of the informal economy. Charting the evolution of these explanations, the argument of this chapter will be that scholarship has shifted over time from the domination of modernisation theory, through a period when the neo-liberal and political economy theories competed for dominance, to the present day when institutional theory has become the dominant explanation, not least because it synthesises and incorporates many tenets of the previous theorisations. Dell’Anno (2022) makes a similar argument in his review of how the informal economy has been explained, albeit using different labels for the theories. To understand these theories and the evolution of thought regarding how the informal economy is explained, the first section of this chapter will review modernisation theory, the second section political economy theory, and the third section neo-liberal theory. This is followed by a fourth section reviewing institutional theory, which synthesises and advances these previous explanations, and a fifth and final section that draws conclusions about the evolution of thought on explaining the informal economy.

MODERNISATION THEORY Modernisation theory dominated how the informal economy was explained over the course of the twentieth century and traces persist in contemporary scholarship. This theory construes the informal economy as a pre-modern economic system which will inevitably and naturally decline with the mod24

Evolution of theories explaining the informal economy

25

ernisation of governance and economic development (Geertz, 1963; Gilbert, 1998; Lewis, 1959; Packard, 2007). A first core tenet of modernisation theory is thus that the informal economy is discrete from the formal economy and a leftover from an earlier economic system (Potts, 2008). This dualistic depiction is exemplified by Boeke (1942) in his studies of South-East Asia, and by the economist Lewis (1954). Kanbur (2014, 2020) depicts these scholars as envisaging a wall between the “colonial economy” governed by the rules and regulations of the colonists and the “native economy” following its own methods and structures outside these rules. Still reflected in much contemporary scholarship, disaggregation and differentiation of the native economy is of no interest. Instead, it is the separation between the “native” and “modern” economies that is deemed important. The depiction is of a modern economy that is capitalist, progressive, dynamic, and capital-intensive and the “other” economy, portrayed as a “subsistence” or “peasant” economy, that is pre-capitalist, dependent on family labour, based on unsophisticated production, uses low technology, and has low levels of productivity. For Lewis (1954), economic development involves the inevitable absorption of this latter pre-modern sector into the modern sector. Similarly, Boeke (1942) depicts a clash of cultures between the imported social system (e.g., the modern capitalism system) and the indigenous social system. In other words, they are not only separate economic systems but also discrete social systems incorporating different social values and incapable of co-existing. Conceptualising this dualistic depiction in broader philosophical terms, this view reflects the theory of binary oppositions discussed by Derrida (1967). For him, western thought conceptualises issues in terms of binaries, with activity or ideas generally constructed in “either/or” terms as discrete opposites. In his thesis of hierarchical binary thought, these binary opposites are ordered both in a hierarchical normative manner and in a temporal sequence. One side of the binary is viewed as superordinate and in the ascendancy, while the other side is subordinate and receding. This is clearly apparent in modernisation theory. The informal economy is subordinate, normatively negative, and receding. The formal economy is superordinate, normatively positive, and growing (Williams and Round, 2008a; Williams, 2009a). This hierarchical normative and temporal ordering represent the second and third core tenets of modernisation theory. In modernisation theory, the perception is of a mono-dimensional and universal linear trajectory where less developed countries inevitably and naturally follow the development path of the “advanced” capitalist economies. The outcome is that countries are normatively ordered by their relative level of economic development and modernisation, with countries at the front of the development queue having smaller informal economies and being “advanced”, “modern”, and “progressive”, and countries nearer the back having larger informal economies

26

A modern guide to the informal economy

and being “backward”, “traditional”, and “under-developed” (Geertz, 1963; Gilbert, 1998; Lewis, 1959; Packard, 2007). Based on this normative and temporal sequencing, the informal economy is the antithesis of modern, advanced, and progressive and signals under-development and backwardness (Meagher, 2020; Potts, 2008; Williams and Gurtoo, 2012; Williams and Round, 2007). However, this one-dimensional linear development path takes no account of different histories, nor of how the global economic and political environment confronting Africa, Asia, and Latin America differs to that experienced by much of Europe and North America. Neither does it consider how the power relations they confront now differ with the existence of already “modern” advanced capitalist economies. This temporal tenet of modernisation theory that the informal economy will inevitably disappear has been soundly refuted in recent decades. As Williams and Round (2007a: 2332) state, there is “a widespread recognition that the informal sector is not some weak and disappearing realm but strong, persistent and even growing in the contemporary global economy”. However, the normative tenet of modernisation theory has proven more resilient. In much contemporary literature the formal economy remains depicted in a positive manner and the informal economy as harmful, negative, and deleterious, even “pathological” (Munck et al., 2020). Often this is subtle. Baumol (1990), for example, discusses entrepreneurship in the formal economy as “productive” entrepreneurship and entrepreneurship in the informal economy as “unproductive” entrepreneurship. Even more subtle is that until recently only the negative impacts of the informal economy were discussed. That there might be advantages or positive impacts, as Chapter 1 highlighted, was rarely entertained. Although modernisation theory no longer dominates scholarship on the informal economy, it cannot be labelled as an old theory that is no longer relevant. Indeed, modernisation theory, albeit in an updated form, has re-emerged. This is clearly seen in the scholarship of La Porta and Shleifer (2008, 2014). They recognise the resilience and extensiveness of the informal economy, but nonetheless persist in portraying the informal and formal economies as separate spheres and the informal economy as normatively negative. Informal workers are viewed as uneducated marginalised populations operating small unproductive economic units producing low-quality products using little capital and adding little value for discrete “bottom of the pyramid” (BOP) markets serving low-income consumers. As such, core tenets of modernisation theory remain centre-stage, with the formal and informal economies portrayed as discrete and normatively hierarchical. Persistent too in scholarship is the view of modernisation theory that the key determinants of the prevalence of the informal economy are the level of economic development and quality of governance. As Table 2.1 reports, numerous

Evolution of theories explaining the informal economy

27

studies find evidence to support this view. Regarding the first determinant, a significant association has been found between participation in the informal economy and the level of development, not only when measured in conventional terms (i.e., gross domestic product [GDP] per capita) but also when measured in alternative terms, including household final consumption expenditure per capita, the Human Development Index, and the Social Progress Index. The greater the level of development, the lower is the prevalence of the informal economy. So too is a significant association identified between the prevalence of the informal economy and the modernisation of governance (see Table 2.1). As Ohnsorge and Yu (2021) assert, on average in the past three decades, emerging market and developing economies with above-median informality scored significantly lower (by 0.4–0.7 standard deviation) on government effectiveness, control of corruption, and rule of law than those with below-median informality. Indeed, a one-standard-deviation improvement in the control of corruption was associated with a cumulative decrease in informality by about 0.1 percentage point of GDP in the following three to five years. As Kuehn (2014) similarly reveals but in relation to Organisation for Economic Co-operation and Development (OECD) countries, although tax rates alone explain only 23 per cent of the cross-national variations in the size of the informal economy, when including both governance quality and tax rates this increases to 72 per cent. In sum, the tenets of modernisation theory that the prevalence of the informal economy is determined by the level of economic development and modernisation of governance appear to have validity, even if the tenets that the formal and informal economies are discrete and that the informal economy is disappearing do not. To understand more fully the refutation of these modernisation tenets that the informal economy will disappear and that the formal and informal economies are discrete, attention now turns to political economy theory.

POLITICAL ECONOMY THEORY A second explanation for the prevalence of the informal economy derives from an array of scholars adopting a political economy school of thought. This was instigated by Caroline Moser in the late 1970s (Moser, 1977) along with Alejandro Portes and his colleagues in the late 1980s (Castells and Portes, 1989; Portes, 1994). Rather than view the informal economy as a residue of a pre-modern economic system and discrete from the formal economy, this political economy perspective represents the informal economy as an inherent feature of late capitalism composed of an ever more de-regulated and open world economy (Aliyev, 2015; Bhattacharya, 2014; Castells and Portes, 1989; Dibben and Williams, 2012; Dibben et al., 2015; Gallin, 2001; Harriss-White,

 

 

 

 

 

 

 

 

 

Social Progress Index (SPI)

informal economies

Williams and Horodnic, A., 2019 (112 countries)

(112 countries)

Countries with a higher SPI have smaller

Eilat and Zinnes, 2002 (25 transition countries); Williams and Horodnic, A., 2019

informal economies

Williams and Horodnic, A., 2019 (112 countries)

2017b (EU-28 except Malta)

A., 2019 (112 countries); Williams and Kayaoglu, 2017 (EU-27); Williams et al.,

Teobaldelli, 2011 (73 countries); Williams, 2014b (EU-27); Williams and Horodnic,

Williams, 2017 (35 Eurasian countries); Navickas et al., 2019 (Eastern Europe);

Countries with a higher HDI have smaller

informal economies

consumption per capita have smaller

Human Development Index (HDI)

Countries with a higher household final

capita

municipalities); Feld and Schneider, 2010 (21 OECD developed countries); Ginevicius et al., 2020 (EU countries); ILO, 2018a (global analysis); Krasniqi and

Baklouti and Boujelbene, 2020 (34 OECD countries); Bologna, 2016 (Brazilian

smaller informal economies

Study and coverage

Countries with a higher GDP per capita have

Result

Modernisation theory: determinants

Household final consumption per

GDP per capita

Level of development

Variable

Table 2.1

28 A modern guide to the informal economy

informality

economy

Control of corruption

Navickas et al., 2019 (Eastern Europe); Nêmec et al., 2021 (Czechia); Teobaldelli,

the higher is the prevalence of the informal

Davis and Henrekson, 2005 (21 high-income countries); Torgler and Schneider, 2007b (88 to 100 countries); Torgler and Schneider, 2009 (55 to 88 countries)

The higher the control of corruption, the

smaller is the size of the informal economy

Kayaoglu, 2017 (EU-27); Williams et al., 2017b (EU-28 except Malta)

2011 (73 countries); Williams and Horodnic, A., 2019 (112 countries); Williams and

2017 (EU-27/EU-28); Krasniqi and Williams, 2017 (35 Eurasian countries);

The higher the perceived level of corruption,

corruption

Eilat and Zinnes, 2002 (25 transition countries); Esaku, 2021a (Uganda); Franić,

Williams et al., 2017b (EU-28 except Malta)

and Schneider, 2007b (88 to 100 countries); Williams and Kayaoglu, 2017 (EU-27);

(developing economies); Torgler and Schneider, 2009 (55 to 88 countries); Torgler

emerging economies); Sebele-Mpofu, 2020 (Zimbabwe); Thai and Turkina, 2014

countries); Kuehn, 2014 (OECD countries); Mara, 2021 (EU-28); Omri, 2020 (19

et al., 2014 (37 Asian developing countries); Kelmanson et al., 2019 (European

countries); Huynh and Nguyen, 2020 (19 Asian developing countries); Jamalmanesh

African countries); Franić, 2017 (EU-27/EU-28); Hassan and Schneider, 2016 (157

countries); Eilat and Zinnes, 2002 (25 transition countries); Estevặo et al., 2022 (17

Dau and Cuervo-Cazurra, 2014 (developing countries); Dreher et al., 2009 (135

Autio and Fu, 2015 (18 Asia Pacific countries); Canh et al., 2021a (112 countries);

Study and coverage

Perceptions of public sector

Formal institutions acting in a corrupt manner

Higher institutional quality reduces

government effectiveness

Result

Formal institutional quality/

Level of modernisation of government

Variable

Evolution of theories explaining the informal economy 29

30

A modern guide to the informal economy

2014; Hudson, 2005; Portes, 1994; Sassen, 1996; Slavnic, 2010; Tabak and Crichlow, 2000; Taiwo, 2013). As Hammer (2019: 344) puts it, “Not only has the informal economy not declined over the last decades, economic liberalisation and globalisation have drawn even greater numbers of workers and firms into work that is informal, often pays below poverty levels and is highly insecure.” Or as Roberts (2014: 438) states when drawing attention to the geographies involved, “the informal economy is an integral part of global capitalism because it facilitates profit accumulation in the periphery and semi-periphery”. Therefore, “the informal sector is far from a vestige of earlier stages in economic development. Instead, informality is part and parcel of the processes of modernization” (Fernandez-Kelly, 2006: 18). A principal way in which the informal economy is asserted to have become integrated into capitalism is by the formal economy subcontracting and outsourcing to businesses and workers in the informal economy to reduce production costs (Castells and Portes, 1989; Davis, 2006; Goel and Rehman, 2020; Meagher, 2010; Slack et al., 2017; Slavnic, 2010; Taiwo, 2013). As Dellot (2012: 186) asserts, it “exists to serve the needs of the larger firms by supplying cheaper goods and services”. Or as Godfrey (2011: 24) puts it, the “rich formal sector extracts value from the poor informal sector”. As such, the informal economy is viewed as reducing the costs of formal production and distribution. Rather than separate formal and informal economies, the view is of functionally related spheres that are part of the same economic system, namely late capitalism (Portes, 1994). For Piore and Sabel (1984) and later Chen (2007), informalisation directly results from the shift away from Fordist mass production towards “flexible specialisation”, namely small-scale, decentralised, and more flexible economic units. Not only has there been subcontracting to small-scale informal units and workers, but standard employment relationships (i.e., permanent full-time jobs) have been turned into non-standard ones (part-time, temporary, and contract jobs), with a contemporary manifestation being bogus self-employment where employees are misclassified as self-employed, such as in the so-called “gig” or “platform” economy (Williams and Horodnic, 2019a). Accompanying this ever more de-regulated and open world economic system has been diminishing state involvement in social protection and ever less economic intervention, resulting in those excluded from the formal labour market and social protection being pushed into the informal economy to survive (Chen, 2012; ILO, 2015; Meagher, 2010; Mešić, 2016; Sasaki et al., 2016; Taiwo, 2013). Hence, from this political economy perspective, participants in the informal economy are depicted as low-paid marginalised populations participating out of necessity in the absence of alternative options (e.g., Barsoum, 2015; Castells and Portes, 1989; Gallin, 2001; Lagos, 1995; Maldonado, 1995). From studies of street-sellers in the Dominican Republic

Evolution of theories explaining the informal economy

31

(Itzigsohn, 2000), China (Lin, 2018), Nepal (Karki and Xheneti, 2018), South Africa (Petersen and Charman, 2018), Latin American cities (Linares, 2018), and Somalia (Little, 2003), through studies of informal garment businesses in India (e.g., Das, 2003; Unai and Rani, 2003) and the Philippines (Doane et al., 2003), to studies of home-based workers in Mexico (e.g., Staudt, 1998) and Martinique (Browne, 2004) and waste pickers in the global South (Coletto and Bisschop, 2017), work in the informal economy is deemed a necessity-driven endeavour (e.g., Itzigsohn, 2000; Otero, 1994; Rakowski, 1994). As Bhowmik (2005: 96) states, the informal economy “is the only means for survival”. Consequently, informal workers are viewed as having much poorer working conditions than formal workers. This view is epitomised by Venkatesh (2006) in his portrayal of the informal economy as populated by those excluded from the social mainstream and composed of discriminatory practices, scant regulations, and exploitative practices. Informal workers are survivalists engaged in the informal economy as a last resort. This political economy perspective thus transcends the modernisation tenet of separate formal and informal economies by asserting that they are intertwined but continues to depict the informal economy as a normatively negative economic activity. From this theoretical perspective, de-regulation and an ever more open world economy has reduced state intervention in work and welfare that protected workers and increased poverty and inequality. The prevalence of the informal economy is consequently claimed to be greater when there is less state intervention in work and welfare (e.g., when taxes are lower, public expenditure as a proportion of GDP is lower, and there are lower levels of social protection) and when poverty and inequality are higher. Table 2.2 provides a summary of studies supporting this perspective. They display that the greater the level of state intervention in work and welfare and the lower the level of poverty and inequality, the lower is the prevalence of the informal economy. To take just two examples, Ohnsorge and Yu (2021: 274) find that coverage of unemployment benefits is significantly lower, by about 3 percentage points of the population, in emerging market and developing economies with above-median informality than in those with below-median informality. In an average emerging market and developing economy with below-median informality, social insurance programmes cover about 34 per cent of the annual income or consumption of the beneficiary household, which is significantly higher, by 6 percentage points, than in emerging market and developing economies with above-median informality. Meanwhile, Gutiérrez-Romero (2021) reveals that across 138 countries over the 1991–2015 period, past levels of inequality are the most salient factors explaining the size of the informal economy, and that countries with the highest levels of initial inequality are steadily diverging in terms of the larger size of their informal economies from those that started with lower levels of inequality and those that have made a significant redistribution.

Result

Countries with greater healthcare

Williams, 2014c (Central and Eastern Europe); Williams, 2014d (EU-27); Williams, 2015a

economies

prices and considering personal

Williams, 2013c (EU-27); Williams, 2014d (EU-27); Williams, 2015b (East-Central

effective in reducing poverty have smaller

informal economies

transfers

Europe); Williams, 2014d (EU-27); Williams and Horodnic, 2016a (EU-28); Williams and

have smaller informal economies

vulnerable groups (active labour

 

(EU-28)

Horodnic, 2017b (EU-28); Williams and Kayaoglu, 2017 (EU-27); Williams et al., 2017a

across the globe); Williams, 2013c (EU-27); Williams, 2014c (Central and Eastern

expenditure on labour market interventions

market interventions targeting

market policies)

Ciccarone et al., 2014 (12 Euro area countries); Loayza and Rigolini, 2011 (54 countries

Countries with higher levels of state

State expenditure on labour

2016a (EU-28); Williams and Horodnic, 2017b (EU-28); Williams et al., 2017a (EU-28)

Europe); Williams and Horodnic, 2015a (East-Central Europe); Williams and Horodnic,

Eastern Europe); Williams, 2014b (EU-27); Williams, 2012b (East-Central Europe);

Countries where social transfers are more

Effect of redistribution via social

Krasniqi and Williams, 2017 (35 Eurasian countries); Williams, 2014c (Central and

and Horodnic, A., 2019 (112 countries); Williams and Kayaoglu, 2017 (EU-27)

(East-Central Europe); Williams and Horodnic, 2015a (East-Central Europe); Williams

2012b (East-Central Europe); Williams, 2013c (EU-27); Williams, 2014b (EU-27);

expenditure have smaller informal

purchasing power parities (PPPs)

Krasniqi and Williams, 2017 (35 Eurasian countries); Mara, 2021 (EU-28); Williams,

Countries with greater levels of social

Krasniqi and Williams, 2017 (35 Eurasian countries)

head of the population at current

economies

expenditure have smaller informal

countries)

Luong et al., 2020 (18 transition economies); Williams and Horodnic, A., 2019 (112

Total social expenditure per

Healthcare expenditure

government as a share of GDP have smaller

GDP)

informal economies

Countries with a higher expense of

Expense of government (%

Study and coverage

Political economy perspective: determinants

State intervention in work and welfare provision

Variable

Table 2.2

32 A modern guide to the informal economy

Gini coefficient

Income inequality

Severe material deprivation

Williams, 2014c (Central and Eastern Europe); Williams, 2014d (EU-27); Williams and

informal economies

Horodnic, A., 2019 (112 countries); Williams et al., 2017b (EU-28 except Malta)

Gutiérrez-Romero, 2021 (138 countries); Williams and Kayaoglu, 2017 (EU-27);

Countries with higher inequality have larger

countries); Williams et al., 2017a (EU-28)

Europe); Williams and Horodnic, 2017b (EU-28); Williams and Horodnic, A., 2019 (112

Eastern Europe); Williams, 2014d (EU-27); Williams and Horodnic, 2015a (East-Central

2021b (Uganda); Navickas et al., 2019 (Eastern Europe); Williams, 2014c (Central and

inequality have larger informal economies

Horodnic, 2017b (EU-28)

deprivation have larger informal economies

Dell’Anno, 2021 (transition and emerging countries); Franić, 2017 (EU-27/EU-28); Esaku,

Williams, 2014d (EU-27); Williams and Horodnic, 2016a (EU-28); Williams and

the population living in severe material

Countries with higher levels of income

Williams and Kayaoglu, 2017 (EU-27); Williams, 2014c (Central and Eastern Europe);

Countries with higher proportions of

and Horodnic, A., 2019 (112 countries)

larger informal economies

lines (%) + Poverty gap at $1.90

a day

(Central and Eastern Europe) Berdiev et al., 2020a (100 countries); Pham, 2022 (100 developing countries); Williams

Countries with a large poverty gap have

Poverty gap at national poverty

Franić, 2017 (EU-27/EU-28); Williams, 2015a (East-Central Europe); Williams, 2014c

Study and coverage

Countries with higher levels of poverty have

Result

larger informal economies

Population at risk of poverty

Poverty and inequality

Variable

Evolution of theories explaining the informal economy 33

34

A modern guide to the informal economy

NEO-LIBERAL THEORY For neo-liberal scholars, participation in the informal economy is not necessity-driven but a matter of choice and a reaction to over-regulation in the formal economy. It is a populist response to high tax rates and too much meddling by the state in the free market. From this perspective, participants in the informal economy are rational economic actors releasing themselves from the state-imposed manacles of high taxes and the intrusive rules of an over-regulated formal economy (Becker, 2004; De Soto, 1989, 2001; London and Hart, 2004; Nwabuzor, 2005; Sauvy, 1984; Schneider and Williams, 2013). They voluntarily operate in the informal economy to escape the excessive costs of formal registration along with the associated time and effort required (De Soto, 1989, 2001; Perry and Maloney, 2007; Small Business Council, 2004). As Nwabuzor (2005: 126) claims, “Informality is a response to burdensome controls, and an attempt to circumvent them”, or as Becker (2004: 10) puts it, “informal work arrangements are a rational response by micro-entrepreneurs to over-regulation by government bureaucracies”. Hernando De Soto, the Peruvian economist, is perhaps the most influential exponent of this viewpoint. His claim is that the excessive costs of formalisation are a major driver of informality, and that deregulation and simplifying registration could resolve this problem of formality in developing countries, setting free those currently operating in the informal economy to positively contribute to economic growth and development (De Soto, 1989). Participants in the informal economy are thus part of a populist movement protesting state interference. They want to work legally but cannot do so due to the heavy costs of formality. Working in the informal economy is a rational economic tactic practised by those whose spirit is choked by high taxes and state-imposed burdens (De Soto, 1989, 2001). To understand this neo-liberal depiction of the informal economy in the broader context of the evolution of neo-liberal theory, Bhattacharya (2014) maps seven waves of neo-liberal anti-labour discourse. Sequentially, these have: (1) attacked labour “rigidities” rather than depicted labour’s hard-fought-for rights; (2) depicted low-cost labour as a comparative advantage; (3) portrayed labour rights as barriers; (4) advocated the practice of flexibilisation in advanced economies; (5) pursued informality in developing countries; (6) demanded the formalisation of informal workers and disguised the informalisation of formal workers; and (7) celebrated enterprise culture and informal entrepreneurship. Seen in relation to the two theories already discussed, this neo-liberal depiction is normatively more positive about informal work than either modernisation theory or political economy theory. Participants in the informal economy,

Evolution of theories explaining the informal economy

35

viewed largely as own-account workers or informal entrepreneurs rather than as waged employees, are the vanguard of a populist movement against state interference in the economy and voluntarily exit the formal economy. This more agency-oriented view of voluntary participation in the informal economy is validated in many studies (Adom and Williams, 2012, 2014; Cross, 2000; Cross and Morales, 2007; Gerxhani, 2004; Gurtoo and Williams, 2009; Maloney, 2004; Snyder, 2004). As such, neo-liberal scholars, in contrast to modernisation and political economy theorists, started to highlight positive impacts of the informal economy. The outcome is a sea-change that still has resonance today in wider scholarship. Neo-liberals in effect argue the inverse of political economy scholars in relation to what causes the informal economy. While political economy scholars claim that the informal economy results from under-intervention by the state in work and welfare, neo-liberals assert that it is due to over-intervention. Table 2.2 reported the studies on state intervention in work and welfare, revealing that the tenets of the political economy theory are supported rather than those of the neo-liberal theory. Table 2.3 reports the results on the tenet of taxation. This reveals little conclusive evidence to support the neo-liberal stance. Although a few studies find that higher tax rates are associated with larger informal economies, many find no correlation or even a negative association. Instead, it is perhaps other factors rather than tax rates alone that determine the size of the informal economy. For example, Górecki and Letki (2021), using a survey experiment in 14 countries of East-Central Europe, reveal that increasing the tax rate lowers the probability of evasion if the population views “most others” as honest taxpayers, highlighting the importance of horizontal trust (see below) for compliance. Until now, three contrasting theorisations of the informal economy have been outlined. All possess an internal consistency in their logic and appear to their adherents as sufficient explanations. Nevertheless, it has gradually emerged that these rival theories are not mutually exclusive. Studies have evaluated the validity of these three contrasting theories when explaining the prevalence of the informal economy. This has involved evaluating the association between cross-national variations in the prevalence of the informal economy and cross-national variations in the key determinants proposed in each of the three theories. On the one hand, these studies have produced simple bivariate correlations between the prevalence of the informal economy and the various determinants highlighted in each of the theories, analysing cross-national variations at the level of the European Union (Williams, 2013d, 2014b,d, 2017b), East-Central Europe (Williams, 2015b,c), Latin America (Williams and Youssef, 2014a,b) and the wider developing world (Williams, 2015d,e,f). These studies all confirm the validity of the modernisation and political economy theories and

(East-Central Europe); Williams, 2015a,b (East-Central Europe) Eilat and Zinnes, 2002 (25 transition countries); Williams, 2014c (Central and Eastern Europe); Williams, 2013a,c (EU-27); Williams and Horodnic, A., 2019 (112 countries)

No correlation with prevalence of informal economy A higher level of tax on revenue as a percentage of GDP is associated with smaller informal economies

Tax revenue as a % of GDP

Taxation on labour

Share of direct and/or indirect taxation (% GDP)

Total tax rate as a % of GDP

Williams, 2014c (Central and Eastern Europe); Williams, 2012b

economy

Schneider, 2000 (Austria); Schneider, 2010 (21 OECD developed

Ciccarone et al., 2014 (12 Euro area countries); Vos et al., 2011 (Belgium)

The reduction of the tax burden on labour is mildly effective in reducing informality

and Turkey); Tafenau et al., 2010 (European Union)

countries); Schneider et al., 2015 (EU-28 plus Norway, Switzerland,

Feld and Schneider, 2010 (21 OECD developed countries);

associated with larger informal economies

(Central and Eastern Europe)

economy A high level of direct and indirect taxation is

Eilat and Zinnes, 2002 (25 transition countries); Williams, 2014c

No correlation with prevalence of informal

Horodnic, A., 2019 (112 countries)

No correlation with prevalence of informal

taxes on goods and services as % of revenue

Williams, 2014c (Central and Eastern Europe); Williams and

Williams, 2014a (Central and Eastern Europe)

Taxes on income and profits as a % of GDP and

economy

2017a (EU-28)

Williams and Horodnic, 2016a (EU-28); Williams and Horodnic,

informal economies No correlation with prevalence of informal

Williams and Kayaoglu, 2017 (EU-27); Williams, 2014c,d (EU-27);

Countries with higher current taxes have smaller

Study and coverage

Result

Current taxes on income and wealth, etc.

Neo-liberal theory: evaluation of taxation determinant

Variable

Table 2.3

36 A modern guide to the informal economy

Variable

Williams and Kayaoglu, 2017 (EU-27); Williams, 2012a (South-East Europe); Williams, 2012b (East-Central Europe);

Countries with a higher tax rate on labour have smaller informal economies

(EU-27/EU-28); Williams, 2013a (EU-27); Williams and Horodnic,

the size of the informal economy

2017b (EU-28 except Malta)

Williams, 2014c (Central and Eastern Europe); Williams et al.,

2016a (EU-28); Williams and Horodnic, 2017a,b (EU-28);

Eilat and Zinnes, 2002 (25 transition countries); Franić, 2017

No correlation between implicit tax on labour and

Williams and Horodnic, 2015a (East-Central Europe)

Williams, 2014c,d (EU-27); Williams, 2015a (East-Central Europe);

Study and coverage

Result

Evolution of theories explaining the informal economy 37

38

A modern guide to the informal economy

refute the tenets of neo-liberal theory. On the other hand, multivariate regression analyses have evaluated the relationship between cross-national variations in the prevalence of the informal economy and the key determinants in each of these theories, including at the level of East-Central Europe (Williams and Horodnic, 2015a), the Baltics (Williams and Horodnic, 2015b,c), and South-East Europe (Williams and Horodnic, 2015d). These again confirm the validity of the modernisation and political economy theories but not the tenets of neo-liberal theory. Studies have also evaluated the validity of these three theories when explaining the prevalence of different types of informal work. First, these have evaluated the relationship between cross-national variations in the prevalence of informal entrepreneurship and the key determinants of the three theories. Using bivariate correlations, these again confirm the tenets of the modernisation and political economy theories but not the tenets of the neo-liberal theory (Williams, 2014e,f). There are also multivariate regression analyses conducted at the level of the European Union, albeit limited to the tendency of small businesses to falsely declare the salaries of their employees by paying them two salaries, namely a declared salary and an undeclared (“envelope”) wage (Williams and Horodnic, 2016a), and a study of the self-employed working in the informal sector (Williams and Martinez-Perez, 2014d,e). These studies again confirm the validity of the modernisation and political economy theories but not neo-liberal theory. There have also been studies of quasi-formal employment whereby formal employers pay their formal employees a declared salary plus an undeclared (envelope) wage. Studies using bivariate correlations in the European Union (Williams, 2013b, 2014c) and East-Central Europe (Williams, 2012a,b) again confirm the tenets of the modernisation and political economy theories but not those of the neo-liberal theory. Likewise, a multivariate regression analysis confirms the same finding in the Baltic Sea region (Williams and Horodnic, 2017a). However, over the past decade, this emergent consensus that the determinants of the modernisation and political economy theories need to be combined to explain the prevalence of the economy has been disrupted. A new more comprehensive explanation has emerged that not only incorporates these previous findings by treating them as formal institutional failings that lead to informality but also extends understanding by explaining why some populations in a country engage in the informal economy and others do not. This was an issue that neither the modernisation nor political economy theories proved capable of explaining.

Evolution of theories explaining the informal economy

39

INSTITUTIONAL THEORY The above three theories all propose structural causes of the informal economy. They do not explain why some businesses, employers, workers, and consumers within a country participate in the informal economy and others do not. Since the turn of the millennium, this has been solved by applying to the study of the informal economy a variant of institutional theory (Baumol and Blinder, 2008; Helmke and Levitsky, 2004; North, 1990). By “institutions” is meant the rules of the game that prevail in all societies and govern human behaviour. These rules are of two types. On the one hand, there are formal institutions (i.e., laws and regulations), which are the legal rules of the game; on the other hand, there are informal institutions, which are the unwritten socially shared rules existing outside of official codes and laws (Helmke and Levitsky, 2004). These are the norms, values, and beliefs held by businesses, employers, workers, and consumers reflecting their individual morale about what is acceptable (Denzau and North, 1994). Using this institutionalist lens, economic activity in the formal economy accords with the formal institutional prescriptions set out in the laws and regulations. Economic activity in the informal economy takes place outside of these formal institutional prescriptions but within the set of values and norms of the informal institutions (Godfrey, 2011; Kistruck et al., 2015; Siqueira et al., 2016; Webb et al., 2009; Welter et al., 2015; Williams, 2017a; Williams and Gurtoo, 2017). Criminal activity takes place not only outside of formal institutional prescriptions but also outside the socially shared rules regarding what is acceptable. Here, three waves of thought in institutional theory are reviewed on how participation in the informal economy has been explained. In the first wave of institutional theory, the focus was upon formal institutional failures. The second wave of thought then recognised that if formal institutional failings occur, these only lead to participation in the informal economy if there is an asymmetry between formal rules and informal rules about what is acceptable. The third wave of thought then synthesised these earlier waves of institutional thought by depicting formal institutional failings as producing an asymmetry between the formal and informal institutions (or what can be seen as state morale and civic morale), which primes participation in the informal economy (Williams, 2017a).

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First Wave Institutional Theory: Formal Institutional Failure Explanations In first wave institutional theory, participation in the informal economy was explained exclusively in terms of formal institutional failings. Consideration was not given to informal institutions or the incongruence between formal and informal institutions. As Williams (2017a) summarises, these formal institutional failings are of four kinds: 1. 2. 3. 4.

Formal institutional resource misallocations and inefficiencies. Formal institutional voids and weaknesses. Formal institutional powerlessness. Formal institutional instability and uncertainty.

Each is considered here in turn. Formal institutional resource misallocations and inefficiencies Formal institutional failings that relate to resource misallocations and inefficiencies are those discussed in modernisation theory regarding the lack of modernisation/quality of state institutions and the pervasiveness of public sector corruption (see Table 2.1). The lack of modernisation of state institutions takes at least three forms. First, there is a perceived and/or actual lack of redistributive justice in relation to public services. Businesses, employers, workers, and citizens do not perceive themselves as receiving the public goods and services that they believe they deserve given the level of tax and social contributions they make (Kinsey and Gramsick, 1993; Richardson and Sawyer, 2001; Thurman et al., 1984). This makes them more likely to operate in the informal economy. Second, there is a perceived and/or actual lack of procedural justice in state institutions. Businesses, employers, workers, and citizens do not perceive public services as treating them in an impartial, respectful, and responsible way (Braithwaite and Reinhart, 2000; Murphy, 2005). This again increases the likelihood of participation in the informal economy (Hartner et al., 2008; Murphy, 2003; Murphy et al., 2009). Third and finally, there is a perceived and/or actual lack of procedural fairness. Businesses, employers, workers, and citizens do not view themselves as being treated in a fair manner relative to others (Kinsey and Gramsick, 1993), which again increases the likelihood of participation in the informal economy (Bird et al., 2006; McGee et al., 2008; Molero and Pujol, 2012). Besides arising from a lack of modernisation of state institutions, resource misallocations and inefficiencies also arise when there is public sector corruption (Aidis and Van Praag, 2007; Khan and Quaddus, 2015; Qian and Strahan,

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2007; Round et al., 2008; Tonoyan et al., 2010). Here, three kinds of corruption are relevant that each impact on the informal economy in different ways. First, and perhaps the most documented kind of corruption, is the “misuse of public office for private gain” (Bardhan, 1997; Pope, 2000; Shleifer and Vishny, 1993; Svensson, 2005). This is where public officials request or receive bribes, gifts, and other kinds of payment (e.g., a portion of a given contract) for a service provided. For businesses, employers, workers, and citizens, this might produce the quicker provision of a public service, such as a swifter issuance of operating licences or construction permits, or prominently, faster access to healthcare services through healthcare professionals in return for an informal payment by citizens (Horodnic, A.V. et al., 2021a,b; Horodnic et al., 2021a; Williams and Horodnic, A., 2017, 2018a,b,c; Williams et al., 2016a). This leads to resource misallocations and inefficiencies. As Myrdal (1968) puts it, corrupt public officials produce delays that would not otherwise happen simply to provide themselves with the opportunity to receive a corrupt payment. As has been revealed in relation to firms, although those paying bribes to public officials have higher subsequent firm performance levels than those refusing to pay bribes, the net impact of such bribery on the economy overall is negative (Williams and Kedir, 2016a; Williams and Martinez-Perez, 2016; Williams et al., 2016b). A second kind of corruption, which is less researched, is state capture. This is where businesses or groups of businesses, using illicit or non-transparent means, influence the formulation of laws and state policies to give them an advantage (Fries et al., 2003). The result is their preferential treatment by the state, such as public resources being allocated to them. For those outside of this powerful elite, the outcome is frequently higher taxes, burdensome registration and licensing regulations, and costs, thus providing a barrier to entry into the formal economy, and fewer state resources provided for the taxes and social contributions paid (De Soto, 1989; Siqueira et al., 2016; Williams et al., 2016a). The third and final type of corruption, again less studied, is when citizens, workers, and employers use their personal connections to circumvent formal procedures and/or gain preferential access to public goods and services. This is termed blat in post-Soviet spaces (Ledeneva, 2013; Williams and Onoshchenko, 2014a,b, 2015), guanxi in China (Chen et al., 2012), wasta in the Arab world (Smith et al., 2011), jeitinho in Brazil (Ferreira et al., 2012), “pulling strings” in English-speaking countries (Smith et al., 2012), veze in Serbia, Croatia, and Bosnia and Herzegovina, vrski in North Macedonia (Williams and Bezeredi, 2017a), and vruzki in Bulgaria (Williams and Yang, 2017a). It has been found to be widespread in all countries where it has been studied and viewed as a natural part of doing business. Indeed, it is rarely depicted in a negative manner and as resulting in nepotism, cronyism, and

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corruption, despite its negative impacts on those who adhere to the formal rules (Williams and Yang, 2017a). Formal institutional voids and weaknesses Another formal institutional failing that drives economic activity into the informal economy comprises formal institutional voids and weaknesses. Indeed, the above-discussed theoretical debates between advocates of the neo-liberal and political economy theories are essentially about whether institutional voids and weaknesses produce larger informal economies. As discussed above, the institutional voids that are viewed as weaknesses by some scholars are seen as strengths by others. That is, the core debate between neo-liberals and political economy theorists is whether the informal economy results from too little state intervention, as political economy theorists argue, or too much state interference, as neo-liberal theorists assert. Given that these debates have already been discussed (see Tables 2.2 and 2.3 above for a summary), they will not be rehearsed again here. Instead, what is necessary to recognise here is that institutional theory contextualises these debates as a discussion about the formal institutional voids and weaknesses that lead to a greater prevalence of the informal economy. Formal institutional powerlessness A third formal institutional failing driving economic activity into the informal economy is formal institutional powerlessness. Powerlessness is expressed in the lack of capacity of state institutions to provide deterrents and incentives to achieve compliance with the formal rules and to be able to persuade businesses, employers, workers, and consumers to comply. One outcome of this lack of power of state institutions is the low costs and high benefits of participation in the informal economy, along with the low benefits and high costs of participation in the formal economy. This is especially the case in many developing countries. For enterprises for example, the benefits of formality might include property rights, access to credit, training, contracts with larger companies, access to public sector procurement contracts, and the ability to become more capital-intensive (Fajnzylber et al., 2011; Skousen and Mahoney, 2015). All these benefits are under-developed in many developing countries, meaning that the benefits of formality are often outweighed by the costs of formality and benefits of informality. For example, McKenzie and Sakho (2010) in Bolivia and McCulloch et al. (2010) in rural Indonesia find that operating formally only increases firm profitability and sales growth for mid-sized firms. To encourage formalisation necessitates, on the one hand, a decrease in the costs of operating in the formal economy, as shown in studies conducted in Bolivia (Garcia-Bolivar, 2006), Kenya (Devas and Kelly, 2001), Peru

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(Jaramillo, 2009), and Uganda (Sander, 2003). On the other hand, the benefits of formality need to increase. This needs to be significant. As De Mel et al. (2012) identify in Sri Lanka, even a financial offer equating to two months’ profits only resulted in half of businesses registering. This is perhaps because even if the power of authorities is increased, other formal institutional failings remain, including a perception that these benefits might not last due to the instability and uncertainty of the formal rules. Formal institutional instability and uncertainty The fourth formal institutional failing concerns the perceived and/or actual instability and uncertainty of the formal rules. Formal institutional instability and uncertainty results from continuous changes in laws and regulations (Levitsky and Murillo, 2009; Williams and Shahid, 2016). Both political and government instability have been revealed as strongly associated with participation in the informal economy (Torgler and Schneider, 2007b, 2009). In many developing and transition economies, businesses, employers, workers, and citizens are confronted with constant changes in the formal rules, meaning that they do not expect today’s rules to exist in the future (Hitt and Xu, 2019; Urbano et al., 2019; Zhao and Li, 2019). In many transition economies for example, citizens and workers do not believe in making compulsory payments for social contributions, so that they can claim unemployment benefits or pensions, because they believe that different rules will apply in future. This perceived fluidity in the formal rules is a major driver of informality. This problem is further compounded in many developing and transition economies by a perception that the formal rules are not indigenous to the country but are imposed from the outside. For example, this was particularly the case in the early stages of transition in the post-socialist countries of East-Central Europe (Williams et al., 2013). It also prevails in many developing countries, not least when the International Monetary Fund (IMF) imposes structural conditions on countries, and businesses, employers, workers, and citizens do not see these formal rules as something belonging to, or decided by, their national government but as imposed rules. In these contexts, especially when the formal rules continuously change, the outcome is that businesses, employers, workers, and citizens look elsewhere for a more permanent set of values, norms, and understandings about what is acceptable, namely informal institutions. This is because in these contexts informal rules are viewed as more enduring than formal rules. As Urbano et al. (2019: 24) state, “These informal institutions that tend to endure a long time reduce the uncertainty.” Indeed, under-developed countries are perhaps so defined exactly because they have under-developed formal rules which are fluid and temporary, and result in businesses, employers, workers, and citizens turning to socially shared norms, values, and beliefs to facilitate, govern, and structure their economic

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activities instead of formal rules (London et al., 2014; Mair et al., 2012). Based on this recognition of the prominent role played by informal institutions, a new wave of institutional theory has emerged for explaining the prevalence of the informal economy. Second Wave Institutional Theory: Informal Institutions and Institutional Asymmetry Explanations Unlike first wave institutional theory with its focus upon formal institutional failings, second wave institutional theory puts more emphasis on the role of informal institutions (Fredström et al., 2021; Khoury and Prasad, 2016; Light and Dana, 2013; Mair et al., 2012; Slade Shantz et al., 2018). The contention is that formal institutional failings only result in a greater prevalence of the informal economy if the socially shared norms, values, and beliefs are not aligned with the formal rules (Godfrey, 2015; Webb et al., 2009; Williams and Horodnic, 2015a,b,c,d). Institutional environments are composed of three pillars, namely the regulative, normative, and cultural-cognitive (Scott, 2008). The regulatory pillar comprises the formal rules, such as the formal rules about paying taxes, declaring work, and the terms and conditions of employment. The second, normative pillar consists of the norms, beliefs, and values regarding acceptable behaviour (i.e., the social acceptability of working informally, or of purchasing goods and services from the informal economy). The third and final pillar, the cultural-cognitive pillar, relates to social norms grounded in shared understandings, such as how routine purchasing from an informal vendor, or not expecting or asking for receipts, is enacted unthinkingly. This cultural-cognitive pillar is most clearly displayed when informal practices are referred to as “cultural” or culturally embedded, such as when populations state that informality is part of, for example, the Balkan mentality, Slavic culture, the African mindset, and so on. Second wave institutional theory asserts that the behaviour of businesses, employers, workers, and citizens reflects the regulatory, normative, and cognitive rules in their institutional environments, and each set of rules gives these behaviours legitimacy (Mickiewicz et al., 2019). Legitimacy in the regulative pillar refers to compliance with the formal rules, in the normative pillar to conformity with a moral basis, and in the cultural-cognitive pillar to adopting a common frame of meaning (Scott, 2008). Institutions thus encourage compliance through various mechanisms of isomorphism. Coercive isomorphism relates to formal institutions and enforcing the formal rules of the game. This either uses “sticks” to enforce compliance or “carrots” to incentivise compliance. Normative isomorphism relates to social pressures to conform to societal expectations, and mimetic isomor-

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phism relates to the cultural-cognitive pillar, whereby businesses, employers, workers, and citizens act according to social norms and shared understandings. The latter two are here aggregated under the umbrella of informal institutions, which is the norm in studies using second wave institutional theory to explain the informal economy. In second wave institutional thought, formal institutional failings on their own fail to drive participants into the informal economy. If formal and informal institutions align and are complementary, participation in the informal economy will not result from formal institutional failings because businesses, employers, workers, and citizens will comply with the formal rules. Participation in the informal economy will only be unintentional, such as due to not understanding the formal rules. Formal institutional failings only produce engagement in the informal economy if there is asymmetry between the formal and informal institutions, namely the rules of informal institutions are incompatible with, and a substitute for, the rules of the formal institutions (see Godfrey, 2011, 2015; London et al., 2014; Webb and Ireland, 2015; Webb et al., 2009, 2019; Williams and Shahid, 2016; Williams et al., 2015; Windebank and Horodnic, 2017). Institutional asymmetry arises “because of the incongruence between what is defined as legitimate by formal and informal institutions” (Webb et al., 2009: 495), and it is only when formal and informal institutions do not align, as is commonly the case in many developing countries, that the informal economy prevails, which although formally illegal, is deemed socially legitimate (De Castro et al., 2014; Kistruck et al., 2015; Siqueira et al., 2016; Webb et al., 2013, 2014). Indeed, the greater the non-alignment between formal and informal institutions, the greater is the prevalence of the informal economy (Arendt et al., 2020; Horodnic and Williams, 2022; Shahid et al., 2022; Williams and Shahid, 2016; Williams et al., 2015). As a result, measures have been adopted to evaluate the level of this institutional symmetry. A dominant proxy measure has been tax morale, defined most often as the intrinsic motivation to pay taxes (Torgler, 2012a; Torgler and Schneider, 2007a), but also referred to as civic duty (Orviska and Hudson, 2003). Using tax morale, institutional symmetry has usually been measured by asking respondents to rate the level of acceptability of various forms of informal economic activity. The number of informal practices explored depends on the survey or experiment designed, ranging from just one item in simple approaches to as many as ten in more complex ones. For example, the 2019 Eurobarometer survey asks respondents to rank five different types of informality on a scale of 1 to 10 (with 1 representing “totally acceptable” behaviour and 10 “totally unacceptable” behaviour). These five types are: (1) a firm hired by another firm does not report earnings, (2) a private person not declaring all or part of their salary, (3) a firm hired by a household does not report earnings,

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(4) evading taxes by not or only partially declaring income, and (5) a person hired by a household does not declare earnings. As Williams and Horodnic (2021a) report, the finding is that the more unacceptable is informality (i.e., the higher their tax morale and the greater the institutional symmetry), the less likely they are to engage in informality. Those not engaging in the informal economy have higher tax morale than those who participate (8.61 compared with 7.19 on the 1 to 10 scale). This finding is mirrored across the tax morale literature. The prevalence of the informal economy and level of tax morale are strongly correlated, with Pearson r values between −0.46 and −0.66 (Alm and Torgler, 2006; Alm et al., 2006; Barone and Mocetti, 2009; Engel et al., 2020; Frey, 1997; Halla, 2010; Lewis, 1982; Pommerehne and Weck-Hannemann, 1996; Riahi-Belkaoui, 2004; Richardson, 2006; Torgler, 2005, 2011; Torgler and Schneider, 2009). The higher the level of tax morale, the smaller is the informal economy. As Ohnsorge and Yu (2021) find, tax morale is weaker in emerging market and developing economies with above-median informality, where the average household scores 2.5 points on a scale of 0–10, with 10 indicating that underreporting of income for tax purposes is always justifiable. This is 0.4 index points and significantly higher than in the average emerging market and developing economy with below-median informality. Examining Europe and the USA, Alm and Torgler (2006) find a strong negative correlation (Pearson r = −0.460) significant at the 0.05 level, with tax morale explaining over 20 per cent of the total variance in the size of the informal economy. In transition economies, Alm et al. (2006) again find a strong negative correlation (−0.657), with tax morale (i.e., institutional asymmetry) explaining more than 30 per cent of the total variance in the size of the informal economy. Examining specifically informal entrepreneurship, Berdiev and Saunoris (2019) find that countries with higher tax morale have lower levels of informal entrepreneurship and that if a country moved from a tax morale consistent with Iraq (1.54) to that of Japan (2.68), the number of informal entrepreneurs would drop by three informal business ventures per 100 adult-age population. To identify the formal institutional failures that lead to higher tax morale (i.e., institutional symmetry), Horodnic (2018) conducts a systematic literature review. The formal institutional failings identified above in the modernisation and political economy theories are identified as significantly correlated with tax morale. However, one key new variable not included in the modernisation and political economy theories is identified, which is also the most salient explanatory factor. This is the variable of trust. Following Frey and Torgler (2007), and more recently Murtin et al. (2018), Horodnic (2018) differentiates between vertical trust (trust between populations and state authorities) and horizontal trust (generalised trust among populations). The finding of her literature review is that if populations find the state trustworthy and believe that

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others comply, they will more likely have a high level of tax morale and be less likely to engage in the informal economy (see also Berdiev and Saunoris, 2020). Here, each type of trust is briefly reviewed in turn in terms of its impact on participation in the informal economy. Vertical trust Vertical trust or the trust in public institutions (e.g., government, parliament, courts and legal systems/rule of law, police, tax authority and public servants, political parties) has been identified as significantly associated with tax morale (institutional symmetry) in a voluminous number of studies (see Horodnic, 2018). A lower tax morale is significantly associated with a low level of trust in multifarious public institutions including the government (e.g., Andriani, 2016; Chan et al., 2018; Leonardo, 2011; Torgler, 2012a), parliament (e.g., Alm and Torgler, 2006; Frey and Torgler, 2007; Martinez-Vazquez and Torgler, 2009), the president (e.g., Torgler, 2005), politicians (e.g., Lago-Peñas and Lago-Peñas, 2010), political parties (e.g., Chan et al., 2018), courts and the legal system/rule of law (e.g., Alm and Torgler, 2006; Torgler and Schneider, 2004), the police (e.g., Leonardo and Martinez-Vazquez, 2016), public officials (e.g., Torgler et al., 2008), and the tax authority and tax officials (e.g., Torgler and Schaffner, 2008; Torgler et al., 2008; Vythelingum et al., 2017). A multitude of studies reveal that the lower the level of vertical trust, the higher is the likelihood of participation in the informal economy. This has been identified in studies conducted in 100 countries across the globe (Torgler and Schneider, 2007b), 21 OECD countries (Feld and Schneider, 2010), 35 Eurasian countries (Krasniqi and Williams, 2017), the European Union (Franić, 2017, 2019; Horodnic and Williams, 2022; Williams, 2019b; Williams and Horodnic, 2016a,b), Southern Europe (Littlewood et al., 2020; Williams and Horodnic, 2015e), South-East Europe (Williams and Bezeredi, 2018a), Baltic Sea countries (Horodnic and Williams, 2016; Williams and Horodnic, 2015b,c), and East-Central Europe (Williams and Horodnic, 2015a), as well as in a host of individual countries including Albania (Williams and Kosta, 2019), Bulgaria (Williams, 2020a; Williams and Franić, 2016a), Croatia (Williams and Franić, 2015, 2016b), France (Windebank and Horodnic, 2017), Germany (Feld and Larsen, 2012), North Macedonia (Williams and Bezeredi, 2017b, 2018a), Pakistan (Williams and Shahid, 2016; Williams et al., 2016c), Poland (Franić, 2020b), Turkey (Williams and Kayaoglu, 2020a), the UK (Williams and Horodnic, 2016c), and Slovakia and Ukraine (Ostapenko and Williams, 2016). Indeed, Feld and Schneider (2010) and Schneider (2010), when studying 21 OECD developed countries, reveal that tax morale has the second biggest individual influence on the size of the informal economy (among a wide range of indicators).

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Using data from the European Bank for Reconstruction and Development’s Life in Transition Survey of 2010, Anderson (2017) finds that trust in government also has a significant positive effect on the willingness of citizens to pay for public goods. Umar et al. (2017), interviewing self-employed taxpayers in Nigeria’s capital city, argue that tax non-compliance is better understood as a “tax boycott” arising from taxpayers’ lack of vertical trust in government. This is further reinforced in Nigeria by McCulloch et al. (2021) using a 2018 survey of 10 000 Nigerian adults, which finds that the greater the trust they have in tax officials, the greater is their tax morale, and the less is their likelihood of engaging in the informal economy. Horizontal trust Compared with vertical trust, there has been less attention given to “horizontal trust” (or what might be termed interpersonal trust, such as trust in competitors to adhere to the formal rules). Yet even a moment’s reflection leads to the realisation that if businesses, employers, workers, and citizens view their peers as operating in the informal economy, this might lead them to do so also. As Frey and Torgler (2007) put it, compliance is an example of “pro-social” behaviour, and they suggest that the willingness to comply is conditional on the pro-social behaviour of others. In other words, businesses, employers, workers, and citizens are more willing to comply if they believe others comply. Therefore, in recent years, a greater number of studies have begun to examine the association between horizontal trust (or interpersonal trust in others) and participation in the informal economy. This began with laboratory experiments, mostly on tax non-compliance. These reveal that compliance is conditional on participants’ perceptions of the behaviour of other taxpayers (Alm et al., 1999; Chang and Lai, 2004; Lefebvre et al., 2015; Mendoza and Wielhouwer, 2015; Narsa et al., 2016; Traxler, 2010). If taxpayers believe that compliance is widespread, they too will be likely to adhere to the rules (Alm, 1999, 2012). However, if they believe that non-compliance is widespread, they too will likely be non-compliant (Hallsworth et al., 2017). For instance, Lefebvre et al. (2015) find in a laboratory experiment in Belgium, France, and the Netherlands that when participants are informed that compliance is high, they too are compliant. Górecki and Letki (2021), using an experiment in 14 countries of East-Central Europe, reveal that the impact of punishment is moderated by the perceived norms of one’s immediate reference group (subjective norms). The deterrence effect of a sanction is unnecessary when norms of compliance are strong, and the impact of tax rates on non-compliance is moderated by the perceived norm of compliance in the wider society. The likelihood that raising tax rates reduces non-compliance is less if most other taxpayers are viewed as non-compliant.

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Using a laboratory experiment, Alm et al. (2017) reveal that the decision of taxpayers on whether to be compliant is shaped by the perceived behaviour of their “neighbours”, namely those they know, have contact with, or have information about. Individuals are more likely to file and report their taxes when they believe that other individuals are also filing and reporting their taxes; conversely, when individuals believe that others are cheating on their taxes, they may well become cheaters themselves. Meanwhile, Garcia et al. (2020) use an experiment to analyse the effects of information regarding the past degree of tax evasion on compliance behaviour. In this experiment, participants are either informed about the average non-compliance rate or sent a private message from peers about their compliance behaviour, and must then declare their income. The finding is that as the average non-compliance rate stated rises, non-compliance grows, and the previously non-compliant are more likely to not comply again (and not comply to a greater extent). When private messages of previous non-compliance are received from peers, both the previously non-compliant and compliant are more likely to not comply. Besides laboratory experiments, an increasing number of surveys investigate the impact of horizontal trust. As Williams and Horodnic (2021a) display in their analysis of the 2019 Eurobarometer survey of 28 European countries, only one in five of those engaging in the informal economy consider that less than 10 per cent of the population engage in the informal economy, but as many as one in three of those not engaging in the informal economy think the same. Similarly, one in five of those engaged in the informal economy believe that over 40 per cent of the population engage in the informal economy but only one in 12 of those not engaged in the informal economy. Horodnic and Williams (2022), using a regression analysis of the 2019 Eurobarometer survey, reveal that horizontal trust is significantly associated with participation in the informal economy. The greater the trust in others that they are complying, the lower is the likelihood that participants engage in the informal economy. This is also the finding of Horodnic and Williams (2018), who find a close relationship between engagement in the informal economy and the level of horizontal trust. Participation in the informal economy is less likely among those with high levels of horizontal trust. Jiminez and Iyer (2016), in a survey of 217 US taxpayers, also find support for the view that social norms influence compliance indirectly through internalisation as personal norms. As social norms about compliance grow, personal norms improve, leading to a growth in compliance. McCulloch et al. (2021), using a 2018 survey of 10 000 Nigerian adults, find that the intention to be compliant is higher the more people believe that others pay taxes. Levenko and Staehr (2021), using a survey commissioned by the Estonian Tax and Customs Board that has around 3700 observations from Estonian residents collected in three rounds from 2018 to 2020, find that social norms and customs

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are important predictors of compliance. However, vertical trust in government is not when measured in terms of perceptions of fairness and satisfaction with public services. Their resultant conclusion is that you and your friends matter, not the government (i.e., horizontal trust, not vertical trust). Indeed, some friends matter more than others. Di Gioacchino and Fichera (2020) reveal that by positively affecting the tax morale of individuals whose influence within the network is high, a fiscal authority can increase tax compliance more significantly. So too do peer group norms have an influence. Paetzold and Winner (2016), drawing upon evidence from Austria, reveal that non-compliance grows among those moving to jobs in businesses with more workers who are non-compliant. Conversely, those moving to businesses with fewer who are non-compliant do not alter their behaviour. In sum, in a second wave of institutional theory, participation in the informal economy is viewed as more prevalent in countries where there is greater asymmetry between formal and informal institutions, which drives businesses, employers, workers, and citizens to use the prescribed rules of the informal institutions as an alternative guiding framework (Williams, 2017a). Engagement in the informal economy is unusual when symmetry prevails between the formal and informal institutions because there is alignment between civic beliefs and the formal rules. However, when there is asymmetry between the formal and informal institutions, such as when there is a lack of trust in the public institutions, and when there is a lack of trust in others, participation in the informal economy will emerge, grounded in the socially shared norms that perceive this activity as legitimate. Third Wave Institutional Theory: Explaining Institutional Asymmetry as an Outcome of Formal Institutional Failings In the first wave of institutional theory on the informal economy, formal institutional failings were seen to lead to a greater prevalence of the informal economy. In the second wave, it was recognised that even if there are formal institutional failings, the informal economy only results when the socially shared norms, values, and beliefs are not aligned with the formal rules. In third wave institutional theory, these previous waves have been synthesised (see Williams, 2017a, 2019a). The contention is that the informal economy does not result from institutional asymmetry on its own. Institutional asymmetry is a direct by-product of formal institutional failings. Put another way, formal institutional failings result in an asymmetry between formal and informal institutions, and this results in a greater prevalence of the informal economy. Whether individual formal institutional failings result in an asymmetry between the formal and informal institutions in any society or institutional environment boils down to a multi-faceted, complex process. For example,

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in institutional environments where formal and informal institutions are largely complementary, and thus in alignment, formal institutional failings are not likely to result in greater participation in the informal economy, except unintentionally when a business, employer, worker, or consumer is unaware of the formal rules. Although such wholesale alignment between formal and informal institutions is hypothetically a possibility, it is highly unlikely in most institutional environments. Potentially it could occur in highly mature developed nations where over a period of many decades slow-to-change formal institutions both sculpt and are sculpted by the informal institutions until they become complementary through a process of iterative sculpting of each other. However, this is not generally the case in lived practice. Much more common is the institutional context where formal and informal institutions are substitutive, meaning that formal institutional failings produce an asymmetry between formal and informal institutions which in turn leads to the acceptability and prevalence of the informal economy. To advance this third wave institutional theory, the formal institutional failings that lead to institutional asymmetry and larger informal economies, along with how these formal institutional failings and the resultant institutional asymmetry can be tackled, need to be understood. These are two key objectives that this book attempts to achieve. To start to do so, the next chapter evaluates the measurement methods used to estimate the size of the informal economy so that structural or country-level conditions (i.e., formal institutional failings) that influence its magnitude can then be evaluated in Chapter 4.

CONCLUSIONS This chapter has reviewed the competing theories that variously explain participation in the informal economy. It has reviewed modernisation theory, which identifies economic under-development and unmodern systems of governance as the major determinants of engagement in the informal economy; neo-liberal theory, which pinpoints the key driver to be too much government intervention in the form of high tax rates and burdensome regulations; and political economy theory, which conversely identifies inadequate state intervention as the major driver of the informal economy. The chapter has then reviewed a contemporary body of thought grounded in institutional theory which has not only synthesised but also advanced these theories. The starting point of this institutionalist approach towards explaining the informal economy is that all societies have both formal institutions (i.e., laws and regulations) and informal institutions (i.e., beliefs and norms). The informal economy is asserted to prevail when formal institutional failings produce an asymmetry between the formal and informal institutions concerning what is acceptable behaviour. To prevent participation in the informal

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economy, the determinants of this asymmetry need to be identified. On the one hand, the formal institutional failings that result in participation in the informal economy need to be identified. On the other hand, the failings of informal institutions that lead to greater participation in the informal economy need to be understood. Starting with the formal institutional failings that lead to higher participation in the informal economy, institutional theory scholarship has drawn upon the determinants identified in the previous theories and grouped the failings into the following categories: (1) formal institutional resource misallocations and inefficiencies, including indicators measuring the lack of modernisation of government and corruption; (2) formal institutional voids and weaknesses, including indicators measuring state intervention in work and welfare; (3) formal institutional powerlessness, including indicators measuring the capacity to enforce law and regulations and the ability to provide incentives to encourage compliance; and (4) formal institutional instability and uncertainty, including indicators measuring the frequency of changing the laws and regulations. Meanwhile, to comprehend the failings of informal institutions that result in participation in the informal economy, institutional thought has recognised that informal work practices are deemed socially acceptable by businesses, employers, workers, and citizens even though they are illegitimate in terms of the formal institutions. To measure this gap between formal and informal institutions in what is deemed legitimate, tax morale has been employed, defined as the intrinsic motivation to pay taxes. The finding has been that a low level of tax morale is associated with higher participation in the informal economy. Given the important role of tax morale in explaining engagement in the informal economy, studies have investigated the determinants of this institutional asymmetry. The finding has been that the most important determinant of institutional asymmetry is trust. Increasingly, two types of trust are identified as important by institutional scholars in determining the prevalence of the informal economy. On the one hand, there is vertical trust, by which is meant the trust of businesses, employers, workers, and citizens in public authorities (e.g., government, the legal system, labour inspectorates, tax authorities). On the other hand, there is horizontal trust, which refers to the trust that businesses, employers, workers, and citizens have in relation to others being compliant, often measured in terms of their perceptions of the prevalence of the informal economy in a society. Having reviewed these theorisations for participation in the informal economy, attention now turns to the lived practice regarding the prevalence and character of the informal economy in the contemporary world. This will then be followed by an evaluation of what should and can be done about the informal economy.

3. Methods for measuring the size of the informal economy The informal economy is hidden economic activity not normally enumerated in any official business or employment registers. As such, it is difficult to measure. Indeed, those glancing at measures of the magnitude of the informal economy may be somewhat puzzled, even cynical, due to the wide-ranging estimates of its size in any country. For instance, estimates of its magnitude have ranged from 9.5 to 37.8 per cent of gross domestic product (GDP) in Romania, and from 1.0 to 17.1 per cent of GDP in Germany (GHK and Fondazione Brodolini, 2009). To comprehend why these markedly different estimates of its size exist, it is necessary to understand the measurement methods used. The aim of this chapter is to review these different measurement methods for estimating the size of the informal economy. To do so, two broad types of measurement methods can be differentiated. On the one hand, there are indirect measurement methods. These employ macro-level data collected for other purposes. The assumption is that even if those engaged in the informal economy want to hide their economic activity, it is possible to detect statistical traces of such endeavour in macro-level data collected for other purposes. Indirect measurement methods thus tend to be used by analysts believing that participants will not be truthful if asked about their engagement in the informal economy and by those without access to more direct measurement approaches due to their limited resources. On the other hand, there are direct measurement methods, such as surveys collecting data on participation in the informal economy. These tend to be used by those recognising that even if participation in the informal economy might contravene the laws and regulations of formal institutions, it is often viewed as legitimate activity in terms of the informal institutions, namely the norms, values, and beliefs of businesses, employers, workers, and citizens. Hence, unlike criminal activity that is both illegal and illegitimate activity, they recognise that the informal economy is hidden in plain sight and openly discussed due to its social acceptability, which makes direct data collection feasible. Each broad measurement method is reviewed here in turn.

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INDIRECT MEASUREMENT METHODS Indirect measurement methods use macro data collected for other purposes to estimate the magnitude of the informal economy. What might be called “proxy indicator” methods, these are divided here into four different types according to the types of indicators they use to measure the magnitude of the informal economy, namely non-monetary indicator methods, monetary indicator methods, income/expenditure discrepancy methods, and multiple indicator methods. As will be shown, each of these four types can be again broken down into various methods depending on the indicators used. Non-Monetary Indicator Indirect Measurement Methods For those using non-monetary indicators, the most common indicators used are, first, very small enterprises as a surrogate indicator of the informal economy, second, electricity demand, and third and finally, formal labour force statistics to identify statistical traces of the informal economy. Each is considered here in turn. A first non-monetary indicator used as a proxy of the magnitude of the informal economy is very small enterprises (VSEs) (e.g., ILO, 2002; Portes and Sassen-Koob, 1987; US General Accounting Office, 1989). However, as a proxy indicator of the size of the informal economy, this VSE indicator measurement approach makes two contrary assumptions. On the one hand, all VSEs are assumed to be in the informal economy, which leads to an overestimate of the magnitude of the informal economy. On the other hand, unregistered VSEs are not included in any business registers, which leads to an underestimate of the size of the informal economy (Portes, 1994). Furthermore, this non-monetary indicator does not include in its estimate either waged informal employment or informal self-employment, which recent surveys reveal constitutes a large proportion of the informal economy, both in developed and in developing countries (ILO, 2018a; Williams and Horodnic, 2021a). Therefore, as a proxy indicator this is very inaccurate. Indeed, it has largely fallen out of use. A second non-monetary indicator used is electricity demand (Friedman et al., 2000; Lacko, 1999), and more recently, energy consumption (Canh et al., 2021b). The assumption is that economic activity and electricity consumption have an electricity-to-GDP elasticity of close to one. Measuring total electricity (or energy) consumption is therefore an indicator of the overall (formal and informal) GDP. By subtracting the GDP of the formal economy, the magnitude of the informal economy can be estimated along with whether it is growing or declining. However, at least three problems are apparent. First, a plethora

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of types of informal work do not require a considerable amount of electricity, such as personal and caring services. Second, alternative energy sources to electricity might be used, such as gas, oil, and coal. Third and finally, evaluating changes over time using this method does not consider improvements in energy efficiency or cross-country and temporal variations in the elasticity of electricity-to-GDP (Andrews et al., 2011). Therefore, as an indicator of the magnitude of the informal economy, this is again an inaccurate proxy indicator. Another variant of this method is to use satellite technology to measure night-time lights. As the IMF (2021) note, in Zimbabwe, satellite data has been combined with other consumption data (e.g., energy consumption) to estimate the size of the informal economy as a proportion of GDP along with growth rates. The same problems apply. A third and final non-monetary measurement method uses formal labour force statistics to seek traces of the informal economy. Several methods exist for doing this. A first uses unaccountable increases (or decreases) in various types of employment where the informal economy is assumed to be rife, such as self-employment and holding second jobs, as a proxy indicator of the magnitude and growth/decline of the informal economy (Crnkovic-Pozaic, 1999; Del Boca and Forte, 1982; Hellberger and Schwarze, 1986). The problem is that it is difficult to know whether the increase in each of these types of non-standard employment relationship is due to the informal economy rather than other factors. This is especially the case in contemporary economies where non-standard employment relationships beyond the standard full-time permanent waged employment relationship have been growing across the world at varying rates in recent decades (ILO, 2018a). A second method using labour force statistics evaluates the discrepancies in the results of different official surveys. Some studies compare discrepancies in the population census and firm surveys (Flaming et al., 2005; Lobo, 1990; Mattera, 1985; US Congress Joint Economic Committee, 1983). However, the most popular discrepancy method, known as the labour input method (LIM), compares surveys of the supply of labour, such as labour force surveys, with surveys of the recorded labour demand, such as surveys on company declarations to tax or social security authorities or national statistical offices (Elek and Köllő, 2019; GHK/FGB, 2009; OECD, 2002; Williams et al., 2017). The LIM method, with its origins in Italy (Baldassarini, 2007; GHK/FGB, 2009), has been applied in Estonia (Paulus, 2015), Hungary (Elek and Köllő, 2016), and the 27 countries of the European Union (Williams et al., 2017). This LIM method assumes that labour force surveys capture participation in the informal economy because workers are not motivated to conceal their true employment status. Thus, the magnitude of the informal economy can be estimated by comparing the discrepancy between the reported labour supply by workers (e.g., recorded in labour force surveys) and the reported data on

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labour used by employers (as recorded in business surveys) after converting the enterprise-based (demand-side) and labour force (supply-side) estimates to the same units of labour input (e.g., hours worked or full-time equivalents) to allow comparison. The discrepancy between the two provides an estimate of the magnitude of the informal economy. A first problem with this method is whether the discrepancies are purely due to the informal economy, or whether other survey design issues or factors are involved. For example, during the COVID-19 pandemic, many employees benefiting from short-term state financial support in the form of job retention schemes may report themselves in a labour survey as not being employed, but businesses will still correctly count them as employees. A second is that informality not related to labour input (e.g., non-declared profit) is not covered by this method, meaning that the LIM method is more effective in estimating the informal economy in sectors with high labour intensity and fewer capital inputs, while concealed income in sectors which are more capital-intensive remains undetected. A third problem is that labour supply data is not necessarily accurate because labour inputs may be intentionally misreported by workers who do not wish to report their informal work when responding to labour force surveys. A fourth is that misreporting labour inputs and mismeasurement on the demand side is not always due to employers hiding informal work. For example, in some enterprise surveys, various ventures are not covered, perhaps due to firm size cut-offs (Williams et al., 2017). Monetary Indicator Indirect Measurement Methods Indirect measurement methods using monetary indicators have been generally of three types based on the monetary proxy indicator employed, namely large denomination notes, the cash-deposit ratio, and money transactions. Each is considered here in turn. First, large denomination notes have been used as a proxy indicator to measure the magnitude of the informal economy (Dotti et al., 2015). The assumption here is that those operating in the informal economy rely on cash when engaging in the informal economy and therefore large sums of money are involved and thus high denomination notes exchanged (Bartlett, 1998; Henry, 1976; Matthews, 1982). However, this assumption is problematic. Historically, not all transactions in the informal economy have been conducted purely in cash (Contini, 1981; Smith, 1985); there is now the availability of cyber-currencies, and many transactions in the informal economy are for small amounts of money (Cornuel and Duriez, 1985; European Commission, 2014; Williams, 2009b; Williams and Horodnic, 2018a, 2021a). Moreover, this measurement method cannot separate the use of large denomination notes for criminal activities from those used in informal economy transactions (Bartlett,

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1998). And many other factors besides the informal economy influence the use of high denomination notes. For example, the shift in modes of payment towards electronic payments has reduced the use of large denomination banknotes, and economic and financial volatility in countries may result in citizens turning to high denomination notes (e.g., in foreign currency such as the dollar) as a store of value. As a proxy indicator, the use of high denomination notes is therefore beset with problems, witnessed in the recognition that abolishing high denomination banknotes (and even cash) might not be wholly effective in preventing the informal economy (Kruger and Seitz, 2017; Reimers et al., 2020). A second monetary proxy indicator examines the ratio of currency in circulation to demand deposits. Assuming that transactions in the informal economy are in cash, it estimates the currency in circulation needed by the formal economy and subtracts from this the actual money in circulation. The difference, multiplied by the velocity of money, is the amount of currency circulating because of the informal economy. The ratio of this number to the observed gross national product (GNP) measures the share of the total economy in the informal economy. Developed by Gutmann (1977) in the USA, this method was widely adopted (Caridi and Passerini, 2001; Cocco and Santos, 1984; Matthews, 1983; Matthews and Rastogi, 1985; Tanzi, 1980, 1999). Nevertheless, it again has major flaws. First, cash is not the only medium of exchange in the informal economy (Contini, 1981; Feige, 1990; Isachsen et al., 1982; Smith, 1985). Second, this method cannot differentiate between the share of cash in circulation resulting from the informal economy and the share resulting from crime, or how this fluctuates over time or has changed with the greater use of cyber-currencies in criminal activities. Third, the decision to use the cash-deposit ratio as a surrogate indicator is arbitrary and not derived from any economic theory (Trundle, 1982). Fourth, the cash-deposit ratio in any society is determined by many factors other than the informal economy (e.g., changing payment methods, financial exclusion), which frequently operate in opposite directions to each other. Fifth, this method requires the choice of a base period when there was no informal economy and this is problematic, particularly given that the results are highly sensitive to the base year selected (Thomas, 1986). Sixth, it assumes that velocity of cash circulation in the informal and formal economies is the same, although there is no evidence to support this (Frey and Weck, 1983; Onnis and Tirelli, 2015), with Marmoraa and Mason (2021) finding that a 1 per cent increase in informal activity lowers the impact of cashless technology on the velocity of currency in circulation by 0.3 per cent. Seventh and finally, it is difficult to estimate the amount of currency of a country that is held domestically and abroad (Feige, 2012). A third monetary indicator estimates the degree to which all monetary transactions exceed what can be predicted if the informal economy was

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non-existent (Feige, 1979, 2012). This method was first explored by Cagan (1958), who noted that changes in cash holdings relative to the size of a broad monetary aggregate may reflect the evolution of the informal economy. One advantage of this method is its recognition that not all transactions in the informal economy are cash-based. Feige (1990) provides evidence that, in the USA, transactions in the informal economy involve cheques and electronic payments as well as cash, by quoting a study by the Internal Revenue Service (IRS) which reveals that a quarter to a third of unreported income involved cheques rather than cash. In Norway, Isachsen et al. (1982) reveal that 20 per cent of informal services were paid for with a cheque in 1980, while Smith (1985) in the US city of Detroit finds in the home repair sector that bills for informal transactions were paid roughly equally in cash and cheques. Indeed, with the rise of cashless payments, Reimers et al. (2020) argue that there is no statistically proven link between the size of the informal economy and cash. Hence, this method has the same problems as the cash-deposit ratio approach. The only problem addressed is that transactions in the informal economy include electronic payments and cheques. Therefore, the above criticisms of the cash-deposit ratio approach also apply to the monetary transactions approach. Income/Expenditure Discrepancy Indirect Measurement Methods The income/expenditure discrepancy method measures the size of the informal economy by evaluating the differences in income and expenditure at either the aggregate national level or the household level. It assumes that even if participants in the informal economy hide their incomes, their expenditures are not hidden. Two different income/expenditure methods are used. The aggregate-level approach evaluates the discrepancy between national income and national expenditure to estimate the magnitude of the informal economy. Such aggregate-level studies of income/expenditure discrepancies have been undertaken in European countries such as Germany (Langfeldt, 1984), Sweden (Apel, 1994), the UK (O’Higgins, 1989), and Switzerland (Weck-Hannemann and Frey, 1985), as well as in the North American countries of Canada (Morissette, 2014) and the USA (Macafee, 1980; Paglin, 1994). The household-level approach examines income/expenditure discrepancies using household income and household expenditure data to estimate the magnitude of the informal economy (Artavanis et al., 2016; Dilnot and Morris, 1981; Lichard et al., 2021; Macafee, 1980; O’Higgins, 1989). This assumes that income underreporting will be revealed when compared with expenditure data. For example, Lichard et al. (2021) analyse the consumption–income gap of households in Czechia and Slovakia using household budget surveys. They find that the underreported share decreases as reported income increases, so income inequality may be less than solely reported income suggests. Artavanis

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et al. (2016) pursue a similar approach in Greece, using consumer loan data from a major Greek bank to estimate households’ real incomes. They find a vast over-consumption of consumer loans in some employment statuses and occupations, with the average self-employed borrower spending more than 80 per cent of their declared monthly income on servicing their loans, and some professions more than 100 per cent. This method makes assumptions about the income and expenditure data used. On expenditure, it assumes that this is measured accurately. However, few households keep records of expenditure or know their expenditure levels, unlike income, which employees receive in regular recorded amounts and the self-employed calculate annually on tax returns (Mattera, 1985). On income, it is difficult to know whether this extra income derives from informal work, criminal activity, or even interest on savings. There are non-response and underreporting errors (Thomas, 1992). The result is problems regarding the accuracy of this income/expenditure discrepancy method as an estimate of the informal economy. As Weck-Hannemann and Frey (1985) show in Switzerland, national income is higher than expenditure, suggesting that the informal economy is negative, which is nonsensical and brings into question using this method to estimate the magnitude of the informal economy. Multiple Indicator Measurement Methods All the indirect methods of measuring the informal economy so far evaluated use single indicators. Multiple indicator measurement methods, the most common of which is the dynamic multiple indicators multiple causes (MIMIC) method, use multiple indicators and multiple causes (Schneider and Williams, 2013; Williams and Schneider, 2016). In this MIMIC method, the informal economy is an unobserved (or latent) variable that influences, and is influenced by, the observed indicators. Pioneered by Schneider (2001), this approach contentiously views the causes of the informal economy as the burden of direct and indirect taxation (both actual and perceived), the burden of regulation, and tax morale (citizens’ attitudes towards paying taxes). To estimate the size of the informal economy, it therefore analyses these determinants and various indicators (e.g., male participation rate, hours worked, and growth of real GNP) and then estimates the size of the informal economy using econometric tools. However, some of the causes and indicators used are highly questionable. As Chapter 2 revealed, studies find that cross-national variations in taxation rates, whatever measure of taxation is used, are either not correlated with the informal economy or the association is in the opposite direction to that assumed by this model. It is similarly the case that it is not the burden of regulation that increases the magnitude of the informal economy; rather, it depends

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on the type of regulation considered (Williams and Renooy, 2014). Despite these caveats about the assumptions of the model underpinning this method, it has rapidly grown in popularity and been widely used (Abela et al., 2022; Almenar et al., 2020; Bajada and Schneider, 2005; Dell’Anno, 2007; Franić, 2019b; Kelmanson et al., 2019; Koufopoulou et al., 2021; Zhanabekov, 2022). Indeed, it is perhaps the dominant measurement method currently employed globally due to it providing a harmonised set of cross-national estimates of the size of the informal economy. However, indirect measurement methods are not the only way of estimating the size of the informal economy.

DIRECT MEASUREMENT METHODS More direct measurements can be used to estimate the size of the informal economy. These involve contacting or observing businesses, workers, or citizens to collect direct data about participation in the informal economy. These direct measurements can use data from workplace inspection records (Berȩsewicz and Nikulin, 2021), from audits of tax returns (Kleven et al., 2011), from tailor-made sample surveys of businesses, workers, or citizens explicitly designed to evaluate the informal economy (e.g., the 2007, 2013, and 2019 Eurobarometer surveys in Europe, the World Bank Enterprise Survey), or from field and laboratory experiments. Those using these direct measurements often contend that indirect measurement methods are unreliable, inaccurate, and make often untenable assumptions about the informal economy which are not based upon evidence (Thomas, 1992; Williams, 2004a; Williams and Windebank, 1998, 1999). However, the usage of indirect measures is seen as understandable in earlier decades when few empirical surveys were available, and these indirect methods were pivotal in raising awareness about the persistence of the informal economy and its importance. Indeed, these measurements justified direct measures being funded. Today, however, with the increasing number of direct surveys of the informal economy, indirect measures are no longer so central and essential as was previously the case (Williams, 2006a, 2019a; Williams and Schneider, 2016). Yet for those on the other side of the debate, namely exponents of indirect measurement methods, the major criticism of direct methods is that they assume that businesses, workers, or citizens will openly reveal, and even know about, their engagement in the informal economy. Purchasers might be unaware that the goods and services they buy are from the informal economy and suppliers might not wish to declare their participation in the informal economy to purchasers. This point regarding purchasers might well be valid, although many purchases in the informal economy are in fact instigated by buyers who ask the supplier “how much for cash?” and therefore knowingly

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purchase and instigate transactions in the informal economy (Horodnic et al., 2021b; Williams, 2006b; Williams et al., 2012c). Nevertheless, there is little evidence that workers in the informal economy will be dishonest when responding to researchers. Instead, the experience of nearly four decades of survey research is the opposite. Pahl (1984), in his UK study on Isle of Sheppey, finds the same magnitude of informal work when analysing the data from suppliers and purchasers, suggesting that suppliers do not hide their informal work. As Bàculo (2001: 2) comments about her face-to-face interviews in Italy, “they were curious and flattered that university researchers were interested in their problems” and she found them willing to share their experiences. Similar conclusions about the honesty and openness of research participants are found in Canada (Fortin et al., 1996) and other UK studies (Leonard, 1994; MacDonald, 1994; Williams, 2004). As MacDonald (1994) comments on the unemployed he interviewed in a deprived UK locality, “fiddly work” was not a sensitive subject. They were happy to discuss it with the researchers and did so in the same breath as discussing their unpaid voluntary work experiences. This openness about informal work was also found by Leonard (1994) in West Belfast. To confirm these previous studies, the 2007, 2013, and 2019 Eurobarometer surveys on the informal economy asked interviewers to report the level of cooperation from interviewees. These surveys are Special Eurobarometer No. 498 in 2019 involving 26 514 respondents, Special Eurobarometer No. 402 in 2013 involving 26 257 respondents, and Special Eurobarometer No. 284 in 2007 involving 25 346 respondents. In 2019, akin to previous years, interviewers reported excellent cooperation from the participant in over 90 per cent of interviews and poor cooperation in just 1 per cent of interviews (Williams and Horodnic, 2021a). When businesses are surveyed, similar findings apply. In a direct survey interviewing businesses about the extent of their participation in the informal economy, namely the 2002 EBRD/World Bank Business Environment and Enterprise Performance Survey conducted in 26 countries of East-Central Europe and the Commonwealth of Independent States (CIS), Fries et al. (2003) identify that it is wholly possible to collect such data. Qualitative interviews with businesses again report the openness of employers and employees when discussing their participation in the informal economy (Jones et al., 2004; Ram et al., 2001, 2002a,b, 2003, 2007). As explained in Chapter 2, this is doubtless because working in the informal economy, although illegal in terms of the laws and regulations of formal institutions, is legitimate endeavour from the perspective of informal institutions, namely the norms, values, and beliefs of businesses, employers, workers, and citizens (Webb et al., 2009). The result is that it is openly discussed, making reliable direct data collection feasible. Direct measurements of the informal economy can also use audits, laboratory experiments, and field experiments. Randomised tax audits provide a direct

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measure of individual-level compliance (Kleven et al., 2011). However, they are costly to undertake in terms of human resources and the data is only available in a few countries. Even if the data is available, audits may not detect non-compliance with certainty. Evidence from randomised audits is used, for example, in a study by Schneider (2005). Laboratory experiments are another means of collecting direct data (Alm, 2012; Alm and Kasper, 2020; Torgler, 2002, 2007), and have been most widely used when examining tax non-compliance, but less used when studying labour law non-compliance. The advantage of a laboratory experiment is that compliance is directly measurable, changes in policy or other socio-economic contexts (e.g., different social norms) are easily testable, and it is easier to investigate the causality of effects. Cultural influences on tax compliance can also be investigated in cross-cultural laboratory experiments. The possible disadvantages are the lack of realism (e.g., severe punishment for evasion such as imprisonment and ostracism of the non-compliant cannot be implemented in the laboratory), which reduces their external validity. The use of students as the subjects, as is common in experimental economic research, may be also problematic because they have little experience with filing tax returns and have a higher education than the average taxpayer. Nevertheless, experiments do enable direct observation of decisions to be non-compliant (Alm, 2012; Alm and Jacobson, 2007; Blackwell, 2007). Alm (2012) describes four types of experiments on compliance: tests of theory such as how people react to different fines and probabilities of detection or to increases in tax rates; tests of biases in individual decision-making, such as whether taxpayers overweight the probability of detection; tests of the impact of social influences, such as how social norms, procedural fairness, or public shame may influence decisions; and tests of new policy measures, such as inspection or audit selection rules. Field experiments provide a potentially higher external validity of the results compared with laboratory experiments. For example, randomised audits can be used to make tax compliance measurable. However, a disadvantage of field experiments is that they are more difficult to implement and are more costly and time-consuming. One of the first field experiments on non-compliance, by Slemrod et al. (2001), explores the effect of differences in perceived audit rates by sending a letter to a group of taxpayers in Minnesota. The letter announced a close examination of the tax report which the respective taxpayers were about to file. The tax payments were compared with that of a control group which consisted of taxpayers who did not receive a letter. Another example is work by Kleven et al. (2011), who conduct a large-scale field experiment in Denmark to test the effect of audits and threat-of-audit letters on individuals’ income tax compliance, using a representative stratified sample of 42 800 taxpayers. Torgler (2012b) investigates the influence of moral appeals on

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tax compliance in a field experiment using a sample of 578 taxpayers in Switzerland, with half the sample randomly selected to receive the standard tax form followed by a letter highlighting the moral obligation to pay taxes. It is reported that the letter has a positive effect on tax compliance, although it is not significant. Hallsworth et al. (2017) examine the propensity of taxpayers to pay their outstanding taxes and how norm and fairness messages affect payments. However, generally speaking, laboratory and field experiments have not been used until now to estimate the size of the informal economy, instead being more used for evaluating potential policy initiatives by seeking behavioural insights into what nudges might result in greater compliance and lower participation in the informal economy (Barr and Serra, 2010; Chaudhuri, 2011; Herrmann et al., 2008; Wenzel, 2005). Surveys are the main direct measurement method, followed by audits, to measure its magnitude.

CONCLUSIONS This chapter has reviewed the different ways of estimating the size of the informal economy. It has differentiated between indirect and direct measurement methods. Indirect measurement methods, used by analysts who assume that respondents will not be truthful, employ macro-level data collected for other purposes. The assumption is that even if those engaged in the informal economy seek to hide their economic activity, it is possible to detect statistical traces of this endeavour in such macro-level data. These indirect measurement methods, or what might be called “proxy indicator” methods, are of four types, differentiated by the indicators they use to measure the magnitude of the informal economy. First, there are non-monetary indicator methods, which can be sub-divided into those that use very small enterprises, those that use electricity demand, and those that use formal labour force statistics, including the LIM method, as a surrogate indicator of the informal economy. Second, there are monetary proxy indicator methods, which can be sub-divided by whether they use large denomination notes, the cash-deposit ratio, or money transactions as a proxy indicator. Third, there are income/expenditure discrepancy methods which can entail either aggregate- or household-level analysis. And fourth and finally, there are multiple indicator methods, of which the most common is the MIMIC method. On the other hand, there are those who recognise that even if participation in the informal economy might contravene the laws and regulations of formal institutions, it is often viewed as legitimate activity in terms of the informal institutions, namely the norms, values, and beliefs of businesses, employers, workers, and consumers. Hence, the belief is that the informal economy is hidden in plain sight and openly discussed since it is socially acceptable, which

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makes direct collection of data on participation feasible using, for example, survey methods. In earlier decades, the value of the indirect measurement methods was that they revealed the resilience of the informal economy in contemporary economies and how it did not appear to be disappearing. This recognition then led to more resources being made available for direct surveys to be conducted. The advantage of these direct surveys is that they have enabled not only the prevalence of the informal economy to be analysed but also, importantly, what informal work participants do, who engages in informal work, and why they do so. In the next chapters, each of these issues will be analysed in turn using various direct surveys that have been conducted in recent decades.

PART II

Magnitude and character of the informal economy

4. Prevalence of the informal economy in global perspective The aim of this chapter is to document the prevalence of the informal economy across the globe and evaluate the theories discussed in Chapter 2 as explanations for the cross-national variations in its magnitude. Although there are indirect measurements of the variations in the size of the informal economy across countries, such as in Schneider and Williams (2013) and Williams and Schneider (2016), this chapter focuses upon direct survey evidence for the reasons discussed in the Chapter 3. Following a brief review of the various direct survey datasets available on a global level, first, this chapter will evaluate the prevalence of the informal economy using an International Labour Organisation (ILO) dataset and, second, it will evaluate the different explanations for the cross-national variations in the prevalence of the informal economy. The three major cross-national direct surveys of the prevalence of the informal economy are the World Bank Enterprise Survey, the Global Entrepreneurship Monitor, and an International Labour Organisation survey. Given the focus in this chapter on the ILO dataset, the other two direct surveys are discussed here. The World Bank Enterprise Survey (WBES) covers 151 countries and has collected data from 2002 to 2021, with a harmonised questionnaire and common methodology used since 2006. In every country surveyed, data is collected from a stratified random sample comprising non-agricultural formal private sector businesses with five or more employees. This is stratified by three variables, namely firm size, business sector, and geographic region. Normally, 1200–1800 interviews are undertaken in larger countries, 360 in medium-sized countries, and 150 in smaller countries. In the WBES, the firm size strata are 5–19 employees (small), 20–99 employees (medium), and 100+ employees (large). Sectors are classified into manufacturing, services, transportation, and construction. In larger countries, the sample is further stratified by manufacturing sub-sectors based on employment levels, value-added, and the total number of such enterprises. Public utilities, government services, healthcare, and financial services are not surveyed. Geographical regions within countries are selected based on which cities/regions collectively contain most economic activity. The sampling frame is generated using all eligible 66

Prevalence of the informal economy in global perspective

67

enterprises, which is normally obtained from the statistical office or another government agency (e.g., tax or business licensing authorities) in each country. From 2006 onwards, all national surveys explain the sampling frame used. The WBES uses four indicators to assess the prevalence of the informal economy. As Table 4.1 reveals, analysing formal private sector firms with more than five employees, nearly half of these enterprises globally (49.5 per cent) view themselves as competing against unregistered enterprises or firms conducting some of their trade informally, and over a quarter of enterprises globally (27.7 per cent) identify the practices of competitors in the informal economy as a major constraint on their business. However, this varies across global regions, ranging from Latin America and the Caribbean where over two-thirds (69.7 per cent) of firms compete against unregistered and informal competitors and 39.6 per cent view such informal businesses as a major constraint on their business, to Europe and Central Asia where just under one-third (32.1 per cent) compete against unregistered or informal enterprises and only one-fifth (20.6 per cent) view them as a major constraint on their business. Turning to the third and fourth indicators of whether formal businesses started up unregistered and the length of time they were unregistered, one in ten (10.9 per cent) formal private sector firms with over five employees assert that they started operations operating on an unregistered basis and only later formalised their operations, on average spending 0.7 years operating unregistered before formalising. Again, this varies globally, ranging from one in six (15.5 per cent) in sub-Saharan Africa spending 0.7 years on average unregistered to just one in 24 (4.1 per cent) in Europe and Central Asia again spending on average 0.7 years unregistered. This WBES finds that half of all enterprises globally compete against enterprises trading fully or partially in the informal economy, and well over a quarter of all enterprises globally identify the practices of competitors in the informal sector as a major constraint. This signifies the prevalence of the informal economy. The second major direct survey collecting cross-national data is the Global Entrepreneurship Monitor (GEM). Autio and Fu (2015) draw on this dataset which annually reports data on entrepreneurship across countries and combine this with the World Bank Enterprise Snapshot, which tracks formal incorporations, to measure the relative prevalence rates of formal and informal start-ups. The finding is that some 59.0 per cent of all new business ventures in Organisation for Economic Co-operation and Development (OECD) countries are informal, 62.6 per cent in transition economies, but 83.9 per cent in Asia Pacific countries, 91.2 per cent in Latin American and the Caribbean countries, and 98.0 per cent in African countries. Therefore, most new businesses across the world start up in the informal economy.

A modern guide to the informal economy

68

Table 4.1

World Bank Enterprise Survey estimates of the prevalence of the informal economy (unweighted means)

Economy

% of firms

% of firms

% of firms

Number of

competing

identifying

formally

years operated

against

practices of

registered when

without formal

unregistered or

competitors in

they started

registration

informal firms

the informal

operations

sector as a major constraint All countries

49.5

27.7

89.1

0.7

East Asia and Pacific

48.3

15.5

84.8

0.7

Europe and Central Asia

32.1

20.6

95.9

0.5

Latin America and Caribbean

69.7

39.6

87.1

0.9

Middle East and North Africa

43.2

30.5

86.8

0.9

South Asia

41.1

20.4

86.8

0.8

Sub-Saharan Africa

66.8

37.1

84.5

0.7

Source: World Bank Enterprise Survey, April 2022, author’s calculations.

Table 4.2

Prevalence rates of informal and formal business start-ups, measured as number of new business entries per 100 adult-age population

 

Formal start-ups

Informal start-ups

% of all business start-ups that are informal

Asia Pacific countries

0.39

2.03

83.9

Latin American and Caribbean

0.21

2.17

91.2

African countries

0.08

3.98

98.0

OECD countries

0.43

0.62

59.0

Transition countries

0.37

0.62

62.6

countries

Source: Derived from Autio and Fu (2015: Table 1).

In the rest of this chapter, it is a 2018 ILO survey that is evaluated. This ILO harmonised data uses national labour force surveys, or similar national household surveys, across 112 countries, representing 90 per cent of the global workforce (ILO, 2018a). It is therefore a comprehensive set of data covering the majority of the world’s workforce.

Prevalence of the informal economy in global perspective

69

PREVALENCE AND INTENSITY OF INFORMALITY ACROSS THE GLOBE Figure 4.1 provides a graphical portrayal of the definitions used by the ILO of informal employment and employment in the informal sector, which were discussed in detail in Chapter 1. In the enterprise-centred definition with the enterprise as the unit of observation, the informal economy is “employment in the informal sector” (1 and 2) while if the employment-centred definition is used with the employment relationship the unit of observation, the informal economy is “informal employment” (1 and 3). In this chapter, an employment-centred definition is mostly used. As such, the prevalence of the informal economy refers to the proportion of the total workforce whose main job is informal employment (1 and 3), while to provide an additional measure of the intensity of informalisation, the share of the total workforce whose main job is informal employment in the informal sector (1) is analysed. The latter signals informality of a more intense form because both the employment and enterprise are informal, which is not the case with formal jobs in the informal sector (2) and informal jobs in formal enterprises (3).

Source: Derived from ILO (2012).

Figure 4.1

ILO typology of jobs

To classify countries, the 2018 ILO harmonised data of the micro datasets from 112 countries, comprising in total 90 per cent of the world’s employed population aged 15 years old and over, is reported. In this harmonised survey, a respondent is classified as engaging in informal employment only if it is their main job. A respondent is not classified as engaged in informal employment if they engage in a second job in the informal economy. This means that these

70

A modern guide to the informal economy

data are likely to underestimate both the prevalence of the informal economy and intensity of informality globally. The conventional approach to classify economies is to use formal economy indicators to differentiate countries, such as their levels of gross domestic product (GDP). However, given the dominance of the informal economy globally, this chapter classifies countries by the size of their informal economies. Figure 4.2 provides such a classification of countries according to the proportion of the total workforce whose main job is informal employment (1 and 3). This classification of countries will be used throughout this chapter.

Source: Derived from Williams (2014d).

Figure 4.2

Classification of countries by the prevalence of the informal economy

Evaluating the Prevalence of the Informal Economy Table 4.3 reports the prevalence of the informal economy in the 112 countries surveyed containing 90 per cent of the world’s workforce. This reveals that 61.2 per cent of the total global workforce are in informal employment as their main job, which equates to some two billion of the world’s employed population aged 15 and over. However, this proportion varies across global regions, with 85.8 per cent of the workforce in Africa in informal employment as their main job, 68.6 per cent in the Arab States, and 68.2 per cent in Asia and the Pacific. In the Americas this lowers to 40.0 per cent, and further reduces to 25.1 per cent in Europe and Central Asia. Given that informal employment is higher in the agricultural sector, when the non-agricultural sector alone is analysed, the share of the global non-agricultural workforce in informal employment as their main job falls to 50.5 per cent. This still means that most of the global non-agricultural workforce have informal employment as their main job. Again, there are variations across global regions. In Africa, 71.9 per cent of the non-agricultural workforce have informal employment as their main job, 63.9 per cent in the Arab States, and 59.2 per cent in Asia and the Pacific. This reduces to 36.1 per cent in the Americas, and to 20.8 per cent in Europe and Central Asia.

Prevalence of the informal economy in global perspective

Table 4.3

71

Informal employment as percentage share of total employment, by global region

 

All employment

Excluding agriculture

World

61.2

50.5

Africa

85.8

71.9

Asia and the Pacific

68.2

59.2

Arab States

68.6

63.9

Americas

40.0

36.1

Europe and Central Asia

25.1

20.8

Source: Derived from ILO (2018a) dataset.

These workers with informal employment as their main job can be in informal employment either in the informal sector, the formal sector, or the household sector. Breaking down the 61.2 per cent of the global workforce in informal employment by the economic unit in which they work, 51.9 per cent have their informal employment in the informal sector, 6.7 per cent in the formal sector, and 2.5 per cent in households. Hence, most informal employment is in the informal sector. Again, this distribution of informal employment between the informal, formal, and household sectors varies across global regions. In all regions, most informal employment is in the informal sector. However, informal employment in the formal sector makes up a somewhat greater proportion of all employment in the Americas, where it is 7.9 per cent of all employment, and in Europe and Central Asia, where it represents 5.3 per cent of total employment. Those in informal employment for their main job can be either employees, employers, own-account workers, or contributing family workers. Table 4.4 displays the composition of formal and informal employment according to their employment status. Globally, own-account workers account for 45.0 per cent of total informal employment, employees for 36.2 per cent, contributing family workers for 16.1 per cent, and employers for 2.7 per cent. Comparing the employment status of the global formal workforce with that of the global informal workforce, the finding is that the informal workforce is far less likely to consist of employees (36.2 per cent compared with 76.3 per cent), and far more likely to consist of own-account workers (45.0 per cent compared with 19.8 per cent) and contributing family workers (16.1 per cent compared to nil). However, there are again some notable variations across global regions. In Asia and the Pacific, a smaller proportion of the informal workforce comprises employees than in other global regions, while in Europe and Central Asia, a smaller proportion comprises own-account workers than in other global regions.

A modern guide to the informal economy

72

Table 4.4

Composition of formal and informal employment, by employment status % of workforce who are: Employees

Employers

Own-account

Contributing

workers

family workers

Global Formal employment

76.3

3.9

19.8

0.0

Informal employment

36.2

2.7

45.0

16.1

Formal employment

87.0

4.4

8.6

0.0

Informal employment

49.2

3.5

40.7

6.5

Americas

Arab States Formal employment

90.9

3.7

5.5

0.0

Informal employment

54.2

4.8

39.3

1.6

Asia and the Pacific Formal employment

73.1

4.2

22.7

0.0

Informal employment

34.4

2.3

45.5

17.8

Formal employment

90.7

2.5

6.8

0.0

Informal employment

56.3

5.3

29.7

8.7

Europe and Central Asia

Source: Derived from ILO (2018a) dataset.

Moving from an analysis of global regions to individual countries, Table 4.5 provides comprehensive data on the prevalence and character of the informal economy for each of the 112 countries. To explain the data in this table, the findings are here described for the first country listed, namely Albania. In Albania, the main job of 61.0 per cent of workers is informal employment, with 29.1 per cent of the total workforce engaged in informal employment in the informal sector, just 0.5 per cent engaged in informal employment in the formal sector, and 31.4 per cent engaged in informal employment in households. Examining the non-agricultural workforce, 33.1 per cent of the non-agricultural workforce in Albania is in informal employment as their main job and 24.9 per cent of the non-agricultural workforce are engaged in informal employment in the informal sector. The economy in Albania is therefore “mostly informal” (using the classificatory schema in Figure 4.2), and measuring the intensity of informality, 29.1 per cent of all workers engage in informal employment in informal enterprises as their main job. Moreover, breaking down the composition of the informal workforce in Albania by their employment status, just 12.7 per cent are employees, 2.4 per cent are employers, 35.1

Prevalence of the informal economy in global perspective

73

per cent are own-account workers, and 49.8 per cent are contributing family workers. In large part, this predominance of contributing family workers is due to their high preponderance in the agricultural sector, since the share of informal family workers in the total workforce drops from 31.4 per cent of the total workforce to 7.3 per cent when agriculture is excluded. To classify and rank countries across the globe by the size of their informal economy, Table 4.6 orders countries by the share of the non-agricultural workforce in informal employment. Using the classificatory schema from Figure 4.2 above, this reveals that no countries have the whole of their non-agriculture workforce in informal employment, and two countries are “quasi-informal” economies (with 90–99 per cent of their non-agricultural workforce in informal employment), namely Benin and Togo. Continuing along the spectrum of the degree of informality, 16 countries (14 per cent of all countries surveyed) are “dominantly informal” economies (with 80–89 per cent of their non-agricultural workforce in informal employment) and are largely in Africa. Moreover, 16 countries (14 per cent) are “largely informal” (with 70–79 per cent of their non-agricultural workforce in informal employment), 12 countries (11 per cent) are “mostly informal” (with 60–69 per cent of their non-agricultural workforce in informal employment), and ten (9 per cent) are “semi informal” (with 50–59 per cent of their non-agricultural workforce in informal employment). Moving along the spectrum towards the more formal end, seven countries (6 per cent) are “semi formal”, ten (9 per cent) are “mostly formal”, six (5 per cent) are “largely formal”, 20 (18 per cent) are “dominantly formal”, and 13 (12 per cent) are “quasi formal” (with less than 10 per cent of their non-agricultural workforce in informal employment), all of which are European countries. The fourth column of Table 4.6 reports for all 112 countries the proportion of total non-agricultural employment that is informal employment in the informal sector. This indicates the intensity of informality since the workers are not only in informal employment but also in the informal sector. There is a strong correlation between the prevalence of informal economy (i.e., the proportion of the non-agricultural workforce in informal employment) and the intensity of informalisation (i.e., the share of all non-agricultural employment which is informal employment in informal enterprises). The greater the prevalence of the informal economy in a country, the higher is the intensity of informality (i.e., the more likely it is for informal employment to be in informal enterprises). Based on Spearman’s rank correlation coefficient (rs), this is a strong statistically significant association within a 99 per cent confidence interval (rs = 0.960***).

94.1

47.2

52.1

10.0

89.0

13.5

94.5

83.1

Argentina

Armenia

Austria

Bangladesh

Belgium

Benin

Bolivia, Plurinational

30.1

65.6

46.0

31.9

15.9

94.6

46.5

Bosnia and Herzegovina

Botswana

Brazil

Brunei Darussalam

Bulgaria

Burkina Faso

Cabo Verde

State of

61.0

Angola

31.9

65.5

15.0

4.0

30.3

52.1

30.0

68.7

90.6

10.8

48.9

8.8

39.2

32.8

77.1

6.0

9.6

0.9

22.3

11.9

5.2

0.1

12.4

2.8

2.6

13.5

1.2

1.4

8.5

16.5

8.5

19.5

0.0

5.7

3.9

8.3

0.0

1.9

1.1

0.0

26.7

0.0

11.6

5.8

0.5

31.4

sector

sector

0.5

holds

formal

informal

29.1

In house-

In the

In the

46.8

88.4

13.6

32.9

42.5

55.1

13.2

75.6

90.6

12.8

82.0

8.9

26.5

47.0

89.5

33.1

Total sector

sector

29.3

67.9

12.7

4.2

26.4

41.2

13.1

55.3

83.7

10.1

49.2

7.7

24.0

32.7

59.2

24.9

7.2

14.5

0.9

22.7

11.8

6.8

0.2

17.5

4.9

2.7

23.1

1.2

2.1

8.5

29.5

10.2

6.0

0.0

6.0

4.3

7.2

0.0

2.8

2.0

0.0

9.7

0.0

0.4

5.9

0.9

7.3

holds

formal

informal

0.9

In house-

In the

In the

in non-agricultural employment (%)

employment (%)

Total

Share of non-agricultural informal employment

Share of informal employment in total

70.3

6.3

41.1

90.2

49.5

70.8

0.0

55.6

6.4

30.5

41.6

42.8

26.2

52.9

42.1

12.7

Employees

3.2

0.7

13.0

0.6

1.7

4.8

17.3

3.8

1.1

15.7

0.7

12.2

0.0

5.6

1.7

2.4

Employers

employment status (%)

11.3

42.5

42.0

7.6

43.9

17.3

65.6

32.8

78.4

49.0

36.4

30.7

59.7

40.3

48.0

15.2

50.6

3.9

1.6

4.9

7.1

17.1

7.8

14.2

4.8

21.3

14.3

14.2

1.3

8.2

49.8

workers

35.1

ting family workers

Contribuaccount

Own-

Distribution of informal workers by

Prevalence of the informal economy: share of informal employment in total and non-agricultural employment, and distribution of informal workers by employment status

Albania

Country

Table 4.5

74 A modern guide to the informal economy

90.9

94.0

40.5

54.4

60.6

89.2

85.3

91.9

Chad

Chile

China

Colombia

Comoros

Congo

Congo, Democratic

11.2

56.3

59.0

63.3

Dominican Republic

Ecuador

Egypt

15.1

Cyprus

Denmark

13.0

Croatia

9.2

92.8

Côte d’Ivoire

Czech Republic

39.1

Costa Rica

Republic of the

93.1

Cameroon

58.5

46.4

37.4

4.1

8.6

15.0

12.8

86.0

27.4

88.2

56.9

84.6

55.9

48.4

32.2

92.0

83.7

4.2

11.1

11.8

7.2

0.6

0.1

0.2

5.2

4.9

3.7

25.9

4.6

3.0

6.1

6.3

2.0

6.4

0.5

1.6

7.0

0.0

0.0

0.0

0.0

1.6

6.9

0.0

2.5

0.0

1.8

0.0

2.0

0.0

0.8

1.0

sector

sector

14.5

holds

formal

informal

77.5

In house-

In the

In the

49.8

50.4

52.6

10.8

9.1

14.1

10.8

87.7

37.4

76.2

85.0

78.5

55.4

53.5

39.3

75.8

79.0

89.8

Total sector

sector

43.4

35.9

31.3

4.0

8.6

14.0

10.6

75.8

25.5

67.0

55.6

69.5

50.0

47.3

30.2

68.0

62.5

67.3

5.7

12.4

13.1

6.8

0.5

0.1

0.2

9.0

4.2

9.3

26.8

9.0

3.4

6.2

6.8

7.8

14.7

0.7

2.1

8.1

0.0

0.0

0.0

0.0

2.9

7.8

0.0

2.6

0.0

2.0

0.0

2.2

0.0

1.8

1.4

holds

formal

informal

21.2

In house-

In the

In the

in non-agricultural employment (%)

employment (%)

Total

Share of non-agricultural informal employment

Share of informal employment in total

Cambodia

Country

41.2

37.9

37.9

33.5

15.1

28.0

24.0

19.7

70.4

11.0

24.7

29.0

22.0

52.0

33.8

3.2

16.1

44.4

Employees

18.8

1.7

2.3

0.0

12.7

9.3

21.1

1.1

3.7

4.0

1.0

3.0

6.2

3.5

7.5

0.3

3.3

0.2

Employers

employment status (%)

20.5

41.7

57.6

57.3

66.2

55.9

40.8

62.0

25.4

69.2

71.9

66.0

65.7

28.8

50.5

65.7

51.5

19.5

18.7

2.2

9.2

6.0

6.8

14.2

17.3

0.4

15.8

2.3

2.0

6.1

15.7

8.3

30.8

29.2

5.6

workers

49.8

ting family

workers

Contribu-

account

Own-

Distribution of informal workers by

Prevalence of the informal economy in global perspective 75

6.9

6.3

9.8

76.7

10.2

90.1

32.8

79.7

79.9

12.2

4.9

88.2

85.6

66.9

13.5

19.0

18.7

44.9

Finland

France

Gambia

Germany

Ghana

Greece

Guatemala

Honduras

Hungary

Iceland

India

Indonesia

Iraq

Ireland

Italy

Japan

Jordan

69.6

43.9

14.3

16.0

11.8

59.7

67.5

80.9

4.6

11.8

70.0

63.3

32.2

84.8

9.7

62.5

5.4

6.2

5.4

1.0

4.3

3.0

1.7

7.2

5.8

6.5

0.3

0.4

1.8

8.8

0.5

4.9

0.5

7.1

4.4

0.1

1.5

0.0

0.0

0.0

0.0

0.0

12.2

0.8

0.0

0.0

8.1

7.7

0.0

0.5

0.0

7.1

0.0

0.0

0.0

4.5

sector

sector

11.2

holds

formal

informal

53.9

In house-

In the

In the

43.0

16.3

18.3

11.1

66.7

80.2

78.1

4.8

10.5

72.7

72.7

25.5

82.6

10.1

68.4

8.9

5.1

6.3

63.1

Total sector

sector

42.0

12.0

15.2

9.4

59.5

62.7

64.3

4.5

10.2

65.7

54.5

25.0

73.2

9.6

52.1

4.5

5.1

4.8

48.1

1.0

4.3

3.1

1.8

7.2

8.3

12.2

0.3

0.4

2.6

12.0

0.6

8.6

0.5

9.2

4.4

0.0

1.5

0.0

0.0

0.0

0.0

0.0

9.1

1.6

0.0

0.0

4.3

6.1

0.0

0.9

0.0

7.2

0.0

0.0

0.0

5.6

holds

formal

informal

9.4

In house-

In the

In the

in non-agricultural employment (%)

employment (%)

Total

Share of non-agricultural informal employment

Share of informal employment in total

Estonia

El Salvador

Country

64.6

29.6

15.2

19.6

57.4

37.7

13.7

65.9

15.9

36.0

53.1

8.5

17.2

62.7

17.2

48.1

5.0

50.0

41.8

Employees

13.5

6.8

19.3

14.6

3.6

2.6

1.2

7.4

32.2

3.2

3.4

14.0

6.9

8.8

1.3

15.0

22.5

10.5

5.2

Employers

employment status (%)

21.3

44.9

58.1

60.6

39.0

42.1

70.3

26.4

48.7

45.6

32.9

65.3

52.5

24.9

59.2

33.0

64.8

37.8

0.7

18.7

7.5

5.2

0.0

17.6

14.9

0.3

3.3

15.2

10.6

12.2

23.4

3.6

22.3

3.9

7.7

1.7

9.9

workers

43.1

ting family

workers

Contribu-

account

Own-

Distribution of informal workers by

76 A modern guide to the informal economy

48.6

93.6

Lao People’s Democratic

8.1

53.4

28.9

53.5

79.9

85.7

67.0

94.3

Moldova, Republic of

Mongolia

Morocco

Myanmar

Namibia

Nepal

92.7

Mali

Mexico

83.0

Malawi

Malta

93.6

Madagascar

12.6

Lithuania

1.2

86.8

Liberia

Luxembourg

13.2

Latvia

Republic

31.5

Kyrgyz Republic

90.7

46.8

71.5

58.7

45.7

21.9

29.1

7.9

74.2

74.1

83.6

0.9

8.2

79.1

11.2

86.7

37.2

3.4

5.6

14.0

19.8

2.1

6.6

19.8

0.2

4.1

4.6

4.1

0.3

4.4

6.0

2.0

6.8

9.6

0.2

14.6

0.3

1.4

5.7

0.4

4.5

0.0

14.4

4.3

5.9

0.0

0.0

1.7

0.0

0.1

1.8

0.0

sector

sector

5.5

holds

formal

informal

26.1

In house-

In the

In the

80.4

61.1

82.3

75.6

35.6

13.7

53.2

7.7

86.4

67.2

79.8

1.0

9.8

77.5

11.2

78.5

42.1

28.8

Total sector

sector

68.5

46.3

64.9

53.3

25.3

7.6

33.1

7.5

70.5

49.4

47.3

0.9

5.6

64.6

9.1

55.2

32.7

23.3

11.0

6.5

16.9

20.4

2.9

5.6

14.9

0.2

10.6

10.8

12.4

0.1

4.2

10.0

2.0

23.2

7.1

0.9

8.3

0.5

1.9

7.4

0.6

5.2

0.0

5.3

7.0

20.1

0.0

0.0

2.9

0.0

0.2

2.3

0.0

holds

formal

informal

5.6

In house-

In the

In the

in non-agricultural employment (%)

employment (%)

Total

Share of non-agricultural informal employment

Share of informal employment in total

Korea, Republic of

Country

16.9

61.1

41.0

38.1

37.8

17.7

59.5

24.6

12.6

36.2

7.4

50.4

52.6

16.3

52.2

12.6

44.9

67.7

Employees

1.4

2.5

2.7

2.3

1.7

0.0

3.5

16.9

1.2

0.8

3.5

0.0

3.6

1.5

7.4

0.5

0.3

1.2

Employers

employment status (%)

37.8

28.8

29.3

32.9

56.9

81.7

27.9

58.3

70.5

55.4

46.4

1.2

34.6

69.0

34.7

54.6

33.2

43.9

7.7

27.0

26.7

3.6

0.5

9.1

0.3

15.8

7.6

42.7

48.4

9.2

13.2

5.6

32.4

21.6

13.7

workers

17.4

ting family

workers

Contribu-

account

Own-

Distribution of informal workers by

Prevalence of the informal economy in global perspective 77

77.4

91.3

92.9

7.4

64.3

Nicaragua

Niger

Nigeria

Norway

Occupied Palestinian

82.4

52.3

70.6

69.2

38.0

12.1

28.9

35.9

94.3

35.7

91.2

22.1

Pakistan

Panama

Paraguay

Peru

Poland

Portugal

Romania

Russian Federation

Rwanda

Samoa

Senegal

Serbia

Territory

9.4

6.4

70.9

21.7

90.9

24.4

27.4

11.9

20.1

55.5

46.0

34.3

77.6

31.2

7.1

80.4

77.3

71.5

10.7

14.0

10.4

1.5

11.5

1.5

0.3

17.8

11.8

17.6

14.0

4.0

30.8

0.2

2.9

9.6

1.4

5.0

6.2

3.7

1.9

0.0

0.0

0.0

0.0

1.9

7.0

3.9

0.8

2.3

0.0

9.6

4.5

4.4

0.0

sector

sector

0.9

holds

formal

informal

8.4

In house-

In the

In the

15.3

87.0

33.8

78.6

35.6

11.1

10.5

31.6

59.1

64.4

46.0

70.8

60.1

6.9

89.0

85.1

68.6

9.2

Total sector

sector

3.6

59.1

21.2

67.0

24.3

9.3

10.2

12.1

40.5

34.9

26.2

62.7

25.8

6.7

82.9

72.6

60.1

8.3 2.1

5.7

19.1

10.9

4.6

11.3

1.9

0.3

19.5

15.9

20.8

15.2

6.8

34.2

0.2

4.2

10.3

6.0

8.7

1.8

7.1

0.0

0.0

0.0

0.0

2.7

8.7

4.6

1.3

0.1

0.0

1.8

2.2

6.5

0.0

holds

formal

1.0

In house-

In the

In the informal

in non-agricultural employment (%)

employment (%)

Total

Share of non-agricultural informal employment

Share of informal employment in total

Netherlands

Country

26.7

26.2

31.5

18.4

97.2

7.3

14.5

54.8

33.4

48.1

42.2

29.7

69.7

49.4

54.3

7.6

36.2

23.8

Employees

0.2

0.4

7.4

0.3

1.7

1.8

18.1

5.6

3.2

2.3

4.8

1.0

3.6

10.5

0.0

0.3

10.6

15.6

Employers

employment status (%)

37.3

48.8

58.5

72.6

0.0

59.6

63.2

32.8

47.8

37.2

46.8

41.3

16.4

37.3

44.7

91.2

36.3

35.9

24.6

2.7

8.7

1.1

31.3

4.2

6.9

15.7

12.4

6.2

28.1

10.2

2.8

1.0

1.0

16.9

4.4

workers

56.2

ting family

workers

Contribu-

account

Own-

Distribution of informal workers by

78 A modern guide to the informal economy

74.8

90.6

Tajikistan

Tanzania, United Republic

71.8

92.8

58.8

34.8

93.7

13.6

18.6

Timor-Leste

Togo

Tunisia

Turkey

Uganda

United Kingdom

United States

of

70.1

70.4

Sri Lanka

Syrian Arab Republic

27.3

Spain

8.2

34.0

South Africa

10.4

5.0

Slovenia

Switzerland

16.7

Sweden

92.5

Slovakia

16.6

13.5

87.6

32.0

53.3

80.6

56.9

83.5

54.4

66.0

4.2

2.6

60.6

17.3

21.8

4.8

16.4

1.5

0.1

6.2

2.4

5.1

5.8

11.0

4.9

14.4

4.1

6.2

5.6

7.9

9.9

4.8

0.3

0.3

0.5

0.0

0.0

0.4

0.4

6.4

3.9

2.3

5.9

0.0

0.0

0.0

2.0

0.0

7.4

0.0

0.0

1.7

sector

sector

1.0

holds

formal

informal

89.8

In house-

In the

In the

18.3

13.4

83.4

21.9

53.5

90.0

54.0

69.3

70.5

61.0

10.1

8.3

62.2

26.8

34.0

4.1

16.5

86.0

Total sector

sector

16.3

13.3

67.1

19.3

47.6

73.6

29.5

48.1

39.8

55.6

3.9

2.6

49.1

16.4

21.4

3.9

16.2

80.8

1.5

0.1

16.4

2.2

5.5

6.7

18.1

15.2

20.5

5.4

6.2

5.7

10.2

10.4

4.9

0.2

0.3

0.5

0.0

0.0

0.5

0.5

9.8

6.4

6.0

10.2

0.0

0.0

0.0

2.8

0.0

7.7

0.0

0.0

2.6

holds

formal

informal

2.6

In house-

In the

In the

in non-agricultural employment (%)

employment (%)

Total

Share of non-agricultural informal employment

Share of informal employment in total

Sierra Leone

Country

73.7

20.5

19.4

36.3

53.1

35.2

17.1

12.2

43.7

50.5

51.5

86.8

42.8

54.8

70.2

10.1

21.4

5.9

Employees

0.0

11.7

1.1

1.7

11.6

0.3

0.9

1.4

0.8

5.7

8.0

2.6

2.4

10.3

5.8

10.8

14.9

0.5

Employers

employment status (%)

25.9

67.8

54.2

29.4

29.5

60.6

49.2

42.7

53.3

40.3

24.4

7.5

43.9

33.1

23.2

48.0

62.7

0.4

0.0

25.3

32.6

5.8

3.9

32.8

43.7

2.2

3.5

16.1

3.2

10.9

1.8

0.8

31.0

1.0

10.5

workers

83.1

ting family

workers

Contribu-

account

Own-

Distribution of informal workers by

Prevalence of the informal economy in global perspective 79

39.7

77.8

87.9

Yemen

Zambia

Source: Derived from ILO (2018a).

76.2

Viet Nam

Republic of

24.5

Venezuela, Bolivarian

79.0

68.5

61.0

26.3

2.9

9.0

11.5

6.3

6.1

0.3

3.7

7.2

3.0

sector

sector

1.9

holds

formal

informal

19.6

In house-

In the

In the

71.5

69.0

57.9

38.3

24.1

Total sector

sector

52.3

56.3

37.4

24.2

18.8

6.3

12.2

19.8

6.4

12.9

0.5

0.7

7.7

3.3

holds

formal

informal

2.0

In house-

In the

In the

in non-agricultural employment (%)

employment (%)

Total

Share of non-agricultural informal employment

Share of informal employment in total

Uruguay

Country

14.7

51.3

27.7

16.9

37.6

Employees

0.3

4.2

1.8

9.3

1.2

Employers

employment status (%)

48.7

44.3

48.6

62.1

36.3

0.3

21.9

11.7

4.3

workers

57.0

ting family workers

Contribuaccount

Own-

Distribution of informal workers by

80 A modern guide to the informal economy

Prevalence of the informal economy in global perspective

Table 4.6 Country

81

Prevalence and intensity of the informal economy, by country Global region

% non-agricultural

Classification of country

employment that is: Informal

Informal

employment

employment in the informal sector

Benin

Africa

90.6

83.7

Quasi Informal

Togo

Africa

90.0

73.6

Quasi Informal

Cambodia

Asia and the Pacific

89.8

67.3

Dominantly Informal

Angola

Africa

89.5

59.2

Dominantly Informal

Nigeria

Africa

89.0

82.9

Dominantly Informal

Burkina Faso

Africa

88.4

67.9

Dominantly Informal

Côte d’Ivoire

Africa

87.7

75.8

Dominantly Informal

Senegal

Africa

87.0

59.1

Dominantly Informal

Mali

Africa

86.4

70.5

Dominantly Informal

Sierra Leone

Africa

86.0

80.8

Dominantly Informal

Niger

Africa

85.1

72.6

Dominantly Informal

Congo

Africa

85.0

55.6

Dominantly Informal

Uganda

Africa

83.4

67.1

Dominantly Informal

Ghana

Africa

82.6

73.2

Dominantly Informal

Myanmar

Asia and the Pacific

82.3

64.9

Dominantly Informal

Bangladesh

Asia and the Pacific

82.0

49.2

Dominantly Informal

Nepal

Asia and the Pacific

80.4

68.5

Dominantly Informal

Indonesia

Asia and the Pacific

80.2

62.7

Dominantly Informal

Madagascar

Africa

79.8

47.3

Largely Informal

Cameroon

Africa

79.0

62.5

Largely Informal

Rwanda

Africa

78.6

67.0

Largely Informal

Comoros

Africa

78.5

69.5

Largely Informal

Laos

Asia and the Pacific

78.5

55.2

Largely Informal

India

Asia and the Pacific

78.1

64.3

Largely Informal

Liberia

Africa

77.5

64.6

Largely Informal

DR Congo

Africa

76.2

67.0

Largely Informal

Chad

Africa

75.8

68.0

Largely Informal

Bolivia

Americas

75.6

55.3

Largely Informal

Morocco

Africa

75.6

53.3

Largely Informal

Guatemala

Americas

72.7

54.5

Largely Informal

A modern guide to the informal economy

82

Country

Global region

% non-agricultural

Classification of country

employment that is: Informal

Informal

employment

employment in the informal sector

Honduras

Americas

72.7

65.7

Largely Informal

Zambia

Africa

71.5

52.3

Largely Informal

Pakistan

Asia and the Pacific

70.8

62.7

Largely Informal

Tajikistan

Europe and Central

70.5

39.8

Asia

Largely Informal

Tanzania

Africa

69.3

48.1

Mostly Informal

Yemen

Arab States

69.0

56.3

Mostly Informal

Nicaragua

Americas

68.6

60.1

Mostly Informal

Gambia

Africa

68.4

52.1

Mostly Informal

Malawi

Africa

67.2

49.4

Mostly Informal

Iraq

Arab States

66.7

59.5

Mostly Informal

Paraguay

Americas

64.4

34.9

Mostly Informal

El Salvador

Americas

63.1

48.1

Mostly Informal

Sri Lanka

Asia and the Pacific

62.2

49.1

Mostly Informal

Namibia

Africa

61.1

46.3

Mostly Informal

Syria

Arab States

61.0

55.6

Mostly Informal

OPT

Arab States

60.1

25.8

Mostly Informal

Peru

Americas

59.1

40.5

Semi Informal

Viet Nam

Asia and the Pacific

57.9

37.4

Semi Informal

Colombia

Americas

55.4

50.0

Semi Informal

Botswana

Africa

55.1

41.2

Semi Informal

Timor-Leste

Asia and the Pacific

54.0

29.5

Semi Informal

China

Asia and the Pacific

53.5

47.3

Semi Informal

Tunisia

Africa

53.5

47.6

Semi Informal

Mexico

Americas

53.2

33.1

Semi Informal

Dominican

Americas

52.6

31.3

Semi Informal

Ecuador

Americas

50.4

35.9

Semi Informal

Egypt

Africa

49.8

43.4

Semi Formal

Argentina

Americas

47.0

32.7

Semi Formal

Cabo Verde

Africa

46.8

29.3

Semi Formal

Panama

Americas

46.0

26.2

Semi Formal

a

Republic

Prevalence of the informal economy in global perspective

Country

Global region

% non-agricultural

Classification of country

employment that is: Informal

Informal

employment

employment in the informal sector

Jordan

Arab States

43.0

42.0

Semi Formal

Brazil

Americas

42.5

26.4

Semi Formal

Kyrgyz Republic

Europe and Central

42.1

32.7

Semi Formal

Asia Chile

Americas

39.3

30.2

Mostly Formal

Venezuela

Americas

38.3

24.2

Mostly Formal

Costa Rica

Americas

37.4

25.5

Mostly Formal

Mongolia

Asia and the Pacific

35.6

25.3

Mostly Formal

Russia

Europe and Central

35.6

24.3

Mostly Formal

Asia South Africa

Africa

34.0

21.4

Mostly Formal

Samoa

Asia and the Pacific

33.8

21.2

Mostly Formal

Albania

Europe and Central

33.1

24.9

Mostly Formal

Asia Brunei Darussalam

Asia and the Pacific

32.9

4.2

Mostly Formal

Poland

Europe and Central

31.6

12.1

Mostly Formal

Asia Korea, Republic of

Asia and the Pacific

28.8

23.3

Largely Formal

Spain

Europe and Central

26.8

16.4

Largely Formal

26.5

24.0

Largely Formal

25.5

25.0

Largely Formal

Asia Armenia

Europe and Central Asia

Greece

Europe and Central Asia

Uruguay

Americas

24.1

18.8

Largely Formal

Turkey

Europe and Central

21.9

19.3

Largely Formal

18.3

15.2

Dominantly Formal

Asia Italy

Europe and Central Asia

United States

Americas

18.3

16.3

Dominantly Formal

Slovakia

Europe and Central

16.5

16.2

Dominantly Formal

16.3

12.0

Dominantly Formal

Asia Japan

Asia and the Pacific

83

A modern guide to the informal economy

84

Country

Global region

% non-agricultural

Classification of country

employment that is: Informal

Informal

employment

employment in the informal sector

Serbia

Europe and Central

15.3

3.6

Dominantly Formal

14.1

14.0

Dominantly Formal

13.7

7.6

Dominantly Formal

13.6

12.7

Dominantly Formal

13.4

13.3

Dominantly Formal

13.2

13.1

Dominantly Formal

12.8

10.1

Dominantly Formal

11.2

9.1

Dominantly Formal

11.1

9.4

Dominantly Formal

11.1

9.3

Dominantly Formal

10.8

10.6

Dominantly Formal

10.8

4.0

Dominantly Formal

10.5

10.2

Dominantly Formal

10.5

10.2

Dominantly Formal

10.1

9.6

Dominantly Formal

10.1

3.9

Dominantly Formal

9.8

5.6

Quasi Formal

Asia Cyprus

Europe and Central Asia

Moldova

Europe and Central Asia

Bulgaria

Europe and Central Asia

United Kingdom

Europe and Central Asia

Bosnia and

Europe and Central

Herzegovina

Asia

Belgium

Europe and Central Asia

Latvia

Europe and Central Asia

Ireland

Europe and Central Asia

Romania

Europe and Central Asia

Croatia

Europe and Central Asia

Denmark

Europe and Central Asia

Hungary

Europe and Central Asia

Portugal

Europe and Central Asia

Germany

Europe and Central Asia

Switzerland

Europe and Central Asia

Lithuania

Europe and Central Asia

Prevalence of the informal economy in global perspective

Country

Global region

% non-agricultural

85

Classification of country

employment that is: Informal

Informal

employment

employment in the informal sector

Netherlands

Europe and Central

9.2

8.3

Quasi Formal

9.1

8.6

Quasi Formal

8.9

7.7

Quasi Formal

8.9

4.5

Quasi Formal

8.3

2.6

Quasi Formal

7.7

7.5

Quasi Formal

6.9

6.7

Quasi Formal

6.3

4.8

Quasi Formal

5.1

5.1

Quasi Formal

4.8

4.5

Quasi Formal

4.1

3.9

Quasi Formal

1.0

0.9

Quasi Formal

Asia Czech Republic

Europe and Central Asia

Austria

Europe and Central Asia

France

Europe and Central Asia

Sweden

Europe and Central Asia

Malta

Europe and Central Asia

Norway

Europe and Central Asia

Estonia

Europe and Central Asia

Finland

Europe and Central Asia

Iceland

Europe and Central Asia

Slovenia

Europe and Central Asia

Luxembourg

Europe and Central Asia

Note: a Occupied Palestinian Territory. Source: Derived from ILO (2018a).

EXPLAINING CROSS-NATIONAL VARIATIONS IN INFORMALITY Chapter 2 reviewed the competing theories used to explain these cross-national variations in the prevalence of the informal economy. Here, the key drivers used by each theory to explain the informal economy are evaluated using macro-level indicators from various data sources for the closest year associated with the 2016 ILO survey data (IMF, 2016; Social Progress Imperative,

86

A modern guide to the informal economy

2018; Transparency International, 2017; United Nations, 2017; World Bank, 2015, 2016a,b,c,d,e,f,g, 2017a,b,c; World Economic Forum, 2017). To evaluate the relationship between cross-country variations in the prevalence of the informal economy, and intensity of informalisation, and the economic and social conditions that each theory contends are associated, bivariate regression analysis is used. Due to the non-parametric nature of the data, Spearman’s rank correlation coefficient (rs) is employed to evaluate whether there are statistically significant associations. Multivariate regression analysis cannot be used because the ILO does not collect individual-level data. To commence, the modernisation, neo-liberal, and political economy theories will be evaluated. Following this, given the emergent consensus around using institutional theory, the formal institutional explanations that lead to an asymmetry between the informal and formal institutions, and therefore the higher prevalence of the informal economy, will be evaluated. To evaluate the tenets of modernisation theory as explanations for the cross-country variations in the prevalence and intensity of informal employment, Table 4.7 first examines various indicators of the level of development. A very strong significant relationship is found between the prevalence of informal employment in a country, as well as the share of employment which is informal employment in informal enterprises, and GDP per capita, gross national income (GNI) per capita, household final consumption per capita, the Human Development Index, and Social Progress Index. The share of the workforce in informal employment is greater in less developed economies, whichever indicators of development are used. This confirms the tenet of the modernisation theory that the greater the level of development, the lower is the level (and intensity) of informal employment. Nevertheless, the direction of the correlation in terms of any cause–effect relationship cannot be established. In consequence, this is a limitation. Analysing the second tenet of modernisation theory that the prevalence of informal employment is higher in countries where there is a lack of modernisation of governance, countries with higher perceived levels of public sector corruption, and where irregular payments and bribes are more common, have a significantly higher prevalence and intensity of informal employment. The prevalence and intensity of informal employment is therefore larger in countries with higher levels of public sector corruption, confirming this second tenet of modernisation theory. Evaluating the tenet of neo-liberal theory that informal employment is more prevalent in countries where taxes are higher, several measures of taxation levels are analysed here. Beginning with the level of taxes on revenue (excluding grants) as a share of GDP, the inverse of the neo-liberal tenet is found. The prevalence and intensity of informal employment decreases as the level of taxes on revenue as a proportion of GDP increases and this is a strong

Prevalence of the informal economy in global perspective

Table 4.7

87

Economic and social conditions associated with share of informal employment in total employment, by theoretical perspective

Theory and indicator

No. of

Share of employment that is:

countries

Informal

 

Informal

employment

employment

(Spearman’s

in the informal

correlation

sector

coefficient)

(Spearman’s correlation coefficient)

Modernisation Theory

 

Level of development

 

GDP per capitab

110

−0.890***

−0.889***

GNI per capitae

110

−0.897***

−0.895***

Household final consumption per capitae

109

−0.900***

−0.890***

Human Development Index

111

−0.925***

−0.915***

100

−0.929***

−0.913***

Corruption Perceptions Indexd

110

−0.747***

−0.744***

Irregular payments and bribes

107

−0.743***

−0.726***

d

Social Progress Indexf Governance/Corruption d

Neo-Liberal Theory High taxes Taxes on goods and services (% of revenue)c

99

Taxes on revenue (excl. grants) (% of GDP)c

101

−0.647***

−0.635***

Tax revenue (% of GDP)c

100

−0.446***

−0.443***

Problematic factors:h Tax rates (%)d

100

−0.275***

−0.243**

Total tax rate (% of profits)b

100

0.059

0.043

0.027

0.079

Neo-Liberal and Political Economy Theories State interference Social contributions (% of revenue)c

97

−0.711***

−0.694***

Expense of government (% of GDP)c

100

−0.688***

−0.653***

56

0.416***

0.416***

Political Economy Theory Level of poverty Poverty gap at national poverty lines (%)a

88

Theory and indicator

A modern guide to the informal economy

No. of

Share of employment that is:

countries

Informal

 

Informal

employment

employment

(Spearman’s

in the informal

correlation

sector

coefficient)

(Spearman’s correlation coefficient)

Poverty gap at $1.90 a dayc

107

0.791***

0.764***

Gini indexc

107

0.503***

0.495***

Notes: a 2015 data or latest available; b 2016 data; c 2016 data or latest available; d 2017 data; e 2017 data or latest available; f 2018 data; g latest available year data; h problematic factors for doing business. Strength of the Spearman’s correlation coefficient: 0.00–0.19: very weak; 0.20–0.39: weak; 0.40–0.59: moderate; 0.60–0.79: strong; 0.80–1.0: very strong (pale grey to black shading). Significant at *** p < 0.01, ** p < 0.05, * p < 0.1. Source: Own calculations based on data from ILO (2018) (harmonised data on the share of informal employment in total employment) and Social Progress Imperative (2018), Transparency International (2017), United Nations (2017), World Bank (2015, 2016a,b,c,d,e,f,g, 2017a,b,c), World Economic Forum (2017), IMF (2016).

statistically significant correlation. It is similarly the case that the prevalence and intensity of informal employment is significantly lower in countries where tax revenue is a higher proportion of GDP, and where tax rates are more often listed among the problematic factors when doing business. No statistically significant association is found between the scale and intensity of informal employment and the level of taxes on goods and services (as a percentage of revenue) or the total tax rate (as a percentage of profits). As such, the evidence does not validate the neo-liberal tenet that higher tax rates result in a greater prevalence (and intensity) of informal employment. Instead, the inverse is the case: higher tax levels are correlated with a lower prevalence and intensity of informal employment. Turning to the second tenet of neo-liberal theory that greater state interference leads to higher levels of informal employment, and the contrary political economy tenet that the prevalence of informal employment decreases with more state intervention in work and welfare, the first finding is that as the level of social contributions as a percentage of revenue increases, there is a strong statistically significant decline in the prevalence and intensity of informal employment. There is also a steep decline in the prevalence and intensity of informal employment as the expense of government as a share of GDP increases. Bigger government is correlated with a decrease, not increase, in the prevalence and intensity of informal employment. The neo-liberal tenet that greater state interference leads to higher informal employment is refuted and, instead, the political economy tenet that informal employment is associated

Prevalence of the informal economy in global perspective

89

with too little state intervention supported. The political economy tenet that informal employment is higher when poverty and inequality is greater is also supported. The prevalence and intensity of informal employment is greater when the proportion falling into the poverty gap is higher, the proportion receiving no more than $1.90 per day is greater, and when inequality is higher. Are the same findings validated when considering non-agricultural informal employment? Table 4.8 reports the results. The prevalence and intensity of informal employment in the non-agricultural economy is greater in countries with lower levels of development, whether measured by GDP per capita, GNI per capita, or the alternative development indicators of household consumption expenditure per capita, the Human Development Index, or the Social Progress Index. This supports the tenet of modernisation theory that the prevalence and intensity of informal employment in the non-agricultural economy is lower in more developed economies, however measured. Evaluating the second tenet of modernisation theory, this is again confirmed. The prevalence and intensity of informal employment in the non-agricultural economy is lower in countries with lower perceived levels of public sector corruption, where irregular payments and bribes are less common, where the Control of Corruption Index is lower, where the share of firms giving gifts in meetings with tax officials is lower, and where the share of firms giving gifts to public officials to “get things done” is lower. Evaluating the neo-liberal theory tenet that non-agricultural informal employment is greater when taxes are higher, the finding is that the prevalence and intensity of informal employment in the non-agricultural economy decreases as the level of taxes on revenue (excluding grants) as a share of GDP increases, as tax revenue as a proportion of GDP increases, and when the percentage of firms considering tax rates as a problematic factor when doing business decreases. In all cases, the direction is again in the opposite direction to that suggested by neo-liberal theory. Therefore, the neo-liberal view of taxes is not confirmed. The second neo-liberal tenet that too much state intervention results in informality in the non-agricultural economy is again not confirmed, and the contrary political economy tenet that too little state intervention in work and welfare results in informality in the non-agricultural economy is confirmed. The prevalence and intensity of informal employment in the non-agricultural economy is significantly lower when social contributions as a percentage of revenue increases and when the expense of government (as a percentage of GDP) increases. This reinforces the World Bank (2019a) finding that in developing economies with the most pervasive non-agricultural informality, government revenues are lower by 5–10 percentage points of GDP (and government expenditures lower by 4–10 percentage points of GDP) than in those developing economies with the lowest levels of non-agricultural informality.

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Table 4.8

Economic and social conditions associated with share of non-agricultural informal employment in total non-agricultural employment, by theoretical perspective

Theory and indicator

No. of

Share of non-agricultural employment

countries

that is: Informal

Informal

employment

employment in the

(Spearman’s

informal sector

correlation

(Spearman’s

coefficient)

correlation coefficient)

Modernisation Theory Level of development GDP per capitab

110

−0.858***

−0.851***

GNI per capitae

110

−0.868***

−0.860***

Household final consumption per capitae

109

−0.867***

−0.850***

Human Development Indexd

111

−0.906***

−0.898***

Social Progress Index

100

−0.906***

−0.884***

Corruption Perceptions Indexd

110

−0.734***

−0.721***

Irregular payments and bribesd

107

−0.727***

−0.708***

Control of Corruption Index

f

Governance/Corruption

100

−0.722***

−0.704***

Gifts in meetings with tax officials (% firms)g

86

0.562***

0.516***

Gifts to public officials (% firms)g

85

0.404***

0.354***

Taxes on revenue (excl. grants) (% of GDP)c

101

−0.632***

−0.615***

Taxes on goods and services (% of revenue)c

99

d

Neo-Liberal Theory High taxes 0.027

0.009

Tax revenue (% of GDP)c

100

−0.451***

−0.437***

Problematic factors:h Tax rates (%)d

100

−0.292***

−0.256**

Total tax rate (% of profits)b

100

0.075

0.114

Social contributions (% of revenue)c

97

−0.714***

−0.708***

Expense of government (% of GDP)c

100

−0.686***

−0.662***

56

0.420***

0.417***

Neo-Liberal and Political Economy Theories State interference

Political Economy Theory Level of poverty Poverty gap at national poverty lines (%)a

Prevalence of the informal economy in global perspective

Theory and indicator

91

No. of

Share of non-agricultural employment

countries

that is: Informal

Informal

employment

employment in the

(Spearman’s

informal sector

correlation

(Spearman’s

coefficient)

correlation coefficient)

Poverty gap at $1.90 a dayc

107

0.780***

0.742***

Gini indexc

107

0.531***

0.511***

Notes: a 2015 data or latest available; b 2016 data; c 2016 data or latest available; d 2017 data; e 2017 data or latest available; f 2018 data; g latest available data; h problematic factors for doing business. Strength of the Spearman’s correlation coefficient: 0.00–0.19: very weak; 0.20–0.39: weak; 0.40–0.59: moderate; 0.60–0.79: strong; 0.80–1.0: very strong (pale grey to black shading). Significant at *** p < 0.01, ** p < 0.05, * p < 0.1. Source: Own calculations based on data from ILO (2018) (harmonised data on the share of non-agricultural informal employment in non-agriculture) and IMF (2016), Transparency International (2017), United Nations (2017), World Economic Forum (2017), World Bank (2015, 2016a,b,c,d,e,f,g, 2017a,b,c), Social Progress Imperative (2018).

Examining the second political economy tenet in relation to the nonagricultural economy, it is again found that when the prevalence and intensity of informal employment is greater in the non-agricultural economy, poverty is significantly higher (measured in terms of both the poverty gap at national poverty lines and the poverty gap at $1.90 per day) and so too is inequality (measured by the Gini index). This confirms previous studies displaying that informality is associated with higher income inequality and poverty (see Chapter 2). Over the past decade or so, as Chapter 2 highlighted, institutional theory has incorporated the tenets of these earlier three theories under its umbrella by viewing them as formal institutional failings that lead to an asymmetry between the formal and informal institutions, and thus a higher prevalence of informal employment. Table 4.9 reports the association between the formal institutional failings highlighted by institutional theory and the prevalence of the informal economy, including the various tenets of modernisation and political economy theory that have been incorporated into institutional theory. Again, these are bivariate correlations between the prevalence of informal employment and these formal institutional conditions using Spearman’s rank correlation coefficient due to the non-parametric nature of the data.

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Table 4.9

Formal institutional conditions associated with the prevalence of informal employment No. of

Share of informal

countries

employment in total employment (Spearman’s correlation coefficient)

I. Formal Institutional Resource Misallocations and Inefficiencies 1. Lack of modernisation of government Reliability of police services

100

−0.553***

Efficiency of government spending

100

−0.198**

Irregular payments and bribes

100

−0.743***

Diversion of public funds

100

−0.441***

Favouritism by government officials

100

−0.280***

Corruption Perceptions Index

110

−0.747***

Control of Corruption Index

111

−0.741***

Corruption (doing business)

2. Formal institutions acting in a corrupt manner

100

0.525***

% of firms expected to give gifts in meetings with tax officials

86

0.571***

% of firms expected to give gifts to public officials “to get things done”

85

0.420***

GDP per capita

110

−0.890***

Human Development Index

111

−0.925***

Social Progress Index

100

−0.929***

Burden of government regulation

100

0.008

No. of procedures required to start a business

100

0.373***

Time required to start a business

100

0.409***

Inefficient government bureaucracy

100

−0.477***

Tax rates

100

−0.275***

Tax regulations

100

−0.452***

Restrictive labour regulations

100

−0.654***

Total tax rate

II. Formal Institutional Voids and Weaknesses

100

0.043

Tax revenue to GDP ratio

56

−0.294**

Total expenditure (% of GDP)

61

−0.703***

Taxes on goods and services (% of revenue)

99

0.059

Revenue (excluding grants)

101

−0.647***

Tax revenue

100

−0.446***

Prevalence of the informal economy in global perspective

93

No. of

Share of informal

countries

employment in total employment (Spearman’s correlation coefficient)

Social contributions (% of revenue)

97

−0.711***

100

−0.688***

56

0.416***

Poverty gap at $1.90 a day

107

0.791***

Gini index

107

0.503***

Rule of law

111

−0.781***

Government effectiveness

111

−0.827***

Regulatory quality

111

−0.821***

Public trust in politicians

100

−0.289***

Expense of government as a % of GDP Poverty gap at national poverty lines (%)

III. Formal Institutional Powerlessness

IV. Formal Institutional Instability and Uncertainty Policy instability

100

Government instability/coups

100

Transparency of government policymaking

100

0.031 0.063 −0.412***

Notes: Strength of the Spearman’s correlation coefficient: 0.00–0.19: very weak; 0.20–0.39: weak; 0.40–0.59: moderate; 0.60–0.79: strong; 0.80–1.0: very strong. Significant at *** p < 0.01, ** p < 0.05, * p < 0.1.

Table 4.9 displays that informal employment is significantly more prevalent when there are: 1. Greater formal institutional resource misallocations and inefficiencies manifested in: a. A lack of modernisation of government (measured by the reliability of police services and the efficiency of government spending). b. Greater levels of corruption (indicated by multiple indicators of both perceived and actual levels of corruption). 2. Greater formal institutional voids and weakness manifested in: a. Lower levels of development (measured using GDP per capita, the Human Development Index, and the Social Progress Index). b. A lack of regulatory simplification. c. Lower (not higher) tax rates. d. Lower government expenditure and lower expenditure on social contributions. e. Higher levels of poverty and greater inequality.

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3. Greater formal institutional powerlessness manifested in: a. Lower levels of government effectiveness, regulatory quality, public trust in politicians, and perceived rule of law. 4. Greater formal institutional instability and uncertainty manifested in: a. Low transparency of government policymaking. As Chapter 2 revealed, the findings here from the ILO data using bivariate correlations have been reinforced by a multitude of multivariate regression analyses, albeit of geographically narrower datasets such as the Eurobarometer survey of 27 European countries (e.g., Horodnic and Williams, 2022; Williams and Horodnic, 2017b, 2021a). Therefore, there is empirical support for the view in institutional theory that formal institutional failings need to be addressed. As Chapter 2 reported, there is also strong empirical evidence that the greater these formal institutional failings, the higher is the asymmetry between formal and informal institutions, and the greater is the prevalence of informal employment.

CONCLUSIONS This chapter has reported an ILO dataset on the prevalence and intensity of the informal economy across 112 countries comprising 90 per cent of the global workforce. The finding is that 61.2 per cent of the global workforce are in informal employment as their main job, which equates to some two billion of the world’s employed population aged 15 and over. However, this differs between global regions, ranging from 85.8 per cent of the workforce in Africa in informal employment as their main job, to 25.1 per cent in Europe and Central Asia. Moreover, breaking down the 61.2 per cent of the global workforce in informal employment, 51.9 per cent of the global workforce have their informal employment in the informal sector, 6.7 per cent in the formal sector, and 2.5 per cent in households. Globally, own-account workers make up 45.0 per cent of the informal workforce, and employees 36.2 per cent, contributing family workers 16.1 per cent, and employers 2.7 per cent. Indeed, when the employment status of the global formal and informal workforces are compared, the informal workforce is far less likely to consist of employees than the formal workforce (36.2 per cent compared with 76.3 per cent), and far more likely to consist of own-account workers (45.0 per cent compared with 19.8 per cent) and contributing family workers (16.1 per cent compared to nil). To explain the higher prevalence and intensity of informal employment in some countries than others, the theories that this is driven by economic under-development and corruption (modernisation theory), state over-interference (neo-liberal theory), or inadequate state intervention to protect workers from poverty (political economy theory) have been evaluated.

Prevalence of the informal economy in global perspective

95

The finding is that the prevalence and intensity of informal employment is significantly greater in countries with economic under-development, higher levels of public sector corruption, smaller government, and lower levels of intervention to protect workers from poverty. In consequence, the analysis confirms the tenets of the modernisation and political economy theories but finds no support for the tenets of neo-liberal theory. This applies whether considering all employment or non-agricultural employment alone. Over the past decade or so, as Chapter 2 highlighted, these modernisation, neo-liberal, and political economy theories have been transcended by the emergence of institutional theory. This institutionalist theoretical perspective incorporates the various tenets of these earlier three theories under its umbrella by viewing these as formal institutional failings that lead to an asymmetry between the formal and informal institutions, and thus a higher prevalence of informal employment. The finding of this chapter is that, first, informal employment is more prevalent when there are greater formal institutional resource misallocations and inefficiencies manifested in a lack of modernisation of government and greater levels of corruption. Second, informal employment is more prevalent when there are greater formal institutional voids and weakness manifested in lower levels of development, lower (not higher) tax rates, lower government expenditure and lower expenditure on social contributions, and higher levels of poverty and greater inequality. Third, informal employment is more prevalent when there is greater formal institutional powerlessness manifested in lower levels of perceived rule of law and regulatory quality, and fourth and finally, when there is greater formal institutional instability and uncertainty manifested in low transparency of government policymaking. However, it is not these formal institutional failings alone that need to be tackled. In third wave institutional theory, as Chapter 2 highlighted, it is also the asymmetry between formal and informal institutions which needs to be addressed. Having provided this overview of the prevalence and intensity of the informal economy across the globe, and explained the cross-national variations, attention can now turn to gaining a deeper understanding of this sphere in which most of the world’s workers have their main job. To do so, the next chapter examines the heterogeneity of this sphere by exploring the different types of informal work that constitute the informal economy.

5. Types of work in the informal economy To break free of what Kanbur (2017) describes as the mindset from colonial times when disaggregation and differentiation of the “native” economy was of no interest, the aim of this chapter is to review the heterogeneous types of work in the informal economy. Given that most of the global workforce have their main employment in the informal economy, this realm cannot be treated as an unvarying and uniform whole. As Rosaldo (2021: 6) argues, “Lumping such a wide range of activity into a single concept tempts scholars to overgeneralize based on whichever segment of the informal economy they study”, and as Kanbur (2017) recognises, this results in inappropriate policy proposals. Until now, modernisation theorists have tended to overgeneralise from their focus upon traditional and survival activities, political economy theorists from their focus upon waged informal employment and workers in subcontracting chains, and neo-liberals from their focus upon informal enterprises and entrepreneurs. It is therefore important to pursue a more disaggregated understanding of the heterogeneous types of informal work conducted by the 61.2 per cent of all workers worldwide for their main employment, the 39.7 per cent of all employees, and the 86.1 per cent of all own-account workers (ILO, 2018a). In this chapter, this is done by differentiating work in the informal economy by whether one is defining it in terms of economic units or employment relationships. On the one hand, based on economic units, first, unregistered enterprises will be examined and, second, participation in the informal economy by registered formal enterprises to reveal the “degrees of informalisation” of enterprises. On the other hand, based on employment relationships, the degrees of informalisation of employment relationships, ranging from more formal to more informal relationships, is again used. This identifies a continuum of informal relationships ranging from, first, bogus self-employment where formal waged employment relationships are misclassified as formal self-employment, second, quasi-formal employment where a formal employer employs a formal employee but pays an undeclared (“envelope”) wage in addition to the formal wage, through third, unregistered employment and, fourth, informal self-employment, to fifth and finally, paid favours at the more informal end of the spectrum. 96

Types of work in the informal economy

97

However, these are not the only kinds of work in the informal economy. Recognising that not all employment relationships are two-way between an employer and a worker but are increasingly three-way relationships between an employer, worker, and an intermediary, two types of triangular employment relationship will then be discussed in which informal work prevails. First, informal work in the collaborative economy will be discussed and, second, informal employment relationships in agency work. Finally, given that the recent COVID-19 pandemic has had significant impacts on work in the informal economy, a discussion will be provided of new forms of work in the informal economy that have arisen during the pandemic. This will provide a contemporary analysis of how there are constantly emerging new forms of informality due to changes in the institutional environment within which informal work takes place. This chapter is therefore structured as follows. First, unregistered enterprises will be discussed and, second, registered enterprises operating partially in the informal economy. Turning from economic units to employment relationships, third, bogus self-employment will be analysed, fourth, quasi-formal employment, and fifth, unregistered employment. Turning to forms of own-account informal work, sixth, informal self-employment will be analysed and, seventh, paid favours between close social relations. Informal work arising from triangular employment relationships will be then analysed. Eighth, the informal work arising from collaborative platforms will be evaluated and, ninth, informal work arising from agency work. And tenth and finally, to show how changes in the institutional environment result in new forms of informality, the forms of informal work that have emerged during the COVID-19 pandemic are analysed. The outcome will be a comprehensive review of the different types of informal work in the contemporary world.

UNREGISTERED ENTERPRISES For much of the twentieth century, the dominant modernisation theory viewed unregistered enterprises as a leftover from a pre-industrial mode of production that would eventually disappear with economic development and growth (Geertz, 1963; Gilbert, 1998; Lewis, 1959). However, in the new millennium, it has been widely recognised that unregistered enterprises are a persistent feature in most economies across the globe (ILO, 2018a, 2020a; Williams, 2015g,h,i, 2016b, 2020b; Schneider and Williams, 2013; Williams and Gashi, 2021; Williams and Kedir, 2016b, 2017a,b, 2018a,b; Williams and Schneider, 2016). Although robust comprehensive data on the number of unregistered businesses is lacking, since they are hidden from view in the sense of not being registered with state authorities, there are various estimates.

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Starting with developed economies, where it might be assumed that unregistered enterprises are less prevalent, a 2012 UK survey of 595 owners of small businesses found that 55 per cent report that trading in the informal sector is necessary when starting a business and 20 per cent report that they did so when starting their own business. For two-thirds of these owners (64 per cent), their main reason was to test the viability of their business venture. Therefore, 13 per cent of these businesses started up in the informal economy to test-trade the viability of their business venture (Williams and Martinez-Perez, 2014a). This is a significant minority of all small business start-ups and reinforces an earlier English Localities Survey conducted in the late 1990s which reveals that 23 per cent of entrepreneurs started up unregistered, trading wholly in the informal economy (Williams, 2008b), akin to the 2012 survey (Williams and Martinez-Perez, 2014a). A global analysis of the proportion of businesses starting up unregistered by Autio and Fu (2015) finds that some two-thirds of all enterprises are unregistered at start-up, not only in emerging and transition economies (where 0.62 informal businesses compared with 0.37 formal businesses are created annually for every 100 people) but also in Organisation for Economic Co-operation and Development (OECD) countries (where 0.62 informal businesses compared with 0.43 formal businesses are annually created for every 100 people). Using data from the Global Entrepreneurship Monitor (GEM), Dau and Cuervo-Cazurra (2014), examining 51 countries, find that 3.37 unregistered enterprises are created annually for every 100 people. Indeed, Acs et al. (2013) conservatively estimate that at least half of all enterprises are unregistered, while the International Labour Organization (ILO, 2020a) estimate that eight out of ten enterprises operate in the informal sector. The outcome has been greater interest in unregistered enterprise. Take, for example, entrepreneurship scholarship. Following many decades when the study of entrepreneurship focused almost entirely on entrepreneurship and entrepreneurs in the formal economy, the last decade or so has witnessed the emergence of a new sub-discipline of entrepreneurship focused upon entrepreneurship in the informal economy. This largely examines unregistered enterprises (Chepurenko, 2018; Coletto and Bisschop, 2017; De Castro et al., 2014; Goddard, 2015; Harris-White, 2017; Karki and Xheneti, 2018; Khan, 2017; Lin, 2018; Mannila and Eremicheva, 2018; Mešić, 2016; Ogando et al., 2017; Ostapenko and Williams, 2016; Petersen and Charman, 2018; Sasaki et al., 2016; Sauka et al., 2016; Slack et al., 2017; Thai and Turkina, 2014; Villaries-Varela et al., 2017; Webb et al., 2009, 2010, 2013; Williams, 2006a, 2017a; Williams and Gurtoo, 2017; Williams and Nadin, 2010a,b). Using an enterprise-based definition, Autio and Fu (2015: 67) “define an informal entrepreneur as an individual actively engaged in managing a new venture that sells legitimate goods and services and is not registered with official authorities”.

Types of work in the informal economy

99

As such, they limit informal entrepreneurship to the study of unregistered ventures, which is mirrored in much entrepreneurship scholarship on the informal economy. One impact of this emergence of a new sub-discipline of entrepreneurship focused on informal entrepreneurs is that the dominant wholesome, positive, and virtuous representation of the entrepreneur as a super-hero (Burns, 2001; Cannon, 1991) has been contested. Entrepreneurs tarnishing this ideal type were previously depicted as existing outside of entrepreneurship, ignored, portrayed as temporary or transient, or claimed to be minor relative to mainstream entrepreneurship (i.e., formal entrepreneurs). The recognition of the prevalence of entrepreneurship in the informal economy has challenged this ideal-type depiction of entrepreneurs (Williams, 2007a, 2008b; Williams and Nadin, 2013a). Until now, this new sub-discipline of entrepreneurship scholarship focused upon informal entrepreneurship has analysed its prevalence (Alnahedh and Alsanousi, 2020; Autio and Fu, 2015; Williams, 2017a), the determinants of its varying magnitude cross-nationally (Dau and Cuervo-Cazurra, 2014; Siqueira et al., 2016; Thai and Turkina, 2014; Williams and Kedir, 2018a,b, 2019; Williams and Krasniqi, 2018), the impacts of non-registration at start-up on future firm performance (Eijenberg and Borner, 2020; Ullah et al., 2019; Williams and Bezeredi, 2018c, 2020; Williams and Kedir, 2016b, 2017a,b, 2020; Williams and Kosta, 2019, 2020a,b), who participates (Webb et al., 2009, 2013; Williams and Gashi, 2021), and their reasons for operating in the informal economy, such as whether they are necessity- and/or opportunity-driven (Maloney, 2004; Perry and Maloney, 2007; Williams, 2007b, 2008c, 2009c; Williams and Laden, 2019; Williams and Youssef, 2014c). To explain the prevalence of unregistered enterprises, a similar theoretical trajectory has been pursued in entrepreneurship scholarship to that pursued by the wider body of literature on the informal economy outlined in Chapter 2. First, there have been attempts to update modernisation theory in a way that recognises the persistence of unregistered enterprises (La Porta and Shleifer, 2008, 2014), albeit continuing to view such enterprises as unproductive and operating in separate “bottom of the pyramid” markets where they produce low-quality goods and services for low-income populations (La Porta and Shleifer, 2014). Second, political economy theory has been applied, viewing unregistered enterprises as a direct by-product of an increase in outsourcing and subcontracting, which has integrated these enterprises into contemporary capitalism to reduce production costs in a “race to bottom” (Castells and Portes, 1989; Davis, 2006; Meagher, 2010; Slavnic, 2010; Taiwo, 2013). Both view those operating informal enterprises as doing so out of economic necessity as a survival strategy.

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A modern guide to the informal economy

Two further theories have viewed entrepreneurs operating unregistered as sometimes doing so out of choice rather than necessity. First, neo-liberal scholars argue that such entrepreneurs weigh up the costs of informality and benefits of formality and decide not to operate formally (Cross, 2000; De Soto, 1989, 2001; Nwabuzor, 2005). Second, institutionalist scholars have argued that unregistered enterprises are the product of formal institutional failings. These lead entrepreneurs to reject the formal laws and regulations and to operate informally (De Castro et al., 2014; Kistruck et al., 2015; Puffer et al., 2010; Siqueira et al., 2016; Sutter et al., 2017; Vu, 2014; Webb et al., 2009, 2013, 2014; Williams and Shahid, 2016). Therefore, informal entrepreneurship results from formal institutional failings (Puffer et al., 2010; Sutter et al., 2017) and/or from the incongruence between what is deemed legitimate by formal institutions and what is deemed legitimate by informal ones (Webb et al., 2009). When formal and informal institutions are not aligned, the outcome is informal entrepreneurship (De Castro et al., 2014; Kistruck et al., 2015; Siqueira et al., 2016; Vu, 2014; Webb et al., 2013, 2014). Indeed, the less the symmetry, the greater is the prevalence of informal entrepreneurship (Williams and Horodnic, 2016a; Williams and Shahid, 2016). This institutionalist approach now dominates the entrepreneurship scholarship studying unregistered enterprise. One key topic has been whether non-registration is deleterious to firm performance for both the unregistered enterprises and their formal competitors. So far as unregistered enterprises are concerned, the long-standing liabilities of newness approach asserts that registration provides legitimacy and reduces the probability of failure (Stinchcombe, 1965), and that unregistered enterprises are worse performing than formal enterprises (ILO, 2007; Farrell, 2004; Palmer, 2007). This poorer performance thesis is apparent to different degrees in all theorisations of unregistered enterprises. First, modernisation theory represents unregistered enterprises as inefficient compared with registered enterprises, as operating in different “bottom of the pyramid” markets and, because of their inefficiency, as incapable of offering lower prices for the same products sold by formal enterprises (La Porta and Shleifer, 2008, 2014). Second, the political economy approach represents informal enterprises as operated by low-productivity necessity-driven entrepreneurs requiring low levels of start-up capital, who stay small to evade detection and do not achieve the economies of scale to be efficient, although the cost advantages achieved by evading taxes and regulations offsets their small scale and low productivity (Farrell, 2004; Palmer, 2007). This poorer performance thesis also prevails among neo-liberal and institutionalist scholars who, despite identifying them as voluntarily operating in the informal economy, represent unregistered enterprises as less productive than registered enterprises and a product of the failure

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of “weak” institutions to provide benefits for being formal and legitimate (De Soto, 1989; Kistruck et al., 2015; Wunsch-Vincent et al., 2015). However, there is weak evidence to support this poorer performance thesis. Most scholarship simply quotes La Porta and Shleifer (2008), who find that productivity is greater in small formal firms than unregistered enterprises and grows rapidly with the size of formal firms. However, this conclusion is based on an analysis of an unrepresentative sample of 2321 registered and 3574 unregistered enterprises, the authors finding that unregistered enterprises outperformed registered enterprises in only six of the 26 countries on value added per employee, three of the 26 countries on sales per employee, and four of the 26 on output per employee (La Porta and Shleifer, 2008). Indeed, these two scholars explicitly state that the overall productivity gap disappears and that unregistered firms are not significantly more unproductive once one controls for expenditure on inputs, the human capital of managers, and firm size (La Porta and Shleifer, 2008). Similarly weak evidence exists in the other studies of this poorer performance thesis (Fajnzylber et al., 2009; Farrell, 2004; McKinsey Global Institute, 2003). For example, Fajnzylber et al. (2009) assert that Mexican enterprises paying taxes have 15–60 per cent higher “productivity” levels, but their indicator of productivity is profit levels and self-employment income and they do not control for many firm-level characteristics determining firm performance. This poorer performance thesis has been similarly applied to compare formal enterprises that start up unregistered relative to enterprises registered from the outset. As La Porta and Shleifer (2008) state, the productivity differences between formal and informal enterprises are so large that it is difficult to believe that simply registering unregistered firms would resolve this difference. One of the few studies finding that formal enterprises starting up unregistered witness poorer firm performance than enterprises registered from the outset of operations is based on just 355 unregistered start-ups across seven Latin American countries (Perry et al., 2007). However, as well as being based on a small sample size, the productivity gaps are significant statistically in just four of the seven countries studied. There is growing evidence to contest this poor performance thesis of unregistered businesses. The most comprehensive is an analysis of World Bank Enterprise Survey (WBES) data from 127 countries (Williams et al., 2017a). This reveals that 10.2 per cent of the surveyed formal private sector businesses with five or more employees started up unregistered. Those formal enterprises delaying registration subsequently outperformed those starting up registered, with 14.5 per cent higher average annual sales growth (i.e., 8.3 per cent compared with 7.3 per cent), 31.6 per cent higher average annual employment growth (i.e., 6.5 per cent compared with 4.9 per cent), and 71.0 per cent higher average annual productivity growth (i.e., 3.9 per cent compared with 2.3 per

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cent). The longer registration was delayed, the significantly better were their annual sales, employment, and productivity growth rates, namely 0.09, 0.11, and 0.10 percentage points greater for every year of non-registration. This is doubtless because even when incongruence exists between formal and informal institutions, social legitimacy with stakeholders (e.g., consumers, suppliers, and employees) can still be achieved without the need for registration, and that by delaying registration, enterprises can focus their resources on overcoming other liabilities of newness, including the internal development of stronger operational routines, as well as camaraderie, trust, and cohesion, which reduces inefficiencies, and the external development of market acceptance and stable links with stakeholders (e.g., suppliers, customers, and investors), thus enabling them to outperform those who devote resources to registration (Williams et al., 2017a). Nevertheless, this does not mean that unregistered enterprises have higher firm performance than registered enterprises. The evidence base that this is the case remains poor. Nevertheless, there is evidence that unregistered enterprises have negative impacts on the performance of their formal competitors. Numerous studies reveal that enterprises asserting that their competitors are in the informal sector have significantly lower real annual sales growth rates, annual employment growth, and/or annual productivity growth compared with those who assert that their competitors are not in the informal sector (Eijenberg and Borner, 2020; Ullah et al., 2019; Williams and Bezeredi, 2018c, 2020; Williams and Kedir, 2016b, 2017a,b, 2020; Williams and Kosta, 2019, 2020a,b). This scholarship on informal entrepreneurship has also displayed the heterogeneity of unregistered enterprises by questioning whether such entrepreneurs are always engaged in commercial entrepreneurship (Williams and Nadin, 2011a,b,c, 2012a,b,c). These studies reveal that entrepreneurs operating unregistered enterprises range from purely for-profit to purely social entrepreneurs, with the majority somewhere in between combining both for-profit and social rationales. The outcome has been a call to recognise the diverse rationales of entrepreneurs operating unregistered enterprises and for a more nuanced understanding of their heterogeneous logics. Furthermore, such entrepreneurs’ logics do not remain static, with the rationales of most found to have changed since starting up. Roughly the same proportion had shifted away from more commercial to more social rationales as had shifted from more social to more commercial rationales. In sum, unregistered enterprises are not only prevalent in the contemporary global economy and a persistent feature in most economies, but they form a heterogeneous group with some unregistered enterprises outperforming registered ones in terms of sales, employment, and productivity growth, and the entrepreneurs operating such unregistered enterprises possessing a diverse array of rationales ranging from those that are purely profit-driven to those that

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are purely social. In future, akin to registered businesses, upon which considerably more research has been conducted, this diverse group of unregistered businesses needs to be unpacked to a far greater extent than has so far been the case.

REGISTERED ENTERPRISES ENGAGING IN THE INFORMAL ECONOMY Businesses engaged in the informal economy are not only unregistered enterprises. There are also registered enterprises operating in the informal economy. These either may not be fully registered with all state authorities with whom they should be registered, may not declare all their transactions, or may use unregistered employment, quasi-formal employment, or bogus self-employment. When registered enterprises operating in the informal economy are added to unregistered enterprises, the definition of enterprises operating in the informal economy becomes more inclusive, including all enterprises not declaring some of or all their employment, production, and/or sales to the authorities for tax, benefit, and/or labour law purposes when they should do so (Ketchen et al., 2014; Williams and Shahid, 2016). When this wider definition of enterprises operating in the informal economy is adopted, the proportion of enterprises doing so is unknown. Indeed, and perhaps surprisingly, this component of the informal economy (i.e., the proportion of formal enterprises operating in the informal economy) is the one about which least is known and on which least research has been conducted. Most studies only examine how many enterprises are unregistered rather than how many have differing levels of informality, and the characteristics of unregistered enterprises and entrepreneurs rather than the characteristics of enterprises and entrepreneurs displaying differing levels of informality, and seek to explain unregistered enterprises operating in the informal economy rather than the differing levels of informality. In other words, there has been a dualistic conceptualisation of enterprises in the informal economy as either registered and formal or unregistered and informal. Much less attention has been paid to the degrees of informalisation of enterprises. However, the lived practice is that enterprises and entrepreneurs are not either formal or informal. There is a continuum of enterprises and entrepreneurs from wholly formal to wholly informal (Andrade et al., 2013; Benjamin and Mbaye, 2014; Böhme and Thiele, 2014; Bruhn and McKenzie, 2013; de Villiers Scheepers et al., 2014; Kanbur, 2009; Ram et al., 2002a,b; Small Business Council, 2004; Verreyne et al., 2014; Williams, 2006a; Williams and Martinez-Perez, 2014a). Some enterprises may be wholly unregistered and do not declare any earnings. Others may be registered with some authorities but

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not with others (e.g., the tax authority but not for the purposes of health and safety, labour law, or social insurance contributions), may not keep business accounts separate from their personal accounts, and/or may declare some of or even all their earnings. Others may be wholly formal. Therefore, over the past decade, a spectrum of enterprises and entrepreneurship has been recognised ranging from the wholly informal to the wholly formal (e.g., Chen, 2012; Welter et al., 2015; Williams, 2017a). In a qualitative study in the Dominican Republic, De Castro et al. (2014) identify that many entrepreneurs comply with some regulations but not others, as do De Mel et al. (2013) in their study of Sri Lankan entrepreneurs. Rothenberg et al. (2016), in a survey of 45 000 smaller businesses in Indonesia, find that many ventures had only partially fulfilled registration requirements, taking some steps towards formalisation but not others. A study of 300 micro-enterprises operating in the retail, manufacturing, and instant consumable food (ICF) sectors in the city of Lahore in Pakistan uses three variables to differentiate the level of informality of an enterprise, namely its legal status, its tax registration status, and the types of accounts kept. The finding is that 29 per cent of the surveyed enterprises operate on a totally informal basis, 34 per cent at a high level of informality, 30 per cent at a low level of informality, and 7 per cent are totally formal enterprises. Therefore, two in three enterprises surveyed are neither wholly formal or wholly informal but somewhere in between (Williams and Shahid, 2016). A further survey in the city of Lahore in Pakistan conducted in 2017, this time involving 500 retail micro-enterprises, uses four variables to construct the level of informality of an enterprise, namely its legal status (i.e., whether incorporated or not), its tax registration status, its labour registration status, and the type of accounts kept. The outcome is a five-point scale of the level of informality, ranging from totally formal enterprises (who are formal on all four components), highly formal enterprises (who are formal on any three of the four components), somewhat informal enterprises (who are formal on any two of the four components), highly informal enterprises (who are formal on any one of the four components), and totally informal enterprises (who are formal on none of the four components). The finding is that 27.5 per cent of the surveyed enterprises operate on a totally informal basis, 39.5 per cent at a high level of informality, 20.4 per cent somewhat informally, 10.9 per cent on a highly formal basis, and 1.7 per cent operate on a totally formal basis. Therefore, 70.8 per cent of the enterprises surveyed are neither wholly formal nor wholly informal but somewhere in the middle of the continuum (Shahid et al., 2020). A 2016 survey in Ghana similarly reveals the varying degrees of informalisation of 171 entrepreneurs. Just 21 per cent were fully informal and 16 per cent fully formal. Nearly two-thirds (63 per cent) are neither wholly informal

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nor wholly formal (Williams et al., 2020a). Floridi et al. (2016) adopt the term “trans-formal” businesses to describe those operating between fully formal and fully informal that display some but not all dimensions of informality. They differentiate three characteristics: registration of the business, existence of a bank account, and presence of a balance sheet. Surveying 32 Egyptian and Palestinian businesses, they find that 72 per cent would be considered “formal” by the registration criterion alone, but when multiple criteria are used, only six of the 32 (19 per cent) would be considered formal, while the majority (63 per cent) are trans-formal. Indeed, the different degrees of informalisation of enterprises is now starting to be recognised by national governments and supra-national organisations. In Colombia, the National Administrative Department of Statistics (DANE) has developed a multidimensional index of the degree of business formality based on four dimensions: entry (commercial registration; tax registration); inputs (formal contracting; adherence to health, pension, occupational risk, and social benefit regulations); output (compliance with health, technical, and environmental regulations); and taxation (tax declaration; payment of taxes; formal accounting) (IMF, 2021). The World Bank (2020) has also adopted an approach to classifying formalisation which recognises the difference between “legal informality”, often used to refer to whether the business is registered or not, “fiscal informality”, which indicates the extent to which informal businesses pay taxes, have bank accounts, and maintain bookkeeping, and “labour informality”, which reflects whether contracts and benefits are made available to employees. They recognise that enterprises are formal on some of these dimensions but not on others, and may also move in and out of informality over time. In sum, besides wholly unregistered enterprises, there are also registered enterprises operating in the informal economy and degrees of informalisation. Studies have begun to capture these degrees of informalisation of enterprises and to reveal that most businesses are not wholly formal or wholly informal but somewhere in between. Indeed, this is now starting to be recognised by national governments and supra-national institutions. One might therefore expect in the future for research on the informal economy to begin to move away from a dualistic depiction of enterprises as either formal or informal and towards a degrees of formalisation approach.

EMPLOYMENT RELATIONS IN THE INFORMAL ECONOMY Besides unpacking the informal economy by using the enterprise as the unit of analysis to reveal the heterogeneity of businesses participating in it, the various kinds of work in the informal economy can be also unpacked using

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employment as the unit of analysis. The classic resultant distinction has been between informal waged employment and informal own-account work (ILO, 2018b). Here, however, a finer-grained differentiation is discerned. As Figure 5.1 graphically portrays, paid employment relationships range from purely formal at one end to purely informal at the other. In between are different forms of paid work infused with informality to varying degrees, with each type merging into one another, displayed in the overlapping circles with hatched lines. The result is a borderless continuum of, rather than separate, forms of paid employment relationship.

Figure 5.1

A typology of employment relations

Formal employment can be defined for the practical purposes of this chapter as paid work registered with the state for tax, social security, and labour law purposes. It has an array of forms such as permanent or temporary, full-time or part-time. In addition, formal employment in the private, public, and third sectors has been distinguished. However, with private businesses increasingly adopting a triple bottom line and public and third sector organisations increasingly seeking surpluses (for reinvesting to achieve their social and environmental goals), a blurring of these three sectors is taking place. Formal employment, moreover, is not discrete, as will now be shown. Bogus self-employment, sometimes termed false or dependent selfemployment, occurs where workers are reported as self-employed but are de facto in formal waged employment, having economic dependence (i.e., their income is from one or mainly from one employer) and personal dependence (i.e., there is a lack of ability to self-determine working methods, the content of work, working time, and the workplace). However, no consensus exists across countries on whether both forms of dependence, or only one, need to be present, or on the criteria that define economic and personal dependence (Williams and Horodnic, 2019a). Nevertheless, there is agreement that workers are falsely classified as self-employed so that employers can circumvent collective agreements, labour laws (e.g., minimum wages, working time legislation, protection in case of redundancy), employment tax, and other

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employer liabilities attached to the standard contract of employment, and thus reduce their costs (Williams and Lapeyre, 2017). Quasi-formal employment is another way in which not all formal employment is wholly formal. Formal employees working for formal employers can be paid two wages, an official declared wage and an additional unofficial undeclared (envelope) wage (Longo, 2020; Williams, 2008a,d, 2009d,e; Woolfson, 2007), and the conditions in the formal written contract can also differ to those verbally agreed. Such conditions can include, first, employees not taking their full statutory entitlement to annual leave, second, working longer hours than in their formal contract, and/or third, undertaking different tasks and responsibilities to that specified in their formal contract (Williams and Horodnic, 2017c). Envelope wages in some instances are simply paid for extra work or overtime, while in other instances the employee has a different verbal contract and wage rate to that stated in the formal contract (Williams, 2009d), displaying the varying degrees of informality of employment relations in these different types of quasi-formal employment. Moving along the continuum from more formal towards more informal employment relationships, there is unregistered employment. Unregistered employment refers to an employment relationship not registered with the authorities when it should be registered. Such employees often do not have written contracts or terms of employment and the remuneration is probably not declared to the authorities, so not only are there labour law violations but there is also tax and social security non-compliance. Unregistered employment, akin to formal employment, can be temporary or permanent, part-time or full-time, and relatively lower or higher paid. Informal self-employment refers to own-account paid activity where income is not declared for tax and/or social contribution purposes. Again, there are degrees of informal self-employment given that the self-employed may not declare either some of or all their income. Moreover, informal self-employment merges into the realm of paid favours (Larsen, 2013a,b; Zelizer, 2011). There thus exists a continuum of informal own-account work ranging from various forms of profit-motivated self-employment, through social entrepreneurship in the informal economy (Gordin and Dedova, 2015) where the self-employed, for example, conduct work for less than market rates such as for the elderly, to paid favours which is own-account work conducted for kin living outside the household, friends, neighbours, and/or acquaintances. Again, all these forms of informal self-employment may be full-time or part-time, permanent or temporary. When paid favours are carried out, work relations significantly differ because this work is often conducted for redistributive and social reasons. Paid favours can also include monetised family labour where paid work takes place for other family members within the household that is not declared to the state for tax, social security, and labour law purposes when it should be declared,

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and market-like relations are absent despite money changing hands. As a rule, the closer the social relations, the less market-like and profit-motivated is the employment relationship (White and Williams, 2010; Williams, 2004a). Given this continuum of employment relationships from more formal to more informal, each apart from formal employment is now considered in turn.

BOGUS SELF-EMPLOYMENT Bogus self-employment, sometimes termed “dependent”, “fake”, “false”, “sham”, or “misclassified” self-employment, or “disguised employment” (Böheim and Mühlberger, 2009; Harvey and Behling, 2008; Kautonen et al., 2009, 2010; Mandrone et al., 2014; Pedersini and Coletto, 2010), is where workers are falsely classified as self-employed but have a de facto formal waged employment relationship. Two types of dependence are important in determining their employment status: economic dependence where they generate their income from one or mainly one employer, and personal dependence manifested in subordination and lack of authority on working methods, content of work, and time and place of work (Böheim and Mühlberger, 2009; Eichhorst et al., 2013; Williams, 2019a). Until now, there has been a lack of consensus in national definitions on whether both forms of dependence need to be present or only one, and on the criteria used to define economic and personal dependence. To resolve this, the 20th International Conference of Labour Statisticians in 2018 proposed a new statistical category of employment relationship termed “dependent contractors” (ILO, 2018b,c). Dependent contractors are workers with commercial contracts (but not a contract of employment) to provide goods or services either for or through another economic unit. They are not employees of that economic unit but are dependent on that unit for the organisation and execution of their work, for their income, or for access to the market (ILCS, 2018). This therefore classifies an employment relationship by, first, the type of authority, classifying workers as independent or dependent and, second, the type of economic risk, classifying workers as in employment for profit or pay (ILO, 2018b,c). The ILO (2018b: 50) thus defines a dependent contractor as having the following characteristics: 1. Their work is organised and/or supervised by another economic unit. 2. They are paid by way of a commercial transaction. 3. The price they can charge for the goods produced or services provided is determined by the client or an intermediary. 4. Their access to raw materials, equipment, or capital items is controlled by the client or an intermediary. 5. Their working conditions closely resemble that of a dependent employee.

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6. The economic unit on which they depend does not withhold income tax. 7. They are responsible for arranging their own social insurance and other social contributions. This enables dependent contractors, dependent employees, and self-employed people to be differentiated. The reason these workers are falsely classified as self-employed when they are in a dependent employment relationship is so that employers can circumvent collective agreements, labour laws (e.g., minimum wages, working time legislation, protection in case of redundancy), employment tax, and other employer liabilities attached to the standard contract of employment, and thus reduce their costs (Eichhorst et al., 2013; Eurofound, 2013b, 2016a,b; Gialis et al., 2017; Giraud and Lechevalier, 2018; Hatfield, 2015; OECD, 2000; Williams and Lapeyre, 2017; Williams and Horodnic, 2019a). In the UK, it has been estimated that misclassifying a worker as self-employed rather than hiring them as an employee is from 35 per cent to 50 per cent cheaper for an employer (Jorens, 2010). These lower costs provide the incentive for employers to hire workers as self-employed through outsourcing and subcontracting arrangements. Indeed, sometimes employees are fired and re-hired as self-employed performing the same work. There is then no requirement to pay the minimum wage or include them in other wage-setting methods such as collective agreements. In addition, no social security contributions are paid when hiring the self-employed, nor compensation in the case of dismissal, higher wages based on seniority, holiday payments, or payment if sick and incapable of work. Bogus self-employment thus circumvents a host of employer liabilities that would otherwise apply in a standard contract of dependent employment (Thörnquist, 2011). Reviewing scholarship on the working conditions of the bogus self-employed, first, they are perceived to be more likely to work in a poor physical environment (Eurofound, 2013b; Millán et al., 2018) and to feel uninformed about health and safety risks (ILO, 2013). Second, work intensification is perceived as greater in terms of working to tight deadlines, the pace of work not being controllable, and emotional demands (Eichhorst et al., 2013; Jansen, 2017). Third, their working time is perceived as poorer in terms of the duration of work (e.g., long working hours or days), atypical working times (e.g., shift or weekend work), flexibility (e.g., working in free time to meet work demands), and/or their control over working time arrangements (Cruz et al., 2017; Eichhorst et al., 2013; Eurofound, 2013; ILO, 2016a; Jansen, 2017; Millán et al., 2018). Fourth, their social environment in the workplace is perceived as poorer in that they are deemed more likely to confront adverse social behaviour (e.g., verbal abuse, threats, sexual harassment, physical violence) and less likely to receive help and social support from colleagues

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(Cruz et al., 2017; Eurofound 2018a,b). Indeed, mental well-being is found to be lowest among the bogus self-employed (Eurofound, 2013b). Fifth, they are perceived to suffer poorer working conditions in terms of the use of their skills and discretion, including a poorer cognitive dimension (e.g., solving unforeseen problems, conducting complex tasks, learning new things), less latitude for taking decisions (e.g., the ability to choose or change the order of tasks, speed of work, their work colleagues), less organisational participation (e.g., consultation regarding objectives, involvement in decision-making about work organisation and processes, ability to influence decisions), and a lack of training (Eichhorst et al., 2013; Eurofound, 2013b, 2018a,b; ILO, 2016a). And sixth and finally, their job prospects are perceived as poorer relative to the rest of the workforce in terms of their career prospects, job security, and the solvency of the businesses in which they are employed (Eurofound, 2013b; Fehringer, 2014). However, a study examining the working conditions reported by the bogus self-employed in the 2015 European Working Conditions Survey (EWCS) reveals that working conditions are not significantly worse among the bogus self-employed than for others in employment. This is the case regarding the physical environment, the quality of working time and discretion, work intensity, skills, and career and job prospects. Only the social environment in their workplace is significantly poorer (Williams and Horodnic, 2019b). Regarding its magnitude, the predominant view is that bogus self-employment is becoming more common, largely due to its usage by collaborative platforms (e.g., ILO, 2016; Taylor, 2017). Comparing the 2010 and 2015 EWCS, Williams and Lapeyre (2017) measure the changing prevalence of bogus self-employment by examining whether a self-employed person without employees possesses all the following characteristics: they have more than one client, they have authority to hire or dismiss staff, and they have authority to make important strategic decisions. If they do not, they are considered bogus self-employed. The finding is that in 2015, 4.3 per cent of the total European Union (EU-28) workforce (one in 23 workers) are in bogus self-employment (compared with 5.3 per cent in 2010 in the EU-27). Some 1.4 per cent (1.3 per cent in 2010) of the total EU-28 workforce are “pure” bogus self-employed complying with only one or less of the three criteria, and a further 2.9 per cent (4.0 per cent in 2010) are “grey” bogus self-employed complying with any two of the three criteria. The result is that, examining all the self-employed without employees in the EU-28, 53 per cent are “genuine” self-employed (compared with 49 per cent in 2010), while 47 per cent (51 per cent in 2010) are bogus self-employed, with 15 per cent (12 per cent in 2010) being “pure” and 32 per cent (39 per cent in 2010) being “grey” bogus self-employed. If the self-employed with employees are added, 31 per cent of all the self-employed are bogus self-employed compared with 36 per cent in 2010. Therefore, there

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is no evidence that bogus self-employment is becoming more prevalent, at least in Europe between 2010 and 2015. Meanwhile, Burchell et al. (1999), examining only the UK and using a different dataset, estimate a similar prevalence of 5 per cent of the total workforce. In Romania, Ghinararu and Mladen (2016) also similarly estimate the share of self-employed persons dependent on a single employer as between one-third to half of the self-employed. Furthermore, a transport sector study covering the EU-27 estimates that in 2009, 15.5 per cent of drivers were dependent upon a single employer in the EU-27 (Lodovici et al., 2009). Using the EWCS data but a more restrictive definition of bogus self-employment, Eurofound (2016b) similarly highlights that some 30 per cent of the self-employed without employees cannot be considered truly independent. In sum, bogus self-employment is a prevalent form of employment relationship. However, there is little evidence that working conditions are necessarily poorer than for the employed in general and neither does evidence exist that it is growing relative to other forms of employment relationship, at least in Europe between 2010 and 2015. Of course, these findings may be different elsewhere and at different times, but there is no known empirical evidence to show that this is the case.

QUASI-FORMAL EMPLOYMENT Since the turn of the millennium, there has been a growing literature on how formal employers often reduce their tax and social security payments and therefore labour costs by paying their formal employees two salaries: an official formal declared salary and an additional informal undeclared (envelope) wage which is hidden from the authorities for tax and social security purposes. This illegal wage practice is usually instigated at the job interview stage. Alongside the formal written contract, the employer at the same time reaches a verbal unwritten agreement with the employee to pay an additional “envelope wage” not declared to the authorities for tax and social security purposes (Chavdarova, 2014; Franić, 2020a; Hazans, 2005; Longo, 2020; Sedlenieks, 2003; Williams, 2008d, 2009d,e; Williams and Krasniqi, 2021; Woolfson, 2007). Although a verbal agreement is in many countries legal and binding in law, the type of verbal contract discussed here is illegal. It is a fraudulent agreement to underreport the total wage of the employee with the purpose of evading the full tax and social security liabilities of the employee and employer to the state. Viewed through the lens of institutional theory, quasi-formal employment can be theorised as directly resulting from individual employers and employees not adhering to the laws and regulations of formal institutions and instead adopting unwritten socially shared rules agreed

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via a verbal agreement to pay an additional unreported (envelope) wage to evade paying the full tax and social security payments owed. Formal employers engage in this illegal wage practice of paying an additional unreported (envelope) wage to their formal employees for several reasons. The first and principal reason is that the employer can reduce their tax and social security contribution payments and therefore their labour costs. A second reason is that envelope wage payments allow employers to impose additional conditions to those in the formal written contract. The most common include that employees will not take their full statutory entitlement to annual leave, that they will work longer hours than the formal contract states, and/or that the tasks and responsibilities will be greater than the formal contract states (Longo, 2020; Williams, 2014a). A third reason is that they can cease envelope wage payments to push employees to resign from their job and this avoids the need for severance pay and formal redundancy proceedings. They can also withdraw or reduce envelope wage payments unless employees conduct additional tasks outside of their formal contract (Williams and Padmore, 2013a,b; Woolfson, 2007). A burgeoning literature has emerged on quasi-formal employment, albeit largely in East-Central European nations. The studies in the first wave of work on quasi-formal employment were small-scale, often qualitative studies in specific East-Central European nations. These include studies in Bulgaria (Chavdarova, 2014), Estonia (Meriküll and Staehr, 2010), Latvia (Meriküll and Staehr, 2010; Putniṇš and Sauka, 2017; Sedlenieks, 2003), Lithuania (Meriküll and Staehr, 2010; Woolfson, 2007), Romania (Neef, 2002), Russia (Kapelyushnikov et al., 2010; Williams and Round, 2007), and Ukraine (Williams, 2007c; Williams and Round, 2008a, 2009a). The study by Sedlenieks (2003) in Latvia comprises 15 face-to-face interviews, while Woolfson (2007) reports an in-depth case study of a single Lithuanian person. In Ukraine, Williams (2007c) reports 600 interviews in three localities, while in Russia, Williams and Round (2007) report 313 interviews in three Moscow districts. Although none use representative samples, they began to reveal the prevalence of quasi-formal employment. In 2002, 22.5 per cent, 11.7 per cent, and 9.6 per cent of formal employees in Latvia, Lithuania, and Estonia respectively were paid an additional unreported wage (Meriküll and Staehr, 2010), while for the Ukraine in 2005 the figure was 30 per cent (Williams, 2007c), and for Moscow, also in 2005, 65 per cent (Williams and Round, 2007). These studies in the early stages of the post-socialist transition process capture the labour market situation at a particular historical juncture. In a second wave of quasi-formal employment studies, the studies have used extensive surveys of representative samples of European citizens. A 2007 Eurobarometer survey comprising 11 135 interviews with formal employees across the European Union (EU) resulted in studies of the prevalence

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of quasi-formal employment in the Baltic Sea region (Williams, 2009f), South-East Europe (Williams et al., 2011), East-Central Europe (Williams and Round, 2008c), and the EU (Williams, 2009g). Using the 2013 Eurobarometer survey, further descriptive studies resulted, namely in the Baltic Sea region (Williams and Horodnic, 2015f), Southern Europe (Williams and Horodnic, 2015e), and the EU (Williams and Horodnic, 2017a). In 2007, 6 per cent of the formal employees surveyed in the EU received an additional unreported wage, amounting on average to 43 per cent of their gross wage, and its prevalence was lower in Western European and Nordic nations than in those in Southern and East-Central Europe, as was the share of the gross wage received as an envelope wage (e.g., Williams, 2009g). In 2013, one in 33 formal employees received an additional unreported wage, with similar variations continuing to persist across the EU regions (Williams and Horodnic, 2017a). The 2019 Eurobarometer survey reveals that the prevalence of quasi-formal employment had reduced from 6 per cent of all employees in 2007 to 3 per cent, which is the same as in 2013. Of those engaged in quasi-formal employment in 2019, 42 per cent received their additional undeclared payments for overtime/extra work, 29 per cent for both their regular work and overtime/ extra work, and 25 per cent for their regular employment. Over time, this illicit wage has become more often used to pay for overtime, extra work, or bonuses and less often used to pay for regular employment. By 2019, 34 per cent of those in quasi-formal employment received less than a quarter of their gross salary as an envelope wage, 10 per cent received 25–49 per cent as an envelope wage, and 5 per cent received 50 per cent or more as an envelope wage. The share of gross salary paid as an envelope wage has decreased between 2013 and 2019 (Williams and Horodnic, 2021a). To break down quasi-formal employment into different types, the 2019 Eurobarometer survey asks a series of direct questions to formal employees. The finding is that 3 per cent of all formal employees reported receiving in the past 12 months a cash supplement to their official declared wage and the amount is always the same, 4 per cent reported receiving cash supplements to their official declared wage which vary according to professional achievements (e.g., if they meet or exceed targets), 5 per cent reported that their pay had varied depending on the total number of hours worked but only a fixed amount is declared, and 10 per cent reported that in the past 12 months their pay was fixed, although they occasionally received additional undeclared payments (e.g., holiday allowances, 13th month wage, bonuses). Aggregating these responses, 22 per cent of all formal employees engaged in at least one type of quasi-formal employment during the past 12 months (compared with only 3 per cent when asked more generally if they had received an undeclared (envelope) wage in addition to their formal salary). This suggests that quasi-formal employment is far from a minor practice. Indeed, following its

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evaluation in Europe, this employment relationship has now started to be analysed in other global regions, exemplified by a study of 422 young people living in the north section of Greater Buenos Aires in Argentina which reveals the prevalence of this practice (Longo, 2020). In sum, quasi-formal employment is a prevalent form of employment relationship that has often been missed by studies treating employment relationships as either formal or informal. As discussed in Chapter 1, the jobs-based definition of the informal economy adopted by the ILO omits quasi-formal employment because the worker is in a formal job. However, given that more than one in five formal employees in the EU are engaged in quasi-formal employment, future research in other global regions and countries will need to analyse this employment relationship. Until this is done, the wider relevance and importance of this employment relationship will remain unknown.

UNREGISTERED EMPLOYMENT Unregistered employment is employment not registered with the authorities when it should be registered, where the dependent employees often do not have written contracts or terms of employment and the remuneration is often not declared to the authorities. Indeed, the ILO (2018a) identify that 36.2 per cent of the informal workforce are engaged in unregistered employment, and 39.7 per cent of all employees worldwide are in unregistered employment. Nevertheless, there are global regional variations in the proportion of the informal workforce in unregistered employment, ranging from 56.3 per cent in Europe and Central Asia and 54.2 per cent in the Arab States to 49.2 per cent in the Americas and just 34.4 per cent in Asia and the Pacific (ILO, 2018a). Reflecting these global regional variations, most studies of unregistered employment have been in Europe and Central Asia (Hazans, 2011; Gashi and Williams, 2019; Krasniqi and Williams, 2017; Williams, 2022a; Williams and Horodnic, 2018b; Williams and Kayaoglu, 2017). As Williams and Kayaoglu (2017) find in the EU in 2013, 5 per cent of employees are in unregistered employment, while Hazans (2011), using data on 30 countries for the period between 2004 and 2009, finds that the proportion of employees without a contract is 2.7 per cent in Nordic countries, 9.5 per cent in Southern Europe, and 5.0 per cent in Western and East-Central Europe. Williams and Horodnic (2018b), reporting a 2015 EWCS based on 43 850 face-to-face interviews, find that 7 per cent (one in 14) of service industry employees have no written contract of employment across the 35 European countries surveyed, although this varies from 34 per cent in Cyprus to 1 per cent in Sweden. Gashi and Williams (2019), reporting a 2017 survey of 8533 households in Kosovo, find that 34.6 per cent of all employees are engaged in unregistered employment. Williams (2022a) reveals that 2.4 per cent of the European citizens surveyed in

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2019 reported engaging in unregistered employment in the 12 months prior to the survey, and this ranged from 1.5 per cent in East-Central Europe, through to 2.0 per cent in South-East Europe, 2.1 per cent in Western Europe, and 2.3 per cent in the Nordic nations, and rising to 5.8 per cent in Southern Europe. These latter figures, it should be noted, are participation rates in unregistered employment of all citizens, not just employees. In sum, unregistered employment is a large segment of the global informal economy and nearly two in five employees globally are in unregistered employment. However, considering its share of the total informal economy, relatively little research has been conducted. This is a gap in the literature that could be usefully addressed in future years.

INFORMAL SELF-EMPLOYMENT Informal self-employment here refers to those working on an own-account basis who do not register their venture and/or declare all their paid activities to the authorities for tax, social security, and/or labour law purposes (Ketchen et al., 2014; Khan, 2017; Siqueira et al., 2016; Williams and Martinez-Perez, 2014a,b; Williams, 2017a). The ILO (2018a) estimate that 86.1 per cent of all own-account workers globally operate in the informal sector and that 45.0 per cent of the global informal workforce are own-account workers. Therefore, informal self-employment is a large segment of the informal economy. In developing countries the share is much higher, amounting to 67.2 per cent (Bonnet et al., 2019a). Reviewing the literature on informal self-employment, this has variously documented its magnitude and cross-national prevalence (ILO, 2018a, 2020a; Williams, 2017a), the macro-level conditions associated with its variable prevalence cross-nationally (Dau and Cuervo-Cazurra, 2014; Siqueira et al., 2016; Thai and Turkina, 2014), who engages in this endeavour (Afreh et al., 2019; Webb et al., 2009, 2013; Williams and Gashi, 2021; Williams and Horodnic, 2015g), and their motives for participating in informal self-employment (Maloney, 2004; Perry and Maloney, 2007; Williams and Windebank, 2022). According to the OECD (2008), self-employment provides more opportunities for participation in the informal economy than being an employee, not least because detecting informal self-employment is difficult, but also because in many countries there are more opportunities to engage in informal self-employment than informal waged employment. In addition, formal employees can operate in the informal economy as self-employed outside of formal work hours, by moonlighting. The key problems faced by those engaged in informal self-employment are that, first, they are socially unprotected and unrepresented by formal labour organisations or unions (Maloney, 2003), second, they experience volatile

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incomes and thus financial insecurity (Temkin, 2009), which makes this sector insecure financially, and third and finally, there are low rates of productivity since these economic agents cannot freely expand their activities if they are to remain below the radar of the state authorities (ILO, 2002).

PAID FAVOURS Paid favours are often included in informal own-account work. However, here, they are differentiated from for-profit informal self-employment conducted between a buyer and seller in a relationship akin to paid employment. This is because paid favours are acts of one-to-one aid provided to kin, friends, and neighbours, reimbursed with money. For example, a friend might offer a lift in their car, so money is given for fuel costs. However, this is not conducted for profit. The payment is often not related to the market price. Indeed, the closer the social relation, the less is the likelihood that the payment conforms to the market price. So far, this practice has been discussed as a separate form of informal work mostly in developed economies (Cornuel and Duriez, 1985; Jensen et al., 1995; Larsen, 2013a,b; White, 2009, 2011; White and Williams, 2010; Williams, 2004a, 2009b; Williams and Horodnic, 2018a; Williams and Windebank, 2001a,b). In a study of people moving to French new towns, Cornuel and Duriez (1985) find that they frequently partake in paid favours for neighbours, not to make money but to develop new social networks and trust through reciprocal exchange. Similarly, in a study in rural Pennsylvania, Jensen et al. (1995) reveal that some engaged in the informal economy voiced rationales that had little or nothing to do with profit. In a study of lower- and higher-income urban and rural neighbourhoods in England (Williams, 2004a, 2009b; Williams and Windebank, 2001a,b), 70 per cent of all informal work is undertaken by close social relations (i.e., friends, neighbours, kin) and economic gain is hardly apparent in their rationales. Rather, a kinship relative who is unemployed and in need of money may be asked to do some gardening or paint a bedroom to give them money and avoid any notion that charity is involved, which would probably result in the kin member declining the money. Such redistributive and social network rationales are also found in a study of women’s informal work in Salford in the UK (Brill, 2010), and a study consisting of 134 interviews conducted in the small city of Limninge in Sweden that finds most informal work is paid favours carried out for close social relations to help each other out (Larsen, 2013b), such as when getting the car repaired (Larsen, 2013a). Swanson and Bruni‑Bossio (2019), in their study of 375 participants in the Canadian province of Saskatchewan, identify a “righteous undocumented” economy that participants view as a tool for capacity building and helping each other out, and part of tradition and culture. Indeed, it is this

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existence of such paid favours that perhaps explains the finding of Marè et al. (2020), in their econometric analysis of 70 countries between 1990 and 2010, that in countries where family ties are stronger, the informal economy is larger. Hence, this identification of paid favours challenges the long-standing narrative that one-to-one help is unpaid and that monetary payments are always market-like and profit-motivated, which has prevailed across a range of economic perspectives from the neo-classical to the Marxian (Ciscel and Heath, 2001; Harvey, 1989), and the “formalist” anthropological tradition that views exchange in western societies as less embedded and thinner than in pre-industrial societies (Mauss, 1966). However, this “thin” depiction of monetary exchange as always market-like and profit-motivated has been questioned by substantivist anthropological theory, which adopts a “thicker” reading of monetary exchange as socially, culturally, and geographically embedded (Bourdieu, 2001; Gibson-Graham, 2006; Zelizer, 1994). Indeed, Williams (2009b) finds that in just 5 per cent of cases did the recipient paying wider kin, neighbours, or friends state that their primary motive was to save money, and that in only 7 per cent of cases did those recompensed with money for supplying material help to wider kin, friends, and acquaintances assert that they conducted this work primarily to make money. Instead, they view offering or accepting payment to or from wider kin, friends, or acquaintances as “natural” and “normal”. There is a culture of paying for favours. The only reason payment will not occur is when it is deemed unacceptable, inappropriate, or impossible. It is deemed unacceptable when the favour is too small for a payment (e.g., when a hammer is loaned), inappropriate when the social relations do not allow payment (e.g., when the recipient of the favour would be unable to pay and would have to offer a favour in return but cannot do so due to, for example, a physical inability), and impossible when the supplier refuses payment because they desire a specific favour in return that only the customer can provide (e.g., food that only they make). In all other circumstances, monetary payment is the norm in community exchange. The first reason for payment is to prevent a souring of relations if a favour is not returned. Payment avoids the need for reciprocity. The second reason relates to a redistribution rationale. Many ask for a favour because they want to give money to the person doing the activity. This usually involves close social relations such as kin. Paying enables the supplier to be given money without any connotation of charity being involved. A redistributive motive is also present among those supplying favours. They recognise that the recipient is unable to get a task done so offer “mate’s rates” if a craftsperson or, when unemployed or early retired, offer their free time to help others who are suffering from time famine. Examining the prevalence of paid favours in the EU, Williams and Horodnic (2021a) identify that, in 2019, 47 per cent of those engaged in informal work

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do such work for close social relations such as kin, friends, colleagues, or acquaintances (48 per cent in 2013 and 39 per cent in 2007). The share of all work in the informal economy that is paid favours therefore has increased since 2007 and remained steady between 2013 and 2019. In sum, although paid favours have been disaggregated from own-account work mostly in developed countries, it is perhaps worthwhile also doing so in the developing world. This has not been done so far as is known. Given the prevalence of informal own-account work in the developing world, and the evidence from developed countries that paid favours form a sizeable proportion of all informal work, future research in developing countries could usefully disaggregate paid favours from wider own-account informal work.

INFORMAL ECONOMY IN TRIANGULAR EMPLOYMENT RELATIONSHIPS: THE COLLABORATIVE ECONOMY The informal economy does not only occur in two-way employment relationships between an employer/purchaser and a supplier/buyer. Work in the informal economy also happens in triangular relationships involving three parties. This is clearly seen in the case of the collaborative economy where there is a digital platform, a user/client, and an individual service provider/ worker. The collaborative economy, sometimes called the sharing or platform economy, refers to digital platforms or apps that facilitate the matching of demand and supply of unused or under-used goods and services. The concept originally had a not-for-profit connotation but increasingly global businesses in various sectors (e.g., personal transport, accommodation, delivery services) have based their for-profit business models on these digital technologies, thereby challenging traditional providers in their sectors. When discussing participation in informal work in the collaborative economy, it is largely, although not exclusively, digital labour platforms that are a concern. These are private internet-based companies acting as intermediaries for on-demand services for individual or corporate consumers (European Commission, 2021). To evaluate the extent to which the collaborative economy is being used by those engaged in the informal economy to source their informal work, a 2019 Eurobarometer survey asked respondents engaged in informal work the following question: “Were any of these activities arranged through a mobile application – app – or an online tool or specialised website?” Over one in ten (11 per cent) of those supplying informal work used collaborative platforms for selling their goods and services, with 4 per cent of all informal workers using collaborative platforms for all their informal work and 7 per cent using collaborative platforms for some of their informal work. As such, 36 per cent of those using collaborative platforms for arranging informal work are doing

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all their informal work via digital platforms and 64 per cent do so for only some of their informal work, of which 31 per cent are doing this work outside their formal job, 22 per cent as part of their formal job, and 11 per cent outside their formal job but at the request of the employer (Williams and Horodnic, 2021a). This finding in Europe that some one-tenth of informal work is arranged via platforms provides an early indication of the extent to which platforms are being used to arrange informal work. What types of informal work are arranged via digital platforms? There is no reason to assume, nor evidence to substantiate, that employers operating on collaborative platforms (i.e., users of digital platforms) are more likely to use unregistered employment than employers not using collaborative platforms. Neither is there any reason to assume, nor evidence to substantiate, that employers/users are more likely to use quasi-formal employment than those operating in the non-collaborative economy. However, there are reasons to believe that collaborative platforms increase the use and prevalence of bogus self-employment (Eurofound, 2016a; Heyes and Hastings, 2017). As platforms are intermediaries between service providers and users, many legal cases have judged whether service providers on digital platforms are self-employed or employees of the platform (Williams et al., 2020b). If the standards of service provided or the price of the service are determined by the platform, there is economic dependence with the worker receiving their income from one or mainly from one employer, and personal dependence manifested in subordination and lack of authority on working methods, content of work, and time and place of work, service providers are usually deemed bogus self-employed. A growing tendency across the world is for judiciaries and legislatures to classify platform work as dependent waged employment rather than self-employment, resulting in some cases in digital platforms withdrawing from national economies (Williams et al., 2020b). However, despite a heavy emphasis both in the media and in academic literature on the relationship between the collaborative economy and bogus self-employment, this is not the only form of informal work facilitated by digital platforms. Collaborative platforms also appear to increase informal self-employment. They have enabled bigger tasks to be broken down into smaller jobs and made it easier for the genuine self-employed who would anyway be intentionally non-compliant to find markets for their services. There is also evidence that collaborative platforms increase participation in unintentional informal work

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among self-employed service providers. This is because service providers are often confronted by: 1. A lack of clear guidance on whether their own-account activities on platforms are classified as non-commercial or commercial activities. 2. Unclear guidance on whether their activities need to be declared for tax, social security, or labour law compliance purposes. 3. Complex procedures for declaring services provided via platforms. This is clearly displayed by the 2018 Flash Eurobarometer 467 survey. This reveals that in the EU, the most common problems of operating in the collaborative economy are: 1. The lack of clearness on what is required to provide a service legitimately (stated by 22 per cent of service providers). 2. The systems for paying tax are complicated (19 per cent). 3. It is complicated or difficult to provide the service legally (13 per cent). 4. The impact on their employment status is unclear (9 per cent). This intimates that there is unintentional participation in informal work by service providers because of insufficient information being available on how to operate legitimately, a perception that tax compliance is difficult, and a view that it is complicated or difficult to provide the service on a legitimate basis. In sum, there is little doubt that informal work is being arranged through collaborative platforms and this is likely to grow in future as collaborative platforms become more widely used. However, most literature has been on one specific form of informal work occurring via digital platforms, namely bogus self-employment. Less attention has been paid to how digital platforms are resulting in the growth of genuine informal self-employment.

INFORMAL ECONOMY IN TRIANGULAR EMPLOYMENT RELATIONSHIPS: TEMPORARY AGENCY WORK Another triangular employment relationship that leads to participation in the informal economy involves temporary work agencies (TWAs). Here, three parties are again involved: the TWA, the employer, and the worker. The worker enters a contract of employment with a TWA, with a view to being assigned to a user company for which they will work temporarily under their supervision and direction. The contract of employment with the TWA is of limited or unspecified duration, with no guarantee of continuation, and is not based on the intention to work for the same user undertaking on a permanent

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basis. The user undertaking pays fees to the agency, which in turn pays wages to the worker. Many employment relationships that TWAs establish are fully compliant and fully formal employment. Indeed, there is evidence that bona fide temporary agency work can reduce the prevalence of the informal economy. Williams and Renooy (2014) show that in countries where TWAs are better established and easier to access, and subject to efficient regulation, there is a lower prevalence of informal employment. This is because in such contexts businesses can easily turn to TWAs to fulfil their need for casual and cyclical labour. There is less requirement to turn to the informal economy. Nevertheless, this triangular employment relationship can lead to participation in the informal economy. This can occur in three ways: 1. Between the worker and the TWA – such as quasi-formal employment where the agency pays envelope wages to the worker to reduce tax and social security costs, with no explicit involvement or knowledge of the user business/employer. 2. Between the worker and the user business – where the user underreports the working time to the agency to save on fees and pays envelope wages to the worker for the remaining time worked. 3. Between the user company and agency – where the TWA, in agreement with the user employer, covers up the amount of work requested by the user employer by falsifying data. In these three cases, all three stakeholders, namely the worker, employer, and TWA, are registered legitimate workers, employers, and TWAs. The result is that participation in the informal economy takes the form of quasi-formal employment. However, if one or more of these stakeholders is unregistered/unlicensed, participation in the informal economy takes the form of unregistered employment and unregistered business. The following permutations are hypothetical possibilities, some of which are more likely in practice than others: 1. Unregistered worker, licensed TWA, and formal employer – a licensed TWA provides a worker to a formal employer but, to reduce tax and social contribution payments, does not register the employee for tax, social security, and/or labour law purposes. 2. Unregistered worker, unlicensed TWA, and formal employer – an unlicensed TWA (e.g., an unlicensed gangmaster in agriculture or construction industry labour provider) provides unregistered workers (e.g., seasonal workers and day labourers picked up from known locations each day) to a formal employer for an undeclared fee and the workers are paid “off-the-books”.

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3. Unregistered worker, licensed TWA, and unregistered business – a licensed TWA provides unregistered workers to an unregistered business on an “off-the-books” basis, for a fee. 4. Unregistered worker, unlicensed TWA, and unregistered business – an unlicensed TWA provides unregistered workers to an unregistered business for an undeclared fee. All stakeholders do not declare the transaction for tax, social security, and/or labour law purposes. 5. Registered worker, unlicensed TWA, and formal employer – perhaps not a logical possibility since an unlicensed TWA could not provide a registered declared worker. 6. Registered worker, licensed TWA, and unregistered business – a logical possibility but unlikely that an unregistered business would approach a licensed TWA to employ a registered worker, for fear of being caught. 7. Registered worker, unlicensed TWA, and unregistered business – this is not a logical possibility. 8. Registered worker, licensed TWA, and formal employer – this is the formal legitimate employment relationship that is the norm across the industry. Research has not so far been conducted on which are the most common practices or what is their prevalence. Nevertheless, anecdotal evidence exists on some of these permutations, especially the permutation of unregistered worker, an unlicensed TWA, and formal employer. A growing body of literature exists on unlicensed agricultural gangmasters and construction industry labour providers providing unregistered workers employed on an unregistered basis to formal employers, such as seasonal workers or day labourers picked up from well-known locations each morning. Take, for example, the “caporale” (i.e., gangmaster) system in Italy. To recruit agricultural workers, an arranger, namely the gangmaster, hires the workers and transports them to their place of work. Workers are hired each day in well-known public places such as village squares by the gangmaster, who sets the terms of employment and price. The farmer pays the wages to the gangmaster plus a commission. The gangmaster hires based on demand (Urzi and Williams, 2017; Williams, 2019c). In sum, the triangular employment relationship involving TWAs, employers, and workers leads to participation in the informal economy. However, the precise forms of informality involved are currently unknown. Therefore, future research could begin to investigate the prevalence of different permutations of informality in this triangular employment relationship.

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COVID-19 PANDEMIC AND NEW TYPES OF INFORMAL EMPLOYMENT In early January 2020 a new variant of coronavirus (SARS-CoV-2) that produced a respiratory disease (COVID-19) started to spread across the globe, and on the 11 March 2020 a pandemic was declared by the World Health Organization (WHO). The impact on businesses and workers, as well as economies, was significant. By April 2020, 81 per cent of the global workforce had been affected by the closure of businesses to restrict movement and the spread of the virus (ILO, 2020b) and by January 2021, 93 per cent of the world’s workers lived in countries with workplace closure measures (ILO, 2021a). To protect workers, support jobs and income, and stimulate the economy and employment, governments implemented short-term financial support schemes (IMF, 2020). These schemes provided social protection for those affected, supported employment retention, and supplied financial and tax relief for the impacted enterprises (ILO, 2020d,e). For example, employment retention schemes sought to preserve formal jobs by giving businesses financial support to temporarily reduce the hours of formal employees or suspend their employment, with government funding covering the hours not worked. The content of these employment retention schemes varied across countries, such as in terms of the criteria used to determine whether an employer can access such support (Eurofound, 2020; IMF, 2020). Short-term financial support initiatives have only applied to those engaged in the formal economy. For those operating in the informal economy prior to the pandemic, support has generally not been forthcoming (Guven et al., 2021). Informal workers and enterprises have been unable to access in full or in part the short-term financial support provided by government to registered businesses and formal workers. This has had different impacts for different types of enterprises and workers in the informal economy (Omobowale et al., 2020; Ricketts, 2020; Webb et al., 2020). Here, the impacts for each type of work in the informal economy outlined in this chapter is discussed in turn. First, there are unregistered enterprises. These have been wholly excluded from accessing such short-term financial support. Second, there are registered businesses that declare only a portion of their work and revenue. These registered businesses and independent workers have been able only to access short-term financial support to offset the shortfalls in their declared turnover or profits, and for their formal employees. Turning to different kinds of informal employment relationship, the bogus self-employed have been excluded from the financial support for employees but able to access any financial support provided for the self-employed

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(Williams, 2021c). Employees engaged in quasi-formal employment generally received lower payments under the short-term job retention schemes than they would have if their full salary had been declared. Unregistered employees have been wholly excluded from the short-term financial support for employees. Depending on the system of social insurance in countries, they have been also often excluded from welfare benefits, although some governments have bolstered social protection, such as by introducing the temporary enhancement of unemployment insurance benefits and relaxing eligibility rules for benefits (IMF, 2020). Informal own-account workers have been unable to access any support, and those self-employed only partially declaring earnings have, depending on the scheme, often had limited access to support. Besides the exclusion of informal enterprises and workers from short-term financial support, a further concern has been the abuse of the short-term employment retention schemes by employers and how this has resulted in the emergence of new types of informal employment during the pandemic period. These new types of informal employment that are arising from the abuse of the employment retention and short-term financial support schemes largely involve the “bogus declaration of the suspension of work”. As Williams (2021a,b) reports, the new types of informal employment arising out of the abuse of employment retention schemes include: 1. Employers claim state support for the temporary suspension of their employees’ contracts and then either: a. Employees work normally, not knowing the employer is claiming for them. b. Employees (for whom support is being claimed) are employed either unregistered or on a “bogus part-time” basis. c. Employees are requested to “volunteer” (and threatened with redundancy if they do not). d. Employees are employed in a linked business. e. Employ new workers. f. Submit claims for support at higher salary levels than that earned by the employees. 2. Employers claim for a “ghost” employee such as someone made redundant or someone who is non-existent (although declaring an employee who does not exist is criminal and perhaps better not considered as part of the informal economy). 3. Employers and/or employees claim several forms of support when they are only entitled to one. At the time of writing, there has been little evidence collected on the extent of these new forms of informal employment arising from the abuse of short-term

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financial support schemes. One exception is France, where more than a million companies have claimed support for the temporary suspension of employment contracts for over 13 million employees (DARES, 2020). A 2020 survey of 34 000 employees reveals that 31 per cent had continued normal working despite receiving such support (UGICT-CGT, 2020). A further survey of 2600 employees finds that 24 per cent have been required to continue their activity at the request of their employer (Delgenes, 2020). In the UK, fraud and error has been estimated at £5.5 billion across the employment retention scheme, self-employed income support scheme, and “eat out to help out” scheme, £4 billion being in relation to the employment retention scheme alone. A taskforce of 1265 full-time government officials costing £110 million has been established to detect this abuse. With a cumulative cost of £70 billion, the furlough scheme paid 80 per cent of the wages of 11.5 million workers placed on leave since March 2020, up to a maximum of £2500 a month. About 8.7 per cent of the money paid out under this scheme in the 2020/21 tax year was the result of fraud or error. A further £490 million (2.5 per cent of total funds awarded) was lost to fraudulent or incorrect claims under the self-employment income support scheme (HMRC, 2021). Examining the bounce back loans scheme to businesses in the UK, which provided loans of up to £50 000, or a maximum of 25 per cent of annual turnover, to support businesses, a quarter of all UK businesses had applied to the scheme, and 11 per cent of loans worth £4.9 billion have been estimated to be fraudulent (National Audit Office, 2021). Beyond these new types of informality and fraud related to the short-term financial support schemes, there have also emerged new violations of labour rights not recognised and protected by legislation prior to the pandemic. An example is employers’ responsibilities and workers’ rights in relation to remote working (Williams, 2021b,c). There has been also the growth of new business models during the pandemic. With the expansion of mobile food service activities and home delivery, new forms of provision and business models have come to the fore where informal employment is likely to be prominent. An example is the growth of “dark kitchens”, sometimes termed “virtual restaurants” and “cloud” or “ghost” kitchens. These produce meals solely for delivery via an online ordering system. They often avoid regulations applying to restaurants and takeaways, and major concerns have been expressed about the working conditions of the kitchen staff as well as delivery workers (Williams and Horodnic, 2020a). In sum, the lockdown and pandemic resulted in the reduction of economic activity not only in the formal economy but also in the informal economy. This involved the temporary contraction of “traditional” forms of informality, including unregistered enterprises, registered enterprises conducting a portion of their work in the informal economy, bogus self-employment, quasi-formal

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employment, unregistered employment, informal self-employment, and paid favours. However, the lockdown has also resulted in the emergence of new forms of informality associated with the short-term financial support schemes put in place for businesses and workers, largely involving various types of “bogus declaration of the suspension of work”, and the emergence of new violations of workers’ rights (e.g., remote working) and new business models (e.g., dark kitchens) that need to be recognised and addressed.

CONCLUSIONS Given that most of the global workforce have their main employment in the informal economy, informal work cannot be treated as an unvarying and uniform singularity. Instead, the heterogeneous components of the informal economy must be unpacked. This chapter has reviewed the different types of work in the informal economy. Based on economic units, first, unregistered enterprises have been examined and, second, participation in the informal economy by registered formal enterprises. This has revealed the growth of a burgeoning body of knowledge on unregistered enterprises and their prevalence, and on participation in the informal economy by registered formal enterprises. This chapter has revealed the recent adoption of a “degrees of informalisation” approach and mapped the evidence on the prevalence of enterprises displaying different degrees of informalisation. Turning to employment relationships, the chapter has displayed that a continuum of employment relationships from more formal to more informal is similarly applicable. At the more formal end of informal relationships can be found bogus self-employment and quasi-formal employment, with the spectrum then moving through unregistered employment and informal self-employment before reaching paid favours at the more informal end. For each employment relationship, knowledge on its prevalence has been documented. However, these are all two-way relationships between an employer and worker. Reflecting the recognition that employment relationships can be three-way relationships between an employer, worker, and an intermediary, two types of triangular relationship are discussed in which informal work exists. First, informal work in the collaborative economy has been discussed and, second, the heterogeneity of informal relationships in agency work. Again, what is known about their prevalence has been outlined. Finally, given that the recent pandemic has had a significant impact on the informal economy across the world, this chapter has discussed how the resultant lockdown has led to a reduction in work not only in the formal economy but also in the informal economy. This has involved the temporary contraction of “traditional” forms of informality, including unregistered enterprises, registered enterprises conducting a portion of their work in the informal economy,

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bogus self-employment, quasi-formal employment, unregistered employment, self-employment, and paid favours. However, the lockdown has also resulted in the emergence of new forms of informality associated with the short-term financial support schemes put in place for businesses and workers, largely involving various types of “bogus declaration of the suspension of work”, and the emergence of new violations of workers’ rights (e.g., remote working) and new business models (e.g., dark kitchens) that need to be recognised and addressed. The outcome is a comprehensive review of the different types of informal work in the contemporary world. Given this, attention now turns to who engages in each of these types of informal work and what their motives are for doing so.

6. Who participates in the different types of informal work and why? Who engages in the various kinds of informal work? Why do participants engage in each type of informal work? This chapter answers these questions. Until now, most scholarship on who works in the informal economy and their reasons for doing so has examined the informal economy as a single uniform entity. However, as Chapter 5 revealed, an array of heterogeneous types of informal work exists. Therefore, it is necessary to analyse who works in the informal economy and why in relation to each type of informal work. This is because those running registered enterprises operating in the informal economy and their reasons for doing so will be quite different from, for example, those engaging in paid favours. So too will those operating unregistered enterprises and their rationales differ starkly from those engaging in quasi-formal employment. In consequence, each type of work in the informal economy is taken in turn to examine, first, who participates in such work and, second, their motives. Nevertheless, throughout this chapter, two common conceptualisations will be evaluated. On the one hand, in relation to who engages in each type of informal work, the widely held marginalisation thesis will be evaluated, which holds that it is groups marginalised from the formal labour market. On the other hand, in relation to their rationales, whether participation is due to their exclusion from the formal economy, or whether at least some workers participate due to their desire to exit the formal economy, will be evaluated. Besides evaluating the characteristics and rationales of those supplying each type of informal work, the characteristics and motives of those purchasing goods and services in the informal economy will be analysed. To commence, the next section evaluates who engages in each type of informal work. This will examine in turn the characteristics of those engaged in unregistered enterprises, registered enterprises operating in the informal economy, bogus self-employment, quasi-formal employment, unregistered employment, informal self-employment, paid favours, and informal work via triangular relationships. In each case, the marginalisation thesis will be evaluated. Following this, the second section reviews the motives of those engaged in each type of informal work. In each case, whether these participants are exclusion- or exit-driven into each type of informal work will be evaluated. 128

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Having reviewed those supplying each type of informal work, the third section turns to the demand side and who purchases goods and services from the informal economy, again evaluating the marginalisation thesis. The fifth section then evaluates the reasons for purchasing goods and services from the informal economy, again evaluating whether it is purely those seeking a lower price, or whether other rationales prevail. The fifth and final section then draws some conclusions.

WHO PARTICIPATES IN THE INFORMAL ECONOMY? It is now recognised that the informal economy does not exist in the margins but is the mainstream, with 61.2 per cent of global workers having their main job in the informal economy (ILO, 2018a). Despite this, the principal and persistent view has been that work in the informal economy is disproportionately conducted by marginalised populations. This is witnessed in claims that the informal economy is more prevalent in deprived global regions (ILO, 2018a), less developed nations (Schneider, 2013; Schneider and Williams, 2013; Williams, 2015e), poorer localities and neighbourhoods (Kesteloot and Meert, 1999; Williams and Windebank, 2001b), and rural rather than urban areas (Button, 1984). It is also witnessed in claims that the informal economy is more likely to be undertaken by unemployed people (Brill, 2011; Castells and Portes, 1989; Leonard, 1994; Slavnic, 2010; Taiwo, 2013; Williams and Nadin, 2014b), women rather than men (ILO, 2018a; Leonard, 1994, 1998; Stănculescu, 2005), those with greater financial difficulties (Barbour and Llanes, 2013; Katungi et al., 2006; Williams, 2004a), and even offenders (Nguyen et al., 2022). This marginalisation thesis is frequently more of an assumption than an evidence-based finding. Indeed, it has been increasingly put under a critical spotlight. As Deléchat and Medina (2021: 1) state, “not all informal workers are poor, and not all poor workers are in the informal sector”. Indeed, studies have claimed that informal work is more prevalent and higher paid in affluent regions and localities (Evans et al., 2006; van Geuns et al., 1987; Williams, 2004a; Williams and Windebank, 2001b), among those in formal employment (Gasparėnienė et al., 2022; MacDonald, 1994; Pahl, 1984), among men (Lemieux et al., 1994; McInnis-Dittrich, 1995), and among those without financial difficulties (Williams, 2004a). The result has been a competing “reinforcement” thesis claiming that the informal economy reinforces, rather than reduces, the inequalities produced by the formal economy (Kaitedliou et al., 2013; Moldovan and Van de Walle, 2013; Pfau-Effinger and Sakač Magdalenić, 2009). Exemplifying this is the conceptualisation of a two-tier informal labour market in which there is a lower tier of necessity-driven informal workers from marginalised population groups and an upper tier of

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informal workers engaging more out of choice and less likely to be from marginalised population groups (Fields, 1990, 2005). In this section, given the heterogeneity of work in the informal economy, who engages in each of the diverse types of work in the informal economy is evaluated. In each case the validity of the marginalisation thesis will be assessed. Distribution of Unregistered Enterprise Most commentaries on who operates unregistered enterprises reflect the classic marginalisation thesis. They assert that unregistered enterprises prevail more in marginalised populations, such as less developed global regions (ILO, 2018a) and deprived localities (Williams, 2010b; Williams and Round, 2010). Similarly, marginalised population groups are claimed to prevail more among those operating unregistered enterprises. Scholars also state that those operating unregistered enterprises are relatively younger and relatively older entrepreneurs (Adom and Williams, 2014; Akorsu and Akorsu, 2009; Asian Development Bank, 2010; Federal Board of Revenue of Pakistan, 2008; Gennari, 2004; Fortin et al., 1996; Pedersen, 2003; Williams and Martinez-Perez, 2014a), engaging due to the lack of livelihoods in the formal economy for younger age groups and means of social support for older age groups. Likewise, as the level of educational attainment of entrepreneurs decreases, non-registration is claimed to increase. This is contended both in developed nations (Copisarow, 2004; Copisarow and Barbour, 2004) and in developing countries (Arby, 2010; Burqi and Afaqi, 1996; Burki and Khan, 1990; Khan, 1983). Women entrepreneurs are also said to be more likely to start up ventures unregistered and to continue operating unregistered than men. This is asserted, for instance, in Brazil (Williams and Youssef, 2013), India (Williams and Gurtoo, 2011a,b), England (Williams, 2009h), Ukraine (Williams, 2009i), Russia (Williams and Round, 2008d, 2009b), and Pakistan (Agarwala, 2009; Kemal and Mahmood, 1998; Mumtaz and Saleem, 2010). Those operating unregistered enterprises are also claimed to be more likely to come from lower-income populations (Ahmad, 2008; Akorsu and Akorsu, 2009; Barbour and Llanes, 2013; Katungi et al., 2006), although this depends on the social protection available in a country (Williams, 2017a). Williams (2009j) identifies that in the lowest quartile of households in terms of gross household income, one finds clustered 34 per cent of those operating unregistered enterprises in England, 35 per cent in Ukraine, and 30 per cent in Russia. In contrast, in support of the reinforcement thesis, others find that unregistered enterprises are not always more prevalent in marginalised populations (Williams and Horodnic, 2016d). For example, analysing global regional variations, Autio and Fu (2015) find that two-thirds of all enterprises are

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unregistered at start-up in not only emerging and transition economies but also Organisation for Economic Co-operation and Development (OECD) countries. Williams and Martinez-Perez (2014a) find that regional variations across the UK in the propensity to start up enterprises unregistered are not significant. Turning to population groups, studies reveal that individuals with lower levels of formal education and training are not more likely to operate unregistered enterprises (Arby, 2010; Barsoum, 2015; Burki and Khan, 1990; Burqi and Afaqi, 1996; Khan, 1983; Gurtoo and Williams, 2009). As Kemal and Mahmood (1998) find in 11 Pakistan cities, those operating unregistered enterprises are better educated than formal workers. Similarly, on gender, a study of English localities reveals that women are more likely to start up unregistered while men are more likely to register but operate partially in the informal economy (Williams, 2009h). A further UK study finds that one in six men entrepreneurs started up unregistered but just one in 14 women entrepreneurs (Williams and Martinez-Perez, 2014b). Others reveal that even if lower-income groups disproportionately operate unregistered enterprises, their income is lower, meaning that informal entrepreneurship reinforces, rather than reduces, the inequalities produced by the formal economy (Barbour and Llanes, 2013; Katungi et al., 2006), resulting in a “reinforced marginalisation” of their position (Williams and Horodnic, 2017d). Nevertheless, this in part will depend on the level of social protection available to lower-income populations. One interesting finding, not necessarily apparent when synthesising the findings across different studies, is that most individual studies seldom find clearcut support for either the marginalisation or the reinforcement thesis. Take, for example, a study of entrepreneurs operating unregistered enterprises in Kosovo. Williams and Gashi (2021) find only partial confirmation that these entrepreneurs belong to marginalised groups. Some of the characteristics of marginalised groups are significantly associated with entrepreneurs operating unregistered enterprises (e.g., lower education level, lower household income, rurality) but others are not (e.g., age, gender, ethnicity). Similar findings are identified in most of the individual studies cited above. Moreover, not all characteristics related to the distribution of unregistered enterprises are associated with the marginalisation and reinforcement theses. For example, the older the enterprise, the higher the likelihood it is formal (Thai and Turkina, 2014; Williams and Martinez-Perez, 2014a; Williams et al., 2017a). Unregistered enterprises are also unevenly distributed across sectors, with their prevalence greater in the retail, distribution, and construction sectors, and lower in others such as manufacturing (Adom, 2014; Asian Development Bank, 2010; Gurtoo and Williams, 2009; ILO, 2018a; Williams et al., 2017a).

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Distribution of Registered Enterprise Engaging in the Informal Economy A simplistic, albeit partial, way of analysing which formal enterprises participate in the informal economy is to examine those that subcontract to the informal economy. Goel and Rehman (2020) examine garment exporters in Pakistan and find that sole proprietors and older entrepreneurs are significantly more likely to subcontract to the informal economy. Meanwhile, older formal enterprises are significantly less likely to do so. The effects of the educational level of the entrepreneur, size of the business, input costs, societal economic prosperity, economic freedom, and government stability are insignificant. However, this study only examines the use of the informal economy in the supply chains of formal enterprises, not the myriad of other ways in which formal enterprises participate in the informal economy. A more comprehensive means of analysing which formal enterprises participate in the informal economy is to examine the characteristics of enterprises and entrepreneurs at varying levels of informality. For example, in a study of eight cities in seven African countries, namely Niger, Mali, Cameroon, Gabon, Benin, Senegal, and Burkina Faso, Mbaye and Tall (2019) apply seven criteria of informality to firms in the region: size (has fewer than five employees), registration (is not registered with any public authority), taxation (is not taxed on an actual-revenue basis), reliable accounting (does not maintain regular accurate accounts), mobility of the workplace (does not operate from a fixed place), access to bank loans (has not received a bank loan or microfinance), and social security coverage of employees (employees do not have social security). They find that the characteristics of the enterprises vary based on their degree of informality. More informal enterprises are younger and managed by younger people and those with lower levels of education. Women are more present in smaller, more informal enterprises. They also find that the more informal the enterprise, the lower is its productivity. In a similar fashion, a 2012 study of 300 micro-enterprises operating in the retail, manufacturing, and instant consumable food (ICF) sectors in the city of Lahore in Pakistan finds that lower degrees of informality are significantly associated with women; older, more educated, and higher-income entrepreneurs; and older enterprises with employees in the manufacturing sector (Williams and Shahid, 2016). Meanwhile, a multivariate regression analysis of data collected in 2017 from 500 retail micro-enterprises in the city of Lahore in Pakistan finds that younger entrepreneurs aged 25 to 34 years old are significantly less likely to operate at higher levels of informality and entrepreneurs with higher levels of education (college or university) have higher levels of formalisation. With regard to firm characteristics, enterprises with six to ten employees are significantly less likely to operate at higher levels of informality than smaller enterprises. When an entrepreneur perceives a substantial per-

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centage of businesses to be operating informally, and therefore there is a lack of horizontal trust, there is a significantly greater likelihood of a higher level of informality. The perceived risk of detection significantly increases the odds of a higher level of formality, as does the possibility of a heavy fine. Finally, a perceived lack of redistributive justice significantly increases the odds of informality (Shahid et al., 2020). In Ghana, a similar 2016 survey of the degree of informalisation of enterprises and entrepreneurs reveals that higher levels of informalisation are significantly associated with younger entrepreneurs, those with lower levels of educational attainment, lower household incomes, and younger enterprises. It is also significantly correlated with the compliance environment. Higher levels of informality exist among entrepreneurs who are unaware of the requirement for registration, lack vertical trust in government, view informality as normal in their peer group, and perceive similar businesses as operating informally and thus lack horizontal trust (Williams et al., 2020a). In sum, the evidence available so far, albeit in only a few countries, reveals only partial support for the marginalisation thesis in relation to the level of informality, in that some marginalised population groups who are entrepreneurs are more likely to display a greater degree of informality. From the limited evidence currently available, this is valid in relation to younger entrepreneurs, those with lower levels of educational attainment, and those with lower household incomes. Importantly, these studies also reveal that those who display greater levels of informality have lower levels of vertical and horizontal trust than those displaying greater degrees of formality. Distribution of Bogus Self-Employment Examining claims about the distribution of bogus self-employment, the marginalisation thesis receives clear expression. Bogus self-employment is widely depicted as conducted by marginalised population groups excluded from full-time permanent dependent employment. Is it the case, however, that it is solely such marginalised population groups who engage in it? Reviewing who engages in bogus self-employment and the organisations and occupations involved, using the 2015 European Working Conditions Survey (EWCS), regression models used by Williams and Horodnic (2018a) and Williams and Lapeyre (2017) reveal that the likelihood of participation in bogus self-employment is not significantly associated with some marginalised population characteristics when bogus self-employment is compared with genuine self-employment, namely gender, years in education, and whether they find it difficult to make ends meet. However, younger age groups are more likely to be bogus self-employed, as are those who were not born in the country in which they reside and are working, or whose parents were not born

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in that country. Analysing its distribution across sectors and occupations, the finding is that the self-employed in manufacturing, construction, wholesale, retail trade, repair of motors, accommodation, and food service activities, and those in professional, scientific, and administrative occupations, are significantly less likely to be bogus self-employed than those in agriculture, forestry, and fishing (Williams and Horodnic, 2018c; Williams and Lapeyre, 2017). Williams and Horodnic (2021a) reinforce these findings in their analysis of 2019 Eurobarometer survey data. Bogus self-employment is significantly more likely among the younger self-employed and those who most of the time have difficulties in paying the bills. Those who have difficulties most of the time in paying the bills constitute 5 per cent of the surveyed self-employed but 11 per cent of those engaging in bogus self-employment. However, the propensity to engage in bogus self-employment is not significantly associated with gender, age, educational level, whether the worker’s parents were born in the country, or the size of the household in which the worker lives. Interestingly, bogus self-employment is found not to be confined to low-skilled manual workers. The highest prevalence of bogus self-employment is found among professionals (e.g., lawyers, doctors, accountants). One in five (19.9 per cent) of self-employed professionals are bogus self-employed. High percentages can be also observed in agriculture, where more than one in ten self-employed farmers and fishing workers are bogus self-employed. Examining further the occupational, organisational, and sectoral characteristics of bogus self-employment, Williams and Horodnic (2019a), using the 2015 EWCS, identify five key findings. First, workers in enterprises with employees are significantly less likely to be bogus self-employed than sole traders. Second, those in workplaces where men are more likely to have the same job title as them are significantly more likely to be bogus self-employed than workers in workplaces where women are more likely to have the same job title as them, but workers are less likely to be bogus self-employed in workplaces where men and women are equally likely to have the same job title as them. Third, public sector workers are significantly less likely to be bogus self-employed than private sector workers. Fourth, professionals and skilled agricultural, forestry, and fishing workers are significantly more likely to be bogus self-employed, and clerical support workers are significantly less likely to be bogus self-employed. Fifth and finally, those employed in the agricultural, forestry, and fishing sector are significantly more likely to engage in bogus self-employment than workers in all other sectors. Until now, less evidence has been collected on this issue in developing countries. This is a marked gap in the literature that will need to be filled in future studies.

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Distribution of Quasi-Formal Employment Examining who engages in quasi-formal employment, and whether it is marginalised population groups, the 2007 and 2013 Eurobarometer surveys identify that across the European Union (EU), younger employees, men, unskilled manual workers, and those who have difficulties paying the bills most of the time are significantly more likely to engage in quasi-formal employment, and that smaller businesses more commonly use this wage practice (Williams and Padmore, 2013a,b; Williams and Horodnic, 2017a). Therefore, quasi-formal employment is more prevalent among marginalised populations experiencing poorer access to the formal labour market. Smaller businesses are also more likely to pay “envelope” wages, due to a lack of human resource management (HRM) personnel and the absence of formal HRM procedures within the business (Barrett and Mayson, 2007), which creates an environment conducive to implementing verbal agreements that infringe upon or supplant formal written employee agreements. In a multi-level regression analysis of data from the 2019 Eurobarometer survey, Williams and Horodnic (2021a) again find that the likelihood of engaging in quasi-formal employment is significantly greater among men, younger age groups, and those having difficulties most of the time in paying the bills. They also find that it significantly greater among those who have worked in another EU country, or both an EU and non-EU country, than it is among those who have only worked in their country of origin. Employees are also significantly more likely to engage in quasi-formal employment in small or medium-sized towns and larger urban areas than in rural areas and villages, and if they work in micro-businesses employing between one and nine employees. Although quasi-formal employment exists across all sizes of firm, 6.1 per cent of formal employees in micro-businesses (with fewer than nine employees) receive envelope wages compared with less than 1 per cent of formal employees in large businesses with 500+ employees. Indeed, 49 per cent of employees surveyed work in businesses employing fewer than 50 employees, but 70 per cent of all employees receiving envelope wages. Quasi-formal employment, therefore, is a small-firm problem. However, it is not absent in larger firms. For example, 23 per cent of all formal employees receiving envelope wages are in firms with more than 50 employees. Analysing the country-level variations, studies of the 2007 and 2013 Eurobarometer surveys reveal that countries where there is greater alignment between the formal and informal institutions, measured in terms of tax morale, have a lower prevalence of quasi-formal employment (Franić, 2017, 2019a; Williams and Horodnic, 2017a). This is further reinforced in the 2019 Eurobarometer survey, where the prevalence of quasi-formal employment is significantly associated with not only vertical but also horizontal trust.

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Examining the formal institutional failings that lead to this, Williams and Horodnic (2021a) identify that quasi-formal employment in 2019 is more prevalent in countries with lower levels of economic development, less modernised state bureaucracies, lower tax levels, and lower levels of expenditure on social protection. Distribution of Unregistered Employment The distribution of unregistered employment is analysed in a limited number of studies. Williams and Kayaoglu (2017) find no significant association between the likelihood of participation in unregistered employment and gender, age, educational level, and occupational status, although Hazans (2011) finds that unregistered employment is more likely among those with fewer years in education, students, and women, and that older and younger employees are more likely to work unregistered. Examining the 2010 Life in Transition Survey (LiTS) in 35 Eurasian countries, Krasniqi and Williams (2017) find that younger age groups, the divorced, and those with fewer years in education are more likely to be in unregistered employment. In a 2017 national representative survey of 8533 households in Kosovo, Gashi and Williams (2019) reveal that 34.6 per cent of all employees engage in unregistered employment, and in a probit regression analysis that unregistered employment is significantly more prevalent among men, younger people, single people, and the widowed or divorced; those with fewer years in education, living in rural areas, and in larger households; those working in construction and services; those who are part-time employees; those with shorter employment duration, and lower wages; and those in elementary occupations and craft and related trades. In Russia, Biryukova et al. (2022), using data from the Russian Longitudinal Monitoring Survey for 2000–20, again find that unregistered employment is more common among men, young people, and people of early working age, as well as among citizens with education below vocational secondary level. In the service sector in Europe, Williams and Horodnic (2018b) find that unregistered employment is more prevalent among women, younger people, those with fewer years in education, migrants, those living in households unable to make ends meet, those working in smaller businesses, and those in the hospitality and household service sectors. Indeed, they reveal that although 5 per cent of employees in the EU overall are in unregistered employment, this rises to 52 per cent of employees in household services, 32 per cent in agriculture, 16 per cent in arts, entertainment, and recreation, and 14 per cent in accommodation and food services. Analysing the characteristics of the unregistered employed using the 2015 EWCS, Williams and Horodnic (2019a) find that those engaged in unregistered

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employment are again significantly more likely to be younger, to have solely a primary education, to live in single person households, to have difficulty making ends meet, and to not be the main contributor to the household income. Examining the occupational, business, and sector characteristics, they are significantly more likely to be employed in workplaces where men are more likely to have them same job title as them, and to be employed in agriculture, forestry, and fishing, and craft and related trades. Unregistered employment is also significantly more likely to be found in the household services sector, and compared with managers, is more likely to be found among services workers and sales workers, and those in elementary occupations. Reporting evidence from the 2019 Eurobarometer survey, Williams (2022a) reveals that tax morale is lower among those participating in unregistered employment than those not doing so, both in Europe as whole and in all European regions (except Southern Europe). They also have a much lower level of horizontal trust than those not engaging in unregistered employment (again except in Southern Europe). Those over-represented are men, single people, multiple adult households, those with no children, those living in a rural area or village, and those who most of the time have difficulties paying the household bills. In sum, the evidence available reveals some support for the marginalisation thesis in that it is marginalised population groups who are significantly more likely to engage in unregistered employment. Distribution of Informal Self-Employment The marginalisation thesis often prevails in narratives regarding the distribution of informal self-employment. The view is that the informal self-employed are likely to reside not only in poorer regions of the global economy (ILO, 2018a) but also in poorer regions, localities, and neighbourhoods of countries (Brill, 2011; Dellot, 2012; Barbour and Llanes, 2013; Kolm and Larsen, 2016). There is also a view that informal self-employment is more common in rural areas (Reimer and Bollman, 2009). However, other studies argue that this is relevant only for necessity-driven informal self-employment and that opportunity-driven informal self-employment is more prevalent in urban areas (Williams, 2011a). Yet other studies do not confirm any significant association between urban/rural location and participation in informal self-employment (Williams and Horodnic, 2015g, 2021a). It is also commonly viewed as engaged in by marginalised groups. Temkin (2009) asserts that the informal self-employed are likely to have fewer years in education and live in households with greater financial difficulties. However, other literature contradicts this. For example, Mussurov and Arabsheibani (2015) find that half the informal self-employed they surveyed have secondary

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education, one-third technical/incomplete higher education, and 11–17 per cent higher education. Williams and Horodnic (2015g) reveal that the informal self-employed who engage for opportunity reasons tend to have fewer financial difficulties and belong to more affluent population groups compared with exclusion-driven informal self-employed. Williams and Bezeredi (2018a) find that a substantial proportion of exit-driven informal self-employed were in formal employment prior to engaging in informal self-employment and had no financial difficulties. Another marginalised socio-economic characteristic sometimes associated with informal self-employment is ethnicity, with ethnic minorities often associated with being more likely to engage in informal self-employment. Shahid et al. (2019) identifies this in a study of informal work in a Pakistani ethnic minority community in the city of Sheffield in the UK. It is also identified by Mussurov and Arabsheibani (2015), whose research on informal self-employment in Kazakhstan reveals a declining number of Kazakhs and rising number of ethnic minorities participating in informal self-employment. Williams and Oz-Yalaman (2021a) examine 2019 Eurobarometer data and find that one in 49 European citizens engage in informal self-employment and that such informal self-employment is significantly more likely among men than women, and among younger age groups. There is no significant correlation between marital status and participation. However, single person households are significantly more likely than multiple adult households to participate in informal self-employment. Those with difficulties paying the bills most of the time and those in rural areas are significantly more likely to engage in informal self-employment than those less commonly having financial difficulties and living in larger towns. In sum, the evidence is that among marginalised populations informal self-employment is less concentrated than other forms of informal work. To fully understand this, it is necessary to differentiate between the motives of marginalised groups where informal self-employment is often necessity-driven, and others who more voluntarily engage in informal self-employment and are less often from marginalised population groups. Distribution of Paid Favours The research on who engages in paid favours for close social relations is limited. Given the community-oriented nature of such exchange it might be perceived as being women rather than men who are more likely to do so. As Windebank and Williams (2010: 94) assert, “women’s informal work … is significantly more likely to be conducted for friends, neighbours, and kin for rationales other than financial gain or, put another way, embedded in the moral

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economy of favours”. It might also be seen as conducted by lower-income populations who cannot afford formal goods and services. One of the few studies of who engages in paid favours examines the 2019 Eurobarometer survey. The descriptive statistics reveal that men are more likely than women to engage in paid favours, as are older age groups, single people, single person households, the unemployed, those living in rural areas and smaller towns and villages, and those in Western Europe rather than other European regions. The regression analysis reveals that those undertaking paid favours display no significant variations by socio-demographic and socio-economic status except that they are more likely to live in Western Europe and the Nordic nations than in East-Central Europe, and those in Southern Europe are less likely than those in East-Central Europe to conduct paid favours (Williams and Oz-Yalaman, 2021a). In sum, the little research conducted suggests that some marginalised populations are more likely to engage in paid favours, but this is not a statistically significant association when other variables are included and held constant. Given the limited research on this issue, future studies could focus upon this, especially in other global regions beyond Europe. Distribution of Informal Work via Collaborative Platforms To analyse which socio-demographic groups are more likely to use collaborative platforms when engaging in the informal economy, Williams and Horodnic (2021a), in a European context, examine how the use of collaborative platforms for arranging informal work varies by gender, age, financial status, type of community, employment status, and working experience (within or beyond the country of origin). The descriptive finding is that men who engage in informal work use collaborative platforms more commonly for arranging their informal work than do women who participate in the informal economy. Indeed, 12.5 per cent of men engaging in the informal economy use such platforms for arranging their informal work (compared with 8.8 per cent of women) and they represent 59 per cent of those engaged in informal work but 67 per cent of those using collaborative platforms for arranging their informal work. Turning to age groups, it is not younger age groups who more commonly use collaborative platforms for sourcing their informal work, as might be assumed in the marginalisation thesis. Rather, it is those aged 25–54 years old (15.7 per cent of those aged 25–39 and 14.4 per cent of those aged 40–54). Collaborative platforms are also used more often by those who never or almost never face difficulties in paying the household bills (12.8 per cent of those engaged in informal work in such households use these platforms). Indeed, they represent 63 per cent of those using collaborative platforms for

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arranging their informal work. Those living in urban areas who engage in informal work use collaborative platforms more commonly than those living in a rural area or village (12.9 per cent of those from small and middle-sized towns, 10.5 per cent of those from large towns, and 8.5 per cent of those from rural areas or villages). Indeed, those living in urban areas represent 68 per cent of those conducting informal work but 75 per cent of those using collaborative platforms for arranging their informal work. Assessing the relationship between the prevalence of informal work sourced via collaborative platforms and experiences in working abroad, the finding is that those who have working experience in other countries use collaborative platforms more to source informal work than those who have only worked in their country of origin. However, the share of the respondents having experience in working beyond their country of origin is small in this survey and therefore the results should be interpreted cautiously. Indeed, 73 per cent of the informal work arranged via collaborative platforms is conducted by those who have only worked in their country of origin. Examining the variation by employment status, the finding is that 15.6 per cent of those engaged in informal work who are formal employees, 10.1 per cent of the self-employed, and 6.8 per cent of those not working, use collaborative platforms for arranging their informal work. Therefore, those engaged in informal work who are employees use these platforms to a greater extent. Although they constitute 43 per cent of all informal workers, they represent 61 per cent of the informal workers using collaborative platforms for arranging their informal work. Due to the small number of respondents both engaged in informal work and using collaborative platforms for arranging their informal work, caution is required regarding these results. However, the study gives a first sight of who uses collaborative platforms to arrange their informal work. Future research could conduct more in-depth analysis by global region, country, industry, and/ or occupation to explore this issue in greater detail, especially given that informal work is likely to be more commonly sourced via digital platforms now and in the future than in the past.

WHY DO PARTICIPANTS OPERATE IN THE INFORMAL ECONOMY? Until now, most scholarship examining the reasons for engaging in the informal economy has used single universal logics. Political economy scholars explain participation in the informal economy as being due to these workers’ exclusion from formal work and welfare (Castells and Portes, 1989; Davis, 2006; Gallin, 2001), neo-liberals explain participation as a voluntarily chosen rational economic decision (De Soto, 1989, 2001; Perry and Maloney, 2007),

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and neo-institutional scholars explain those engaged in the informal economy as being social actors who disagree with the formal rules (Godfrey, 2011; Webb et al., 2009). An important starting point here is that these theories often focus upon different employment relationships when propagating these explanations. For example, political economy scholars depict informal workers as largely dependent employees or bogus self-employed, while neo-liberal and institutional theorists view informal workers as micro-entrepreneurs and own-account workers. As such, there is a need to evaluate the motives for engaging in the informal economy for each of the diverse types of informal work. A second important starting point is that over the past few decades there has been growing recognition that single universal logics are necessary but insufficient for explaining participation in the informal economy. As Perry and Maloney (2007: 2) state when contrasting political economy and neo-liberal explanations, “These two lenses, focusing, respectively, on informality driven by exclusion from state benefits and on voluntary exit decisions resulting from private cost-benefit calculations, are complementary rather than competing analytical frameworks.” Until now, the evidence base supporting this more integrative explanatory approach has pursued several dimensions. For example, it has been asserted that exclusion-driven explanations are more applicable in the developing economies and exit-driven explanations in the developed economies (ILO, 2018a; Williams and Lansky, 2013), and that exclusion-driven explanations are more applicable to marginalised socio-demographic, socio-economic, and spatial populations, and exit-driven explanations to less marginalised populations (Williams and Horodnic, 2017e). Evidence has also revealed that the informal economy is a two-tier labour market composed of “core” exit-driven and “peripheral” exclusion-driven workers (Williams and Windebank, 1998), or what Fields (1990, 2005) terms an “upper tier” of exit-driven and “lower tier” of exclusion-driven workers. This has been shown in numerous studies (Duman, 2020; Grimm et al., 2011; Lozano, 1989; Williams and Bezeredi, 2018d; Williams and Kayaoglu, 2021; Williams et al., 2017c). Quantifying the proportion who are exclusion-driven and the proportion who are exit-driven, Lozano (1989) finds in a study of 50 dealers at flea markets in Northern California that one-fifth had voluntarily become traders while 80 per cent were involuntary traders who either had lost their formal job; had inadequate income from employment, pensions, or welfare payments to cover their normal living expenses and indebtedness; or had been unable to find work in the formal economy. A more extensive study reporting the 2013 Eurobarometer survey finds that 24 per cent of all informal workers are purely exclusion-driven, 45 per cent purely exit-driven, and 31 per cent display mixed reasons (Williams et al., 2017c). Using logistic regression analysis,

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exclusion-driven motives were significantly more likely to be stated by the unemployed and those living in East-Central Europe while exit-driven explanations were significantly more likely from those with few financial difficulties and living in Nordic nations. Meanwhile, a 2015 survey based on 6109 face-to-face interviews in three South-East European countries (Bulgaria, Croatia, and North Macedonia) finds that 17 per cent of informal workers are purely exclusion-driven, 54 per cent purely exit-driven, 27 per cent display a mixture of both exclusion- and exit-driven rationales, and 2 per cent did not answer. Comparing the purely exit-driven with the exclusion-driven, the former are found to be significantly more likely to be formally employed, retired, and not struggling financially (Williams and Bezeredi, 2018d). Examining the 2019 Eurobarometer survey, Williams and Oz-Yalaman (2021a) find that 9 per cent of European informal workers are purely exclusion-driven and 65 per cent purely exit-driven (with slightly more explaining this purely as a rational economic decision rather than purely being due to their disagreement with the formal rules), with the remaining 26 per cent reporting a mixture of exit- and exclusion-driven motives. A probit regression analysis reveals that the purely exclusion-driven are significantly more likely to be younger, single, without full-time education or still studying, unemployed, and living in East-Central Europe, while the purely exit-driven are more likely to be older, self-employed, and living in Nordic and West European countries, and to seldomly have difficulties paying the bills. Finally, those expressing a mixture of exclusion- and exit-driven motives are more likely to be younger people aged 15–24 years old, house persons, unemployed, and living in East-Central Europe, and to have difficulties paying the bills most of the time. They therefore have many similar characteristics to the purely exclusion-driven, perhaps because their exclusion from the formal economy leads them to view their informality also as a rational economic decision and to disagree with the formal rules. Williams and Kayaoglu (2021), examining informal workers in the service sector in Europe, find that for every purely exclusion-driven participant, there are 6.7 participants that are purely exit-driven. Those in the voluntary exit-driven tier are more likely to be older, to be in self-employment, to have been in full-time education longer, and to live in Western Europe and Nordic nations. Given this growing evidence that for the informal economy as a unified whole there is a two-tier informal labour market composed of an exit-driven upper tier and exclusion-driven lower tier, each form of informal work is considered here in turn to analyse whether there is discussion of a primary exit-driven segment and secondary exclusion-driven segment, along with whether there is a discussion that some pursue both sets of motives concurrently.

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Motives for Operating Unregistered Enterprises An extensive literature has examined the motives of entrepreneurs starting up unregistered ventures and/or continuing to operate on an unregistered basis both in the global South (Afreh et al., 2019; Coletto and Bisschop, 2017; Cross, 2000; De Castro et al., 2014; Fajnzylber et al., 2009; Franck, 2012; Gurtoo and Williams, 2009; Ilyas et al., 2020; Khan and Quaddus, 2015; Kistruck et al., 2015; La Porta and Shleifer, 2008; London et al., 2014; McKenzie and Woodruff, 2016; Omri, 2020; Sutter et al., 2017; Williams and Gurtoo, 2012, 2017) and in the global North (Barbour and Llanes, 2013; Small Business Council, 2004; Webb et al., 2009, 2013, 2014; Williams, 2006a, 2017a, 2021d). Most of this scholarship has viewed unregistered enterprises as operated by necessity-driven entrepreneurs involuntarily excluded from the formal economy who engage in this endeavour as a last resort in the absence of alternative means of livelihood (ILO, 2018a). However, others assert that unregistered enterprises are operated by entrepreneurs who voluntarily do so to escape the costs of formality (Berdiev and Saunoris, 2018, 2020; De Soto, 1989, 2001; Small Business Council, 2004). Nevertheless, the growing recognition is that if the motives for unregistered enterprise and entrepreneurship are to be more fully understood, it is necessary to move beyond single universal logics. Studies in advanced and transition economies have evaluated the ratio of necessity to opportunity entrepreneurs operating unregistered enterprises in different contexts, such as in England (Williams, 2006a,c, 2007b,d, 2008c, 2009c), Ukraine (Williams, 2009c; Williams and Round, 2007b; Williams et al., 2006, 2010), and Russia (Williams, 2009c; Williams and Round, 2010). These reveal greater proportions of necessity-driven unregistered enterprise in deprived populations and opportunity-driven unregistered enterprise in more affluent populations. In the global South, meanwhile, studies conducted for example in Latin America (Perry et al., 2007), Ghana (Adom and Williams, 2012), India (Williams and Gurtoo, 2011c, 2012), and Brazil (Williams and Youssef, 2015) reveal the ratio of necessity to opportunity motives. Although they find a greater prevalence of necessity-driven motives in unregistered enterprises, they recognise the existence of opportunity-drivers in the rationales of unregistered entrepreneurs. The outcome is that the view of unregistered enterprises as universally necessity-driven has been questioned. Moreover, some studies have also found that necessity and opportunity drivers can be co-present in the rationales for enterprises and entrepreneurs operating unregistered (e.g., Williams, 2008c; Williams and Gashi, 2019). For example, in Kosovo, Williams and Gashi (2021) find that just 14 per cent of entrepreneurs operating unregistered do so purely out of economic necessity, 47 per cent willingly, and 39 per cent for a combination of necessity

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and choice rationales. Interestingly, although 43 per cent of all entrepreneurs are unregistered, 58 per cent of necessity-driven entrepreneurs are unregistered, displaying that necessity-driven rationales are more likely among unregistered entrepreneurs. Indeed, 14 per cent of unregistered entrepreneurs are necessity-driven but only 8 per cent of registered entrepreneurs. On the contrary, opportunity-driven entrepreneurs are more likely to be registered entrepreneurs, with 67 per cent of opportunity-driven entrepreneurs being registered. When other factors are introduced and held constant, the finding is again that unregistered entrepreneurs are significantly less likely to be opportunity-driven, with opportunity-driven entrepreneurs having a 13 percentage points less likelihood of being unregistered compared with entrepreneurs who are necessity-driven or driven by a combination of necessity and opportunity motives. It is also found that many who start up as necessity-driven become more opportunity-oriented over time (e.g., Knox et al., 2019; Williams, 2008c). This leads Knox et al. (2019), in their study of the street food sector in South Africa, Rwanda, and Senegal, to argue that it is a misnomer to view unregistered enterprises as necessity-driven. Motives for Operating Registered Enterprises Engaging in the Informal Economy Turning to the motives of enterprises operating at varying levels of informality, it is again the case that the literature has evaluated the ratios of exit-to-exclusion motives among entrepreneurs at various levels of informality. A 2012 study of 300 micro-enterprises operating in the retail, manufacturing, and instant consumable food (ICF) sectors in the city of Lahore in Pakistan finds that exclusion rationales are relatively more common among enterprises that are totally informal or have a high level of informality while exit motives are relatively more common among enterprises that are totally formal or have a low level of informality (Williams and Shahid, 2016). For example, examining the exclusion rationale that they operate an enterprise because they could not find a regular job, 53 per cent of totally informal enterprises cited this as their motive, 32 per cent of enterprises with a high level of informality, 22 per cent of enterprises with a low level of informality, and just 5 per cent of enterprises which were totally formal. In Ghana, a 2016 survey displays that is it not clearcut that necessity-driven motives are more prevalent among more informal enterprises and exit-driven motives more prevalent among more formal enterprises. For example, the exit rationale that the state does nothing for me so why should I pay taxes was stated as a rationale by 31 per cent of totally informal enterprises, 9 per cent of enterprises with a high level of informality, 14 per cent of enterprises

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with a low level of informality, and 11 per cent of totally formal enterprises. Examining the exit rationale of high registration costs, this was stated by 39 per cent of totally informal enterprises, 35 per cent of enterprises with a high level of informality, 39 per cent of enterprises with a low level of informality, and 33 per cent of enterprises which were totally formal (Williams et al., 2020a). In consequence, it is not clearcut that necessity-driven motives are associated with more informal enterprises. Indeed, exit rationales are more common among those operating on a totally informal basis. Totally informal entrepreneurs are most likely to state that they operate in this manner because they view the registration system as corrupt (91 per cent), they are unaware of registration requirements (81 per cent), and taxes are high (53 per cent). For those operating on a highly informal basis, who register their business but mostly opt not to formally register with the tax office or keep formal accounts, the most common rationales are a lack of awareness of registration requirements (93 per cent), a corrupt registration system (82 per cent), and a complicated registration system (40 per cent). Those with a low level of informality, in that their business has legal status and is registered with the tax office but does not keep formal accounts, most commonly cite the exit rationales of a lack of awareness of registration requirements (86 per cent), a corrupt registration system (69 per cent), and high taxes (51 per cent). Comparing the commonality of these motives at differing levels of informality, a corrupt registration system is more likely to be stated by entrepreneurs at higher levels of informality, as is a complicated registration system, and a belief that the state does little for them (Williams et al., 2020a). In sum, the few studies conducted on the motives of enterprises operating at various level of informality display that exclusion motives are not necessarily more common among more informal enterprises and exit motives more common among more formal enterprises. However, the evidence base is currently very weak. Far more research is required in a wider range of countries and global regions before any firm conclusions can be drawn. Motives for Engaging in Bogus Self-Employment A burgeoning literature has emerged on how employers are falsely classifying employees as self-employed to circumvent collective agreements, labour laws, employment tax, and other employer liabilities applicable to the standard contract of employment (Eichhorst et al., 2013; Gialis et al., 2017; Giraud and Lechevalier, 2018; Hatfield, 2015). Therefore, only rationales from the employers’ perspective are considered. The view is that employers weigh up the costs and benefits of falsely classifying employees as self-employed and decide to do so because the benefits outweigh the costs.

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Interestingly, there has been little or no discussion of workers’ motives for accepting such an employment relationship. This is because it is seen as entirely an employer’s decision to appoint a worker on a bogus self-employed basis. However, whether this is the case in lived practice is currently unknown. Research is needed on whether workers sometimes voluntarily opt for a bogus self-employed status, so as to lower their taxes and social contributions, and the extent to which workers play a role in making this decision. All that is known so far is that bogus self-employment is more prevalent among those who state that they are self-employed because they have no other choice (Böheim and Mühlberger, 2009; Williams and Horodnic, 2018c; Williams and Lapeyre, 2017). In contrast to other forms of informal work, there has been no debate either on the extent to which exit- and exclusion-driven motives prevail in the decision to engage in bogus self-employment for both employers and workers. On the employer side, it is currently unknown whether they are driven into falsely classifying employees as self-employment out of economic necessity, whether exit motives prevail such as a lack of vertical trust in the state and horizontal trust in their competitors, or whether employers are driven by a combination of these motives. On the workers side, there is similarly no understanding of the extent to which they have any choice when deciding to accept bogus self-employment (even though it is obvious that they could choose not to accept such a contract), and when they do engage in bogus self-employment, whether this is driven by purely economic necessity or whether there is some element of willingness involved. Until research is conducted, there will be a paucity of understanding of the motives for bogus self-employment. At present, it is simply viewed as an employer-instigated economic activity and a result of the economic benefits for employers of misclassifying workers as self-employed rather than correctly classifying them as dependent employees. In future, more research is needed on the rationales for employers and workers engaging in bogus self-employment, so that the current simplistic narratives can be transcended and a finer-grained understanding of the motives can emerge. Motives for Engaging in Quasi-Formal Employment In the literature on quasi-formal employment, akin to the scholarship on bogus self-employment, this type of employment relationship is again simply depicted as an employer-instigated rational economic decision so that they can make savings on tax and social contributions. Little agency is assigned to the employees, despite this decision being superficially in the interests of them if the employer passes on some of this saving to the them so that they receive a higher overall take-home wage. Neither has there been discussion of whether

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employers are driven into this employment relationship out of economic necessity, whether exit motives prevail such as a lack of vertical trust in the state or horizontal trust in their competitors, or whether employers are driven by a combination of these motives. There is also next to no discussion of the workers side. It is seen as a decision driven by employers rather than employees. As such, a lack of knowledge exists on the degree to which employees have any choice when deciding to accept envelope wages (even though it is obvious that they could choose not to accept such an employment contract), and when they do engage in quasi-formal employment, whether this is driven by purely economic necessity or whether there is some element of willingness involved. Again, until research is conducted on this issue, there will be a paucity of understanding of the motives for quasi-formal employment. The only exception is a qualitative study conducted in 2015 with 30 envelope wage receivers (16 women and 14 men) in Croatia in the capital city of Zagreb. This sought to understand whether employees are happy to accept envelope wages (Franić, 2017, 2020a). The in-depth qualitative interviews identified four types of employees receiving envelope wages: 1. Deceived – for Croatian employees, the term “wage” refers to one’s “take-home pay”. Therefore, when employers offer jobs to employees, they specific a specific take-home pay rate. In the case of those deceived into accepting quasi-formal employment, the employer fails to state that only a portion of the take-home pay will be the official declared salary with the rest being an undeclared (envelope) wage. 2. Reluctant voluntarists – these employees know some of their wage will be undeclared and consent to this under-declaration, which is not the case with those deceived, but they accept this arrangement reluctantly and are unhappy with it. They agree to receiving envelope wages due to the lack of fully formal employment available. 3. Monetary rationalists – an employer offers the employee employment either at a higher take-home pay but with a lower declared salary and the rest undeclared, or a lower take-home pay if the salary is fully declared. The employee is given the choice of which to accept. Given that these employees select a higher take-home pay and thus quasi-formal employment, these employees are monetary rationalists. 4. Pure voluntarists – these employees unconditionally agree to receiving an envelope wage. They are often either in senior posts in their businesses or in lower tiers but have an elevated level of trust in their employer. The finding is that most of these employees interviewed accept envelope wages more due to their lack of choice rather than as a matter of choice.

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In sum, and akin to bogus self-employment, there is again a need for future research that transcends the simplistic narrative that quasi-formal employment is a purely employer-instigated endeavour and that there is no agency on the part of the employee. More research is required on the rationales for employers and workers engaging in quasi-formal employment, so that a finer-grained understanding of their motives can emerge. Motives for Engaging in Unregistered Employment Unlike bogus self-employment and quasi-formal employment, studies on unregistered employment have evaluated whether workers are driven by exclusion and/or exit rationales. A study using a special supplement of the 2015 Mexican Labour Force Survey reveals that most in unregistered employment are driven into it out of necessity in that 80 per cent of the respondents who lack social security coverage would prefer to have a job with such benefits, even if that entails having to pay the corresponding contributions. Although it is unknown whether this reflects a preference for social security benefits alone or, more generally, a preference for registered employment, this figure indicates that a substantial proportion of unregistered employees in Mexico are not voluntarily so (Duval-Hernández, 2021). Meanwhile, a study involving 74 semi-structured interviews with Polish economic migrants in Norway displays how their participation in unregistered employment is motivated by a combination of voluntary exit from the formal labour market in their host country and exclusion-drivers that force this type of worker to accept unregistered employment, not least their lack of social integration (Cappelen and Muriaas, 2018). This combination of exit- and exclusion-drivers is similarly found in studies of migrant groups in London’s hospitality sector (Batnitzky and McDowell, 2013) and Tunisian and Romanian migrants working in the agricultural sector in Sicily (Urzi and Williams, 2017). Examining 2019 Eurobarometer survey data reveals that this is not a purely exclusion-driven endeavour. Just 23 per cent of those in unregistered employment cite purely exclusion-driven rationales, with 19 per cent citing purely exit-driven rationales associated with the neo-liberal perspective (e.g., high taxes, burdensome regulations), 8 per cent citing purely exit-driven rationales associated with the institutional perspective, and 50 per cent citing mixed motives from more than one set of drivers. Comparing these findings with the rationales for engaging in informal self-employment and paid favours, those engaged in unregistered employment more commonly cite exclusion-driven rationales. To analyse whether these descriptive findings persist when other variables are introduced and held constant, a logistic regression analysis has been carried out which reveals that those engaged in unregistered employment

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are significantly more likely to state purely exclusion-driven rationales and mixed motives than those engaged in informal self-employment and paid favours (Williams and Oz-Yalaman, 2021a). Besides the EU, this is also found in Togo, where Ayira (2022) identifies that unregistered employment is more likely to be driven by exclusion motives, and informal self-employment by exit-driven motives. Motives for Engaging in Informal Self-Employment The literature on the motives for engaging in informal self-employment is large relative to that for many other forms of informal work, with discussion revolving around whether the informal self-employed are driven into this endeavour out of economic necessity or choice (Adom, 2014; Adom and Williams, 2012; Margolis, 2014; Perry et al., 2007; Williams and Gurtoo, 2011c; Williams and Youssef, 2015). Although some scholarship depicts informal self-employment as driven by largely economic necessity, especially in studies of the global South (Magidimisha and Gordon, 2015; Margolis, 2014; Ogunrinola, 2011; Sahoo and Neog, 2017), a growing literature evaluates the ratio of exclusionto exit-driven informal self-employed (Gunther and Launov, 2012; Temkin, 2009; Williams, 2006a,c, 2007b,d, 2009c; Williams and Round, 2010). However, the results are not clearcut. For instance, Temkin’s (2009) research reveals that in Mexico most informal self-employed persons are excluded from the formal economy. A study by Gunther and Launov (2012) in developing countries also finds that more informal self-employed are exclusion-driven than are exit-driven. Williams and Yousseff (2015) report a 2003 household survey in Brazil which finds that less than half (48.7 per cent) of the informal self-employed cite exclusion rationales. For 45.5 per cent of the informal self-employed participation is a choice, and for the remainder a result of a mixture of motives. This varies, however, by whether they are sole traders or employers with five employees or less. Some 52.2 per cent of informal sole traders primarily participate in the informal economy due to their exclusion from the formal one, but the same applies to only a quarter (23.7 per cent) of the self-employed with five employees or less. Therefore, sole traders are driven more by exclusion, but the informal self-employed who are employers with five or less employees are driven more by exit rationales. Examining the informal self-employed in 28 European countries, Williams and Horodnic (2015g) find that exit-driven motives predominate. Furthermore, Williams and Bezeredi (2018b), in their multinomial regression analysis of a representative sample of 1430 businesses in Bulgaria, Croatia, and North Macedonia, reveal that for every exclusion-driven informal self-employed, there are three exit-driven self-employed. Therefore, it tentatively appears

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that the ratio of exclusion- to exit-driven informal self-employment is in part a product of the level of economic development. There is also a literature revealing that the informal self-employed combine exit- and exclusion-driven motives. For example, Bernal-Torres et al. (2020), using semi-structured interviews with 50 street vendors in the city of Bogotá in Colombia, find that they combine exit and exclusion rationales. Sasunkevich (2019) examines women’s experiences of informal cross-border trade on one of the EU external borders, namely the border between Lithuania and Belarus. She finds that although economic necessity is an important motivation, an element of agency is also involved since the women seek and gain self-respect, solidarity, and an opportunity to socialise through this endeavour. Evaluating the motives for informal self-employment in the EU, Williams and Oz-Yalaman (2021a) examine the 2019 Eurobarometer survey. Just 5 per cent cite solely involuntary motives, 20 per cent solely voluntary rational economic actor motives, 21 per cent solely voluntary social actor motives, and 54 per cent mixed motives. The informal self-employed stating involuntary motives are more likely to be men, younger, single, not in employment, living in single person households, having difficulties paying the bills most of the time, living in rural areas or a village, and residing in East-Central Europe. Voluntary motives associated with it being a rational economic decision are more likely to be stated by the informal self-employed who are women, middle-aged, single living with a partner, employed, in households with two adults, in households with children, paying the bills without ever (or hardly ever) having difficulties, living in rural areas or villages or small or middle-sized towns, and residing in Western Europe. The informal self-employed stating voluntary motives associated with disagreement with the rules are more likely to be younger, (re)married or single (and not widowed/ divorced/separated), employed, in three or more adult households, without children, paying the bills without ever (or hardly ever) having difficulties, and living in Western Europe and Nordic nations. Meanwhile, mixed motives are more likely to be stated by the informal self-employed who are middle-aged, divorced/separated, self-employed, more frequently having difficulties paying the bills, living in larger urban areas, and residing in East-Central and Southern Europe. To evaluate whether these descriptive findings persist when additional variables are introduced and held constant, Williams and Oz-Yalaman (2021a) conduct a logistic regression analysis. Analysing who reluctantly engages in informal self-employment out of economic necessity (reflecting the political economy perspective), this is significantly more likely among single person households. No other characteristics are significantly associated with this motive. Those explaining their informal self-employment solely as a voluntary rational economic decision based on the economic benefits involved (reflect-

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ing the neo-liberal explanation) are again significantly more likely to live in single person households, but also to have no children and to live in rural areas or a village rather than in a large urban area. They are also significantly more likely to live in Western Europe. Those who are significantly more likely to explain their informal self-employment as a voluntary decision based on social reasons (e.g., related to discontent with the state) are people who never, almost never, or only from time to time have difficulties paying the bills, suggesting that financial difficulty is not a motivating factor for these informal self-employed. Finally, those who are significantly more likely to explain their informal self-employment as being due to a mix of more than one of these rationales are younger people aged 15–24 years old. This combination of exclusion- and exit-driven motives in the motives of those engaged in informal self-employment is also found in studies of migrant populations engaged in informal self-employment. These studies argue that migrants’ participation in informal self-employment results from a combination of voluntary exit from the formal labour market in the host country and structures that makes it more likely for this type of worker to be forced to accept informal self-employment, not least their lack of social integration. This is found in studies of informal self-employment among Pakistani migrants in a Western European city (Shahid et al., 2017, 2019), Asian migrants in western cities (Ram et al., 2009), migrant youths in rural Ghana (Afreh et al., 2019), and Ukrainians in the UK (Williams et al., 2012d). Motives for Engaging in Paid Favours Paid favours involve participants engaging in own-account work for close social relations such as friends, kin, neighbours, and work colleagues. To evaluate the motives involved, Williams and Oz-Yalaman (2021a) compare in 28 European countries the motives for engaging in paid favours with the motives for engaging in unregistered employment and informal self-employment. The finding is that those reporting purely exclusion-driven rationales more commonly engage in unregistered employment. Those reporting solely neo-liberal exit-driven rational economic actor motives are slightly more likely to engage in informal self-employment, while those reporting solely exit-driven social actor rationales are more likely to engage in paid favours. However, this does not mean that exit-driven social actor rationales alone explain participation in paid favours. Indeed, 5 per cent of those engaged in paid favours cite purely exclusion-driven rationales, 18 per cent purely rational economic actor exit rationales, 23 per cent purely social actor exit rationales, and 54 per cent mixed motives. To analyse whether those engaged in paid favours are significantly more likely to state social actor exit-driven motives when other variables are introduced and held constant, a logistic regression analysis has been per-

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formed, which reveals that this is indeed the case. Those participating in paid favours are significantly more likely to state social actor exit-driven motives and mixed motives. Until now, however, apart from the above study there has been little research conducted on the rationales for participating in this type of informal work. Why populations engage in paid favours for close social relations could be the subject of future research, especially in other countries and global regions where this type of informal work has been seldom addressed. Motives for Participating in the Informal Economy via Triangular Relationships For completeness, a brief mention is made here of the motives for participating in the informal economy in triangular relationships via the collaborative economy and temporary agency work. Overall, this has received little attention. There has been no research on the rationales of those who source their informal work through digital platforms. Future research needs to evaluate this topic. A working hypothesis might be that the motives of those who use digital platforms to source informal work will depend on whether they are engaged in bogus self-employment, informal self-employment, or unregistered employment, and that for each, their motives will be akin to those who engage in each of these types of informal work. It is similarly the case that no research regarding the motives of those who source informal work via triangular relationships involving a temporary work agency, employer, and worker has been conducted. Akin to quasi-formal employment and bogus self-employment, there is a need to evaluate whether such informal work is simply an employer-instigated (or temporary work agency instigated) decision for profit-oriented purposes, or whether there is an element of agency involved on the part of the workers. Until now, such issues, especially regarding who drives most instances of informal work in this triangular relationship (e.g., the temporary work agency or employer), have not been investigated. However, it is not only the motives underpinning the supply of various kinds of informal work on which there is a paucity of research. Although the empirical research on different forms of informal work on the supply side is patchy, it is more common than the research on the demand side in terms of who purchases goods and services from the informal economy and why they do so.

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WHO PURCHASES GOODS AND SERVICES IN THE INFORMAL ECONOMY? Despite the informal economy being a prominent feature in both developing and developed countries, little research has been conducted on who purchases goods and services in the informal economy. Instead, the conventional assumption has been that such consumers are marginalised populations, and it is left at that. In recent years, this lacuna has started to be addressed (Horodnic et al., 2021b; Igudia, 2020; Littlewood et al., 2018; Marumo and Mabuza, 2018; Williams, 2006b, 2008e; Williams and Bezeredi, 2017c; Williams and Horodnic, 2016c; Williams and Kosta, 2020c, 2021; Williams and Martinez-Perez, 2014c,f; Williams et al., 2012c). Men are more likely than women to make informal purchases (Williams, 2006b, 2008e; Williams and Bezeredi, 2017c; Williams and Horodnic, 2016c; Williams and Martinez-Perez, 2014c,f; Williams et al., 2012c, 2017d), although this difference is not statistically significant in Nigeria (Igudia, 2020). The finding is less clearcut on age. At the EU-27 level and in EU regions, using data from the 2007 Eurobarometer survey, the propensity to purchase goods and services from the informal economy is higher among younger age groups (Williams, 2008e; Williams and Horodnic, 2016c). However, the 2019 Eurobarometer data reveals that older groups are more likely to make such purchases, at least in relation to home repairs and renovations (Williams and Kosta, 2020c, 2021). In South Africa, Marumo and Mabuza (2018) arrive at a similar conclusion when studying 230 households. On marital status, different results are obtained across different geographical areas. While an EU-level study finds that single people are less likely to buy from the informal market (Williams and Horodnic, 2016e), a Western Balkan study finds that single people, the divorced, and separated persons are more likely to purchase informally (Williams and Bezeredi, 2017c). Analysing employment and occupational status, the self-employed, managers, other white-collar workers, and manual workers are significantly more likely to purchase from the informal market while the unemployed, students, and retired persons are significantly less likely to do so (Littlewood et al., 2018; Williams, 2008e; Williams and Bezeredi, 2017c; Williams and Horodnic, 2016c; Williams and Kosta, 2020c, 2021; Williams and Martinez-Perez, 2014c,f; Williams et al., 2012c). This goes against the view that the informal economy serves “bottom of the pyramid” (BOP) markets, although most of these studies are in developed countries. Those with higher educational attainment are also more likely to purchase goods and services from the informal economy (Williams, 2008e; Williams et al., 2012c), as are larger households with more than two members (Littlewood et al., 2018; Williams and Kosta,

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2021) and those living in rural areas (Littlewood et al., 2018; Williams, 2006b; Williams and Bezeredi, 2017c; Williams and Kosta, 2020c). Those with greater financial difficulties are more likely to make purchases of goods and services from the informal market (Littlewood et al., 2018; Williams, 2006b; Williams and Bezeredi, 2017c; Williams and Kosta, 2020c, 2021). Those with greater vertical trust in government (measured using tax morale) are less likely to buy goods and services in the informal economy (Culiberg and Bajde, 2013; Littlewood et al., 2018; Williams and Bezeredi, 2017c; Williams and Horodnic, 2016c; Williams and Martinez-Perez, 2014c). Similarly, the higher the horizontal trust, the less is the likelihood of purchasing from informal market (Viswanathan et al., 2012; Williams and Bezeredi, 2017c). Finally, qualitative studies reveal that engagement in informal markets is greater among those who have a predilection to bargain over the price of products and services (Chikweche and Fletcher, 2010; Marumo and Mabuza, 2018). The conclusion is that a more nuanced understanding of consumers who purchase goods and services from the informal economy is required. Akin to the supply side, it cannot simply be stated that marginalised populations purchase from informal markets. Rather, because of the large size of the informal economy, a wide range of consumer groups purchase from informal markets, albeit some being more likely than others to do so.

WHY DO CONSUMERS PURCHASE FROM THE INFORMAL ECONOMY? Akin to the supply side, similar theories have been used to explain purchases in the informal economy, along with a perspective that recognises unintentional or unknowing purchases. Like the recent supply-side literature, most scholarship investigating these theories views them as complementary explanations for purchaser behaviour rather than single universal logics. Rational Economic Actor Explanation To explain purchases in the informal economy, the dominant view has been that consumers are rational economic actors seeking a lower price, with consumers sometimes even initiating such purchases by asking suppliers “how much for cash?” (Williams, 2008e, 2016b, 2019a). Indeed, this rationale is argued by those who assert that the informal economy prevails in BOP markets where consumers seek a lower price, meaning that they obtain greater utility from their limited monetary resources (Chikweche and Fletcher, 2010; Igudia, 2020; Tustin, 2004; World Bank, 2019a). However, in developed countries, the lower-price explanation represents only one of several reasons for purchasing from the informal economy.

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Studies using the 2007 Eurobarometer survey data show that 44 per cent of the European consumers purchasing from the informal economy assert that lower price alone was the reason, and for another 28 per cent of customers, a lower price was one of several motives mentioned (Williams and Martinez-Perez, 2014c,f). By 2013, this monetary motive had decreased in importance, with a lower price the sole reason for just 30 per cent of purchases, while in 31 per cent of purchases it was one of several reasons (Williams et al., 2017d). Other research on smaller regions provides comparable results. A study across 11 East-Central European countries reveals lower price alone is the explanation for 30 per cent of informal purchases, being one of several reasons given in an additional 31 per cent of cases (Williams and Horodnic, 2016c). Meanwhile, a study investigating consumers in Bulgaria, Croatia, and North Macedonia displays that the lower-price motive alone was valid for 57 per cent of informal purchases (Williams and Bezeredi, 2017c). A study of home repairs and renovation using 2019 Eurobarometer data displays the demise over time in financial gain alone being the motive. Consumers explain their acquisition of home repairs and renovation services as being solely due to a lower price in just 25 per cent of cases (Williams and Kosta, 2020c), while in 2007 the figure was 38 per cent (Williams et al., 2012c). Hence, lower price is not the only reason for purchasing from the informal economy. Social Actor Explanation A social actor explanation, reflecting institutional theory, has criticised the narrow view of economic endeavour as always being about financial gain, recognising multiple other reasons for consumers purchasing from the informal economy. This social actor theoretical perspective was, for the first time, employed to analyse the demand side of the informal economy by Williams (2008e), using data from a 2007 Eurobarometer survey. The finding is that pursuing social ends accounts for 25 per cent of all purchases. Doing favours for friends, kin, and neighbours (14 per cent) or providing an opportunity for those in need to earn some money (11 per cent) are justifications for purchasing from the informal market. The 2013 Eurobarometer survey data reveals that social motives alone explain 13 per cent of purchases, with it being one of multiple reasons in an additional 23 per cent of cases (Williams et al., 2017d). Similarly, another quantitative study from 2017 indicates that social redistributive rationales explain informal street vending market transactions in Nigeria in 9.9 per cent of cases (Igudia, 2020). Examining repair and renovation services, the 2007 Eurobarometer survey finds that social motives explain 8.0 per cent of purchases (Williams et al., 2012c), with the figure rising to 13.8 per cent of

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purchases in the 2019 Eurobarometer survey (Williams and Kosta, 2020c), displaying its growing importance as an explanation. In India and Zimbabwe, there has been qualitative research that reveals the role of social motives (Chikweche and Fletcher, 2010; Viswanathan et al., 2012). Informal purchases are shown to be important in building peer and social networks and providing family support in subsistence BOP markets. Therefore, the social actor explanation appears to apply in various global regions. Formal Market Failures Explanation Another explanation, again grounded in institutional theory, is that formal institutional failings result in purchasers turning to the informal economy. Studies reveal that the failures of the formal economy in delivering goods and services to consumers, namely the lack of availability of goods and services in the informal economy and the poor speed and quality of provision of such goods and services by it, motivate purchases from the informal economy (Williams, 2008e; Williams and Bezeredi, 2017c; Williams and Horodnic, 2016c). To exemplify this, the 2007 Eurobarometer survey reveals that 21 per cent of customers chose to buy informal goods and services due to formal provision being poorer in terms of speed of provision, 8 per cent due to the poor quality of formal economy provision, and 10 per cent due to the lack of availability of the wanted good or service on the formal market (Williams, 2008e). This is further reinforced in the 2013 and 2019 Eurobarometer surveys (Williams et al., 2017d; Williams and Horodnic, 2021a). Unintentional Purchase Explanation While the previous three explanations imply consumers are aware that they are buying informal goods and services, not all informal purchases are made knowingly. The consumer might only become aware that the transaction is informal after the purchase decision, when they do not receive a receipt. This unintentional facet has only recently been included in studies as an explanation to be investigated. The finding is that in the home repairs and renovation sector, 4 to 10 per cent of purchases, depending on the European region considered, are made purely unintentionally, the consumer realising only after the purchase has been made (Williams and Kosta, 2020c, 2021). In sum, to better understand consumer purchases from the informal economy, it is important to consider both intentional purchases and unintentional purchases. However, as the results of this review show, the geographical spread of the research on consumers in the informal economy is narrow.

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Indeed, there are regions of the world where the topic has remained completely untouched in the past two decades, not least North America.

CONCLUSIONS This chapter has evaluated who engages in the informal economy and why they do so. Unlike previous reviews of this subject, the original contribution of this chapter is that it evaluates who engages in informal work, as well as why they do so, in each of its different forms, as well as investigating the demand side of the informal economy. The finding is that compared with literature on who engages with the informal economy treated as a single unified whole, and why they do so, there is much less literature that looks at these same issues but for each form of informal work. When examining who engages in the diverse types of informal work, similar traits exist as when the informal economy as a unified whole is examined. There is a strong tendency to adopt the marginalisation thesis that it is marginalised populations excluded from the formal labour market who engage in these different forms of informal work. However, it is not always the case, for example, that women, younger age groups, the unemployed, low-income groups, and ethnic minorities are more likely to participate in each form of informal work. As such, taking each form of informal work in turn, this chapter has revealed that a more nuanced and variegated understanding is required. Some marginalised groups, in certain places and at various times, are significantly more likely to engage in some forms of informal work. However, this is far from a universal tendency. It is sometimes population groups who benefit from the formal economy who also benefit from participation in some forms of informal work in various places and at various times. Hence, there remains considerable scope for more research on who engages in each form of informal work in different global regions and countries. Turning to the motives for engaging in informal work, there is again much less literature on motives for conducting different forms of informal work than on motives for conducting informal work more broadly in the informal economy as a whole. However, it is again the case that the findings are like those for the informal economy as a unified whole. Singular universal logics are not appropriate for explaining the full range of reasons for participating in each of the different forms of informal work. To explain participation more fully in each form of informal work, it is necessary to combine exit and exclusion explanations. However, the prevalence of exclusion- and exit-driven explanations varies according to the type of informal work evaluated. For example, those engaged in unregistered employment are significantly more likely to state purely exclusion-driven rationales, those engaged in informal self-employment are significantly more likely to state neo-liberal rational eco-

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nomic actor exit-driven motives and neo-institutionalist social actor exit-driven motives, and those engaged in paid favours are significantly more likely to state institutionalist social actor exit-driven motives and mixed motives (Williams and Oz-Yalaman, 2021a). However, no singular logic fully explains motivations for any individual form of informal work. All explanations are required. Moreover, the finding is that mixed motives are also required to explain why individuals engage in different forms of informal work. This reveals the need for a continuum of explanations for each form of informal work to be envisaged as ranging from solely exclusion-driven explanations at one end to solely exit-driven explanations at the other end with emphasis given to the different mixed motives that exist between these two extremes. Indeed, combining the findings on who engages in each form of informal work with those on their multifarious motives, this chapter reveals that for every form of informal work there appears to be a two-tier informal labour market composed of a lower tier of necessity-driven informal workers who are predominantly from marginalised population groups and an upper tier of informal workers who engage in the informal economy more out of choice and are less likely to be from marginalised population groups. The proportion of workers in each group varies by the form of informal work under consideration and according to the context. Even if this chapter has made advances in explaining who engages in each form of informal work and why, there nevertheless exist various limitations and avenues for future research. First, there is a need for more research to evaluate whether these explanations remain valid in other countries and regions of the world. Second, future research could begin to disaggregate the group of participants displaying mixed motives to better understand their position on the continuum of motives. Third, and relatedly, more qualitative research is required of participants’ rationales. For example, a reason for the low level of purely exclusion-driven participants might be that, when excluded, they also view engagement as a rational economic decision and disagree with the formal rules, thus ending up in the “mixed motives” category. This requires fuller exploration. There is also a need for more research on the demand-side characteristics and motives of consumers purchasing from the informal economy. Until now, such demand-side analysis has been geographically narrow, with little or no research conducted, for instance, in North America on this topic. In sum, Parts I and II of this book have reviewed the different theoretical explanations for the prevalence of the informal economy, how to measure its size, what its prevalence is, the different kinds of informal work, the characteristics of participants engaged in each type, and the motives of these participants. Having discussed who engages in the informal economy, what they do, and why, Part III of this book now turns its attention to the key topic of how it can be tackled.

PART III

Policy approaches

7. Policy options for tackling the informal economy: objectives and policy measures Having reviewed the explanations for participation in the informal economy and methods of measuring this economic activity, as well as the prevalence and characteristics of the diverse kinds of informal work, the aim of this chapter is to introduce the policy options for addressing the informal economy. Although modernisation theories in the mid-twentieth century predicted an inevitable and immutable transition to formality, the informal economy has shown a marked vitality and resilience over the past seven decades. The natural disappearance of the informal economy can no longer simply be assumed. Given this, there are a range of interventions available to governments to address the informal economy. First, a decision could be made to take no action. Second, governments could decide to informalise (de-regulate) the formal economy. Third, a decision could be taken to harness the informal economy, fourth, to eradicate the informal economy, or fifth and finally, to formalise the informal economy. This chapter will review each potential intervention in turn by examining their disadvantages and advantages. This will reveal that if nothing is done, the disadvantages far outweigh the advantages. If eradication of the informal economy is pursued as an objective, the disadvantages again outweigh the advantages. This is also the case when informalising the formal economy or harnessing the informal economy. In consequence, this chapter will display that the most viable goal is to formalise the informal economy. Indeed, over the past few decades, this has been the conclusion reached by supra-national institutions and governments when considering what should be done about the informal economy (European Commission, 2016; ILO, 2015; OECD, 2016). How, therefore, can this transition to formality be achieved? Over the past five decades, there has been much debate about this issue. The emergent consensus is that a holistic integrated strategic approach should be adopted that joins up governance and uses the full range of policy tools concurrently. In Europe, this is the core guiding approach of the European Platform Tackling Undeclared Work, which has produced a multitude of reports on how to implement this across the 27 European Union (EU) member states plus Norway and 160

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Iceland (Williams, 2016a, 2017c; Williams and Horodnic, 2022). This strategic integrated approach has also been adopted by the International Labour Organization (ILO) as guidance in Recommendation No. 204 (ILO, 2015), as well as by various national projects, such as those in six Western Balkan economies (Williams, 2020c) and the Central Asian nations of Azerbaijan, the Kyrgyz Republic, Tajikistan, and Uzbekistan (Williams, 2021e). The next section reviews the advantages and disadvantages of five policy choices: taking no action, informalising the formal economy, harnessing the informal economy, eradicating the informal economy, and formalising the informal economy. Revealing the consensus that formalising the informal economy is the most advantageous policy objective, the second section then discusses how this can be achieved. This introduces the holistic integrated strategic policy approach widely adopted by governments and supra-national institutions, along with the full range of policy tools used and how they can be combined. The final section then draws together the conclusions, to set the scene for the next four chapters that evaluate the effectiveness of each set of policy tools in turn.

POTENTIAL GOALS OF POLICY INTERVENTION Reviewing the potential policy objectives that can be adopted when addressing the informal economy, there are five hypothetical choices. Governments can select to either take no action, informalise the formal economy, grow the informal economy, eradicate the informal economy, or formalise the informal economy. Over the past five decades, all have been advocated, and none can be rejected prior to evaluating their advantages and disadvantages. Taking No Action The first hypothetical option is to do nothing about the informal economy. The rationales for taking no action vary according to the context and include: 1. The informal economy acts as a crucible out of which emerges a considerable share of all new business ventures, many of which transition into formal enterprises (Williams and Martinez-Perez, 2014a), so no action should be taken in relation to this sphere. 2. When the informal economy in a country is small, it may not be cost-effective to take actions, so it should be left alone. 3. When the informal economy is in large part composed of paid favours for kin, friends, neighbours, and acquaintances, which in commodified societies represents a main vehicle for active citizenship, it should be left alone. Governments will then not destroy with its policies towards the informal

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economy the active citizenship that it is otherwise seeking to nurture. Furthermore, these paid favours for close social relations can often be the initial activities that lead people to recognise the possibility of, and potential for, creating an entrepreneurial venture, with these transactions enabling them to evaluate the viability of the business venture. For these reasons, taking no action is hypothetically a viable objective. However, doing so will mean that all the disadvantages of the informal economy discussed in Chapter 1 for formal and informal businesses and workers, consumers, governments, and the wider society will remain. They will not be resolved. The consensus is that the disadvantages of taking no action far outweigh the advantages. Therefore, the view is that taking no action is not really viable. Despite this, it is worthwhile considering whether taking no action might be valid in relation to some types of informal work. For example, it could be relevant in relation to small-scale one-off paid favours for close social relations. Or doing nothing could be a temporary intervention applied to unregistered start-ups in the first year of their existence. In consequence, even if not relevant as an overarching policy goal, it might be relevant to some types of informal work in specific circumstances. However, the significant disadvantages of taking no action witnessed by all stakeholders, namely formal enterprises and workers, informal enterprises and workers, purchasers, governments, and the wider society, mean that intervention in the informal economy is required. What form of intervention in the informal economy is thus required? There are four hypothetical interventions, each of which is now considered in turn. Informalisation (De-Regulation) of the Formal Economy A first hypothetical intervention is the informalisation of the formal economy. The main logic for doing this is found in the neo-liberal theory discussed in Chapter 2. As Castells and Portes (1989: 13) assert, although they are not advocates, “In an ideal market economy, with no regulation of any kind, the distinction between formal and informal would lose all meaning since all activities would be performed in the manner we now call informal.” With fewer state laws and regulations, the distinction between formal and informal work would fade away. The formal and informal economies would become indistinguishable because all economic activities would be undertaken under social relations today termed “informal”, even though these economic activities would now be “formal” because they would not be breaking any laws and regulations. However, there are two main problems with this policy approach. First, a paucity of evidence exists that decreasing taxes and stripping away state

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regulations and laws reduces the prevalence of the informal economy. As shown in Chapter 2, the current evidence is that the prevalence of the informal economy is lower in countries with high (not low) tax rates, better (not burdensome) state regulation, and greater (not less) state intervention in work and welfare provision. Second, even if de-regulation led to a decrease in the amount of formal work and increase in what is currently called informal work, the result would be lower-quality work overall and a levelling down (not levelling up) of working conditions (Williams, 2006a). Overall, therefore, the disadvantages of pursuing the informalisation of formal work outweigh the advantages. Nevertheless, even if not viable as an overarching objective, it might be relevant in some limited situations and instances. The simplification of regulations and compliance, rather than purely stripping away regulations, could be useful to help businesses start up legitimately from the outset. When regulations for businesses are complex but can be simplified, this can play an important role in tackling informality. However, de-regulation is not viable because, as already stated, it would level down (not level up) working conditions. It would be a form of formality since the economic activity would comply with the minimal laws and regulations in place, but this formality would exist in the context of lower levels of social protection and fewer rules and regulations, such as in relation to working conditions, occupational health and safety, and consumer protection. In conclusion, even if the informalisation of the formal economy were to decrease the prevalence of the informal economy, albeit in name only, the impact would be a deterioration of working conditions compared with more regulated contexts. Grow the Informal Economy A second hypothetical option is to grow the informal economy. This might be voiced due to the benefits of the informal economy identified in Chapter 1. For example, for workers, it can provide a source of income for those excluded from the formal economy; reduce the barriers to entry into work because informal work is purportedly labour-intensive production requiring few skills and little start-up capital in developing countries, or starts with close social relations in developed nations; and offer an escape route from the corrupt practices of public sector officials demanding bribes. For purchasers, meanwhile, it provides more affordable goods and services not only in low-income environments such as “bottom of the pyramid” (BOP) markets but also in higher-income environments when payment is made in cash and no receipts change hands. For governments, for instance, “on the job” training in informal businesses alleviates pressure on the state and its agencies to provide training, especially in times of reduced public spending.

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However, such benefits of the informal economy are not a reason for encouraging its growth. First, this view ignores the raft of negative consequences of the informal economy, which far outweigh the benefits, and which would be further aggravated if a policy of nurturing the informal economy was adopted. Chapter 1 provides a detailed review of these negative consequences for formal and informal businesses and workers, purchasers, governments, and the wider society. Second, many of these benefits are only benefits in contexts where the formal economy is not operating in an effective and efficient manner, namely where there are formal institutional failings. For example, the benefits of the informal economy as a source of income and livelihood for those excluded from the formal economy are only benefits because the formal economy is not providing full employment. That the informal economy reduces barriers into work for those with low skills and little start-up capital is only a benefit because the formal economic system does not provide comprehensive access to active labour market policies, training, and seed-corn start-up capital. That it provides an escape from corrupt public officials seeking bribes is a problem of weak formal institutions that needs to be resolved, not a benefit of the informal economy. Third and finally, just because the informal economy persists in contemporary societies and is a major provider of work, goods, and services does not mean that it should be harnessed. Most workers, employers, businesses, and purchasers would welcome the ability to engage in the formal economy, but at present the benefits of formalisation are too weak. This is not a rationale for nurturing the informal economy. It is a rationale for improving the benefits of formalisation, especially in the developing world. Just as this viewpoint relies on a one-sided view that emphasises the positive consequences of the informal economy, the next viewpoint does the opposite and relies on a one-sided view that emphasises the negative consequences. Eradicate the Informal Economy Another policy objective might be to get rid of the informal economy. Indeed, this eradication of the informal economy is currently the goal of many enforcement authorities across the world (Williams and Puts, 2017). However, in recent decades, numerous problems have been identified with both the practicality and desirability of getting rid of the informal economy. On the one hand, the practical problem is whether eradication is achievable, as well as how to do it. It assumes that government authorities can be sufficiently powerful to eradicate the informal economy. However, the global regions where the informal economy is most prevalent have the weakest formal institutional environments. Whether it is feasible to sufficiently enhance the power of

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authorities so that they can eradicate, or even significantly reduce, the informal economy is debateable. Indeed, even when developed economies have pursued the goal of eradication, the problem for state authorities has been that the cost of eradicating the informal economy outweighs the benefits. Therefore, there is a point beyond which it becomes difficult to make cost-effective progress. The desirability of eradication can also be questioned. Eradication may not only be expensive for governments to achieve but, if pursued, governments, through their eradication policies towards the informal economy, are likely to destroy the entrepreneurship and active citizenship that its wider policies wish to develop to pursue economic and social development. Therefore, eradication does not enable governments to “join up” their policy approach towards the informal economy with their wider policies on entrepreneurship and active citizenship. However, even if eradication as an overarching policy goal is not viable, it might be pursued in some situations. For example, when businesses have been provided with every opportunity to register and formalise but still fail to do so, then state authorities must possess the option of closing the business (rather than helping them make the transition to legitimacy). However, as an overarching goal, eradicating the informal economy is not viable since it contradicts broader policy goals associated with harnessing entrepreneurship, active citizenship, fuller employment, and social cohesion. Formalise the Informal Economy A fifth and final policy goal is to formalise the informal economy. Beginning with the potential disadvantages, those starting businesses will be no longer able to test-trade in the informal economy when starting up (although this issue is not relevant if the approach recognises that many business start-ups are on a journey to formalisation and facilitates them to take this journey). Another potential disadvantage is that customers will need to pay the full market price because the role of the informal economy in providing cheaper goods and services will no longer exist (if indeed goods and services are cheaper in the informal economy when the full costs are included). Nevertheless, the benefits of moving informal work into the formal economy outweigh the costs. These benefits can be matched to the various groups of the population with a stake in this matter, namely formal and informal businesses and workers, customers, governments, and the wider society. For formal businesses, the benefits of moving informal work into the formal economy are that it eliminates the unfair competitive advantage of informal enterprises over formal ones and enables a “high road” rather than “low road” approach to be pursued by businesses whereby they move towards ever higher regulatory standards on corporate social responsibility and work conditions,

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such as health and safety and labour standards. For informal businesses, the benefits of formalisation of the informal economy are that they can escape being pressured into exploitative supply-chain relationships with the formal sector; can have the same levels of legal protection as formal businesses; and can overcome the structural impediments to their development and growth, such as gaining access to capital and being able to secure the advice and support available to formal businesses. Meanwhile, formal workers benefit from the elimination of informal competitors who force down wage rates; reduce the ability to secure effective collective bargaining rights since employers may exit the formal economy if standards are set too high; and reduce the number of formal jobs. Informal workers benefit from shifting their work into the formal economy because they gain access to health and safety standards in the workplace; enjoy the same employment rights as formal workers; gain access to mortgages and credit since their pay is official and recognised by lending institutions; benefit from greater job security; can get an employer’s reference; gain access to other legal rights such as the minimum wage, tax credits, and the working hours directive; can build up rights to the state pension and other contributory benefits and can access occupational pension schemes; enjoy bargaining rights; improve their ability to evidence their employability; and reduce their constant fear of detection and risk of prosecution. For customers, the advantages are that they benefit from being able to prosecute if the quality of a job is inadequate; can get insurance cover; have legal guarantees; and can be more certain that there has been adherence to health and safety regulations. Finally, for governments and for the wider society, the benefits of moving work from the informal economy into the formal economy are that it improves the revenue for the state in terms of payment of income tax, national insurance, and value added tax (VAT); has beneficial knock-on effects by increasing the money available to governments to pursue social cohesion; results in improved trade union and collective bargaining; allows the creation of more formal jobs to enable societies to move closer to the goal of full employment; enables a joining-up of the policy approach towards the informal economy with the policy approaches towards entrepreneurship and active citizenship so that what is pursued with one hand of government is not negated by another; improves regulatory control over the quality of jobs and services provided in the economy; and encourages a more positive attitude towards the law more widely. Indeed, given the overwhelming advantages of this approach, it is this policy objective which has been adopted by supra-national institutions including the European Commission’s European Platform Tackling Undeclared Work (European Commission, 2016; Williams, 2016a, 2017c; Williams and Horodnic, 2022); the ILO, in its Recommendation No. 204 which adopts the

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goal of the transition to the formal economy (ILO, 2015); and the ILO Global Commission on the Future of Work (2019: 24), which states that its objective is “to facilitate the formalization of those in informal employment”. In sum, this review of the five hypothetical policy options displays that the first goal of taking no action leaves intact the current disadvantages for formal entrepreneurs (e.g., unfair competition), informal entrepreneurs (e.g., the inability to gain access to credit to expand), customers (e.g., no guarantee of health and safety standards), and governments (e.g., taxes owed are not collected). Second, the informalisation (de-regulation) of the formal economy would level down rather than level up working conditions. Third, developing the informal economy would make all the current disadvantages and negative consequences of the informal economy worse while, fourth, eradicating the informal economy would ignore the advantages arising from it (if formalised) and result in governments repressing exactly the entrepreneurship and active citizenship that they wish to foster. Transferring informal work into the formal economy is consequently the most viable policy objective. How, therefore, can this be achieved?

FORMALISING THE INFORMAL ECONOMY: THE HOLISTIC INTEGRATED STRATEGIC APPROACH To achieve the policy goal of a transition to formality, a consensus has emerged within and across the supra-national institutions involved in tackling the informal economy, including the European Platform Tackling Undeclared Work (European Commission, 2016), the ILO in its Recommendation No. 204 (ILO, 2015) and the report of the Global Commission on the Future of Work (ILO, 2017a, 2019), and the OECD (OECD, 2016), as well as across national governments. These supra-national institutions and governments recognise that not only has a fragmented and uncoordinated approach been adopted across the multifarious government bodies responsible for the transition to formality, and there has been a limited participation of social partners, but also there is an incomplete range of policy initiatives. To resolve this, what has been variously called a “holistic” or “integrated strategic” approach has been advocated. This is where a national government facilitates the transition to formality through a whole-government approach to achieve the inclusive structural transformation required, to join up the fields of labour, tax, and social security law, and fully involve social partners, and to use the full range of direct and indirect policy measures available (Lapeyre and Williams, 2020).

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Breaking down this holistic integrated strategic approach, there are four major components: 1. It adopts the policy objective of formalising the informal economy. 2. This transition to formality is to be achieved through the inclusive structural transformation of formal economies. 3. A whole-government coordinated approach joining up the fields of labour, tax, and social security law is pursued, based on four sub-components: cross-government coordinated strategy; coordinating operations across government; cross-government coordination on data mining, matching, and sharing; and improving the participation of social partners. 4. The full range of direct and indirect policy tools are used. The wider economic and social conditions that need to be improved to achieve the inclusive structural transformation of formal economies has been discussed already in Chapters 2 and 4. The whole-government approach will be discussed in Chapter 11. Here, the intention is to outline the full range of direct and indirect tools that can be used to formalise the informal economy, each of which will be evaluated in more detail in Chapters 8–11. On the one hand, there are direct policy tools. These directly dissuade participation in the informal economy and/or incentivise and encourage participation in the formal economy. Put another way, they directly increase the costs and reduce the benefits of participation in the informal economy and reduce the costs and increase the benefits of engaging in the formal economy. On the other hand, there are indirect tools. These shift away from directly using “sticks” and “carrots”, and instead deal with the formal institutional failings to repair the social contract between the state and businesses, employers, workers, consumers, and citizens to foster voluntary compliance. Table 7.1 summarises the full range of direct and indirect policy tools available for formalising the informal economy. These contrasting policy tools, here termed “direct” and “indirect” policy measures, have been variously labelled: “economic deterrence” versus “fiscal psychology” measures (Hasseldine and Li, 1999); a “deterrence model” versus an “accommodative model” (Murphy, 2005, 2008); “deterrence” versus “tax morale” tools (Ahmed and Braithwaite, 2005); “chauvinistic” versus “softy” tools (Cullis and Lewis, 1997); “command and control” versus “responsive regulation” tools (Commonwealth Association of Tax Administrators, 2006); “regulatory formalism” versus “responsive regulation” (Braithwaite, 2002); “market-based” versus “rights-based” tools (Vainio, 2012); “sticks” versus “carrots” (Small Business Council, 2004); “deterrence and incentives” versus “persuasion” (OECD, 2016); and “deterrence” versus “enabling” tools (Williams, 2004a, 2006a). Each set of tools is now considered in turn.

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Table 7.1

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Policy tools available for formalising the informal economy

Approach

Tools

Examples of policy initiatives

Direct controls:

Improved detection

Inspections of workplaces

deterrents

Registration of workers prior to first day at work Workplace identity cards Business registration and certification schemes of tax and social contribution payments Data collection, sharing, and analysis tools Notification letters Complaint reporting tools Certified cash registers Supply chain responsibility tools Improved penalties

Sanctions to deter participation in the informal economy Sanctions to facilitate the transition to formality Sanctions for buying goods and services from the informal economy Non-compliance lists Excluding sanctioned businesses from public procurement contracts, subsidies, and licences “Naming and shaming” lists

Direct controls:

Supply-side incentives

Simplifying the formal regulations

formalisation

Advisory inspections

incentives

Society-wide amnesties Voluntary disclosure schemes Direct tax and social security incentives Targeted indirect tax incentives Formalisation support to start-ups Formalisation support and advice to existing informal enterprises Help with record-keeping Compliance lists Demand-side incentives

Direct tax incentives Service voucher schemes Indirect tax incentives Incentivising electronic payments and deterring cash payments Incentives for encouraging customers to request receipts Social label initiatives

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Approach Indirect controls

Tools

Examples of policy initiatives

Education and

Education to improve tax/social contributions/labour

awareness raising

law knowledge Normative appeals Awareness raising of benefits of formality and costs of informality to suppliers and/or purchasers

Reform of formal

Joining up governance

institutions

Procedural and redistributive justice and fairness in state agencies Wider economic and social developments

Source: Extended from ILO (2016b).

Direct Policy Tools Direct policy tools assume that participants in the informal economy are rational economic actors and, as such, seek to directly increase the costs and reduce the benefits of operating in the informal economy, and to directly reduce the costs and increase the benefits of participating in the formal economy. Therefore, first, the direct tools that increase the costs of operating informally by detecting and punishing non-compliant behaviour are introduced followed, second, by the incentives that increase the benefits of operating formally. Deterrence tools: detecting and penalising participation in the informal economy The use of deterrents to change behaviour has its historical origins in the classic utilitarian theory of crime of Jeremy Bentham (Bentham, 1788) and Cesare Beccaria (Beccaria, 1797). The underpinning assumption is that businesses, employers, workers, and citizens are rational actors seeking to maximise their expected utility. They assess the benefits and risks of an action and break the formal rules if the expected penalty and probability of being caught is small relative to the benefits of non-compliance. This rational actor approach was popularised in the late 1960s by Becker (1968) in relation to criminal behaviour. He argued that governments must increase the costs of non-compliance so that compliant behaviour is a rational decision. By increasing the risks of detection and sanctions, criminal activity would become irrational behaviour. In the early 1970s, Allingham and Sandmo (1972), Srinivasan (1973), and Yitzhaki (1974) applied this rational actor model to tax non-compliance. Non-compliance was similarly depicted as a rational economic decision made when the benefits are greater than the expected cost of being caught and punished. Hence, they called for a change in the cost–benefit ratio confronting those engaged in, or thinking about participating in, non-compliant behaviour. As

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Milliron and Toy (1988: 85) state, from this perspective, the taxpayer is viewed as a “perfectly amoral, risk-neutral or risk-averse, utility maximizing individual who chooses to evade tax whenever the expected gain exceeded the cost”. This rational economic actor approach has been subsequently adopted by enforcement authorities across the world (e.g., Grabiner, 2000; Hasseldine and Li, 1999; Job et al., 2007; Richardson and Sawyer, 2001). It has become commonplace for governments to, first, increase the perceived or actual likelihood of detection and, second, increase the penalties for non-compliant behaviour. However, as it has become recognised that the objective is not eradication of the informal economy, but rather to transform informal work into formal work, the other side of the coin has received more attention, namely making easier and rewarding compliant behaviour. Formalisation incentives The adoption of the goal of transforming informal work into formal work has led to recognition that less emphasis is required on increasing the costs and risks of participation in informal work and more on increasing the benefits of formal work. This positive reinforcement approach based on using incentives (or what might be viewed as “bribes”) to alter behaviour can take two major forms (see Table 7.1). First, for suppliers, engaging in the formal economy and/or making the transition to the formal economy can be made easier and/or more beneficial using supply-side incentives. Second, for customers, using the formal rather than the informal economy to acquire goods and services can be made easier and/or more beneficial by using demand-side incentives. Indirect Policy Tools The problem with using direct policy tools alone to change behaviour is that businesses, employers, workers, and purchasers are not always rational economic actors and are not always in possession of perfect information. They have a limited ability to judge and weigh up the costs and benefits; they do not perceive, or misperceive, the real costs of their economic activities; and their decisions on how to act are shaped by their social environment. Businesses, employers, workers, and consumers are motivated not only by what is most profitable for them and in their self-interest but also by other motivations, such as social customs, norms, and morality, including a desire for redistribution and fairness (Alm, 2011). In other words, businesses, employers, workers, and consumers are not purely profit-maximising rational economic actors but also social actors. Grounded in this recognition, the policy tools used have moved away from solely “sticks” and “carrots” to change behaviour. Greater consideration has been given to improving the social contract between the state and businesses,

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employers, workers, and consumers (see Chapter 2). The aim is to encourage voluntary compliance (i.e., a voluntary commitment to legitimate behaviour). It is not to force businesses, employers, workers, and consumers to comply using punishments and/or bribes. This pursuit of voluntary compliance has a long history. In the nineteenth century, Georg von Schanz (1890) drew attention to the core importance of the tax contract between the state and its citizens. Sixty years later, the “Cologne school of tax psychology” took this idea forward by conducting surveys to evaluate the level of tax morale (Schmölders, 1952, 1960, 1962; Strümpel, 1969). Although this voluntary compliance approach was muted with the emergence of the rational economic actor approach from the 1970s, it has resurfaced with renewed vigour in the past two decades (Ketchen et al., 2014; Kirchler, 2007; Torgler, 2003, 2005a,b, 2006a,b, 2007, 2011). As Chapter 2 highlighted, institutional theory has taken up this social contact approach, arguing that the informal economy results from an asymmetry that exists between the laws and regulations of formal institutions and the norms, beliefs, and values of informal institutions. When these are aligned, the informal economy does not exist, except unintentionally, since businesses, employers, workers, and consumers accept the formal rules of the game. However, when the norms, values, and beliefs of a society’s informal institutions are not aligned with the laws and regulations (formal institutions), what formal institutions deem to be illegal activities are considered legitimate in terms of the norms, values, and beliefs of the society or groups and the informal economy is prevalent (Webb et al., 2009; Williams and Shahid, 2016). Therefore, to tackle the prevalence of the informal economy, this institutional asymmetry needs to be reduced. There are two sets of tools that can be used. On the one hand, tools can seek to change the norms, values, and beliefs of the population (informal institutions) in relation to the acceptability of engaging in the informal economy so that the attitudes of businesses, employers, workers, and consumers align with the formal rules of the game. These tools involve education and awareness-raising campaigns to change norms, values, and beliefs, and promote greater voluntary compliance by fostering an intrinsic social commitment to operating in the formal economy. On the other hand, tools can seek to reform the formal institutions to facilitate a better alignment with social norms. These are of three kinds. First, to tackle the fragmented and uncoordinated approach towards the informal economy across formal institutions, a whole-government coordinated approach containing the four sub-components mentioned above can pursue joining up the fields of labour, tax, and social security law. Second, changes can be sought in the processes of formal institutions in terms of fairness, procedural justice, and redistributive justice. Fairness refers to the extent to which employers and workers believe they are paying their fair

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share compared with others (Wenzel, 2004a; Murphy et al., 2009). Procedural justice refers to the degree to which they believe that governments treat them in an impartial, respectful, and responsible manner (Braithwaite and Reinhart, 2000; Murphy, 2005) and redistributive justice to whether they receive the goods and services they believe that they deserve given the taxes that they pay (Richardson and Sawyer, 2001). Third, changes in the products of formal institutions can be sought in the form of wider macro-level changes in economic and social conditions, in recognition that the informal economy is in large part a by-product of broader economic and social conditions. Combining Direct and Indirect Policy Tools To formalise the informal economy, it is not an either/or choice between using either direct or indirect policy initiatives (ILO, 2015; OECD, 2016; Williams, 2014a, 2017a). Direct and indirect policy tools are not mutually exclusive (Williams, 2014a, 2019a,d). Indeed, supra-national institutions have recognised this and that it is necessary to use both direct and indirect policy tools. Following the adoption of Recommendation No. 204 by the ILO (2015) that seeks to formalise the informal economy, the ILO (2017b) have pursued a “strategic compliance” approach. This recognises the need for compliance authorities to adopt both direct and indirect policy tools. Similarly, the European Platform Tackling Undeclared Work has adopted a “holistic approach” that advocates the use of the full range of direct and indirect policy tools available to enhance the power of and trust in authorities respectively (Williams, 2017c, 2019d). In consequence, the debate is not whether to use either direct or indirect policy tools. The consensus in policy circles is that both are required (Williams, 2020c; Williams and Horodnic, 2022; Williams and Puts, 2017). Instead, the major issue is determining which specific policy tools in each approach are most effective and what is the most effective way of putting these tools together in various combinations and sequences to engender compliance. For example, tools to improve detection through inspections are currently often combined with campaigns to raise awareness. Furthermore, tougher sanctions often follow amnesties and voluntary disclosure schemes. However, whether these are the most effective combinations and sequences to formalise the informal economy is seldom evaluated. Nevertheless, two approaches have emerged in the scholarly literature that offer different ways of combining and sequencing these direct and indirect policy tools, namely the responsive regulation approach and the slippery slope framework approach.

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Responsive regulation approach On how these policy tools can be combined, the responsive regulation approach envisages a regulatory pyramid, sequenced from the least intrusive indirect tools at the bottom and used first, to the most intrusive direct tools at the top and used last (Braithwaite, 2002, 2009). The outcome is that these tools are temporally sequenced. In the first instance, indirect tools are used to facilitate voluntary self-regulation, followed by persuasion using incentive tools and only then punitive tools for those still failing to comply (Alm et al., 2022; Braithwaite, 2009; Job et al., 2007; OECD, 2004, 2017). The recognition is that there exists a continuum of attitudes towards being compliant, and that different policy tools are appropriate for each different motivational posture. The outcome is a temporal sequencing, starting with indirect policy tools applied to the majority of businesses, employers, workers, and consumers who adopt a positive motivational posture (i.e., commitment to being compliant) and feel morally committed to follow the formal rules, and followed by direct incentives for those with less positive motivational postures (i.e., capitulation, resistance). Only after these fail are direct deterrence tools used for those disengaged from the formal institutions and adopting a negative motivational posture (Braithwaite, 2003a). The OECD (2004) notes that these attitudes are not personality traits, and that an individual can adopt any of the attitudes at different times. The Australian Tax Office is an example of an enforcement authority adopting this responsive regulation approach (Braithwaite, 2009; Job et al., 2007). The approach has also been adopted by the Inland Revenue Authority of Singapore (IRAS), which pursues different compliance strategies tailored to the taxpayers’ observable behaviours. It distinguishes between: 1. Voluntarily compliant – those taxpayers who are fully compliant and not in need of intervention. 2. Unaware – those taxpayers who are willing and wishing to comply with their tax obligations but are unable to do so due to a lack of knowledge and understanding of their tax obligations. 3. Negligent – those taxpayers wishing to comply but who do not give sufficient energy and resources to fulfilling their obligations, and 4. Errant – those taxpayers who intentionally evade taxes. For the voluntarily compliant, no action is taken. For the unaware, education and awareness raising is used. For the negligent, tools used include advanced analytics such as predictive modelling, data matching, internal and external referrals, and horizon scanning for trends. Audit programmes (both deskbound audits and field visits) allow IRAS to better understand taxpayers’ circumstances and difficulties in complying. The knowledge from these audits

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enables the refinement of compliance strategies. IRAS has also implemented a voluntary disclosure programme (see Chapter 9) to encourage taxpayers to review their tax situation. Where taxpayers undertake intentional fraud, sanctions are applied including prosecution leading to imprisonment and/or penalties up to four times the tax evaded. Such cases are shared in the media to increase public awareness and confidence in the fairness of the tax system (OECD, 2017). Her Majesty’s Revenue and Customs (HMRC), the tax authority in the UK, is another example of an enforcement body pursuing this approach, through its “promote, prevent, respond” policy approach. Grounded in the belief that the best way to tackle non-compliance is to prevent it, HMRC seeks to: 1. Promote compliance by designing processes and systems to enable customers to comply from the outset. 2. Prevent non-compliance by using the data they possess to identify mistakes, prevent fraudulent claims, personalise online services, and automate calculations. 3. Respond to non-compliance by identifying risky taxpayers and targeting them, using penalties for those deliberately evading their obligations. However, whether this is the appropriate temporal sequence is open to question. There have been no evaluations of whether this sequencing is the most appropriate or effective way of eliciting commitment to the formal rules of the game. Although logically it might appear to be the appropriate and even most effective way of eliciting compliance, no current evidence exists that this is the case. Slippery slope framework approach An alternative approach, termed the “slippery slope framework” (Kirchler, 2007), contends that businesses, employers, workers, and citizens abide by the law either because they fear detection and fines due to the power of authorities (“enforced compliance”) or because they feel a commitment to be honest because they have trust in the authorities (“voluntary compliance”). Voluntary compliance (achieved using indirect policy tools) is viewed as occurring when there is trust in the authorities. Enforced compliance (achieved using direct policy tools) is viewed as requiring the authorities to have power, namely the ability to get businesses, employers, workers, or consumers to do what they were not going to do beforehand, in the way in which the authorities wish them to do it. In this approach, it is recommended that both direct and indirect tools are used concurrently. For example, governments may target key country-level macro-economic and social conditions that have a direct influence on the prevalence of the infor-

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mal economy; change the organisational culture of government departments, such as tax offices and labour inspectorates, towards a more customer-oriented approach; and introduce public campaigns to encourage a commitment to compliance, while simplifying regulatory compliance for business start-ups and introducing incentives for employers, workers, and customers to operate in the formal economy (e.g., amnesties, tax deductions). However, at the same time, in relation to those who fail to comply, sanctions might be used along with improvements in the ability to detect those operating in the informal economy. Over the past decade or so, evidence has emerged that this concurrent combining of voluntary and enforced compliance is the most effective approach. When there is effective enforced compliance and high voluntary compliance, meaning that there is both power and trust, the informal economy is small. When there is ineffective enforced compliance and little voluntary compliance, then authorities find themselves on a slippery slope and the informal economy is more prevalent (Alm and Torgler, 2011; Alm et al., 2012; Faizal et al., 2017; Gangl et al., 2020; Horodnic and Williams, 2022; Kastlunger et al., 2013; Khurana and Diwan, 2014; Kirchler, 2007; Kirchler et al., 2008, 2012; Kogler et al., 2015; Muehlbacher et al., 2011a,b; Prinz et al., 2013; Saeed et al., 2020; Tsikas, 2020; Williams and Horodnic, 2017b). For example, in two experimental studies conducted in Vienna, Austria, with 261 participants, Hofmann et al. (2014) assess the effects of voluntary and enforced compliance applied together. In the experiments, tax authorities are described as having low or high coercive power (e.g., imposing lenient or severe sanctions) and/or low or high legitimate power (e.g., having non-transparent or transparent procedures). The combination of both strategies is found to result in greater levels of compliance than when each strategy is used alone. Meanwhile, Kogler et al. (2013) report an experiment on how changing perceptions of the power of authorities and citizens’ trust in authorities influences compliance in four countries, namely Austria, Hungary, Romania, and Russia. In a two-by-two design, authorities are described to participants as either trustworthy or untrustworthy, and as either powerful or powerless. The finding is that intentions to declare taxes honestly were highest in all countries if the authorities were perceived as powerful and trustworthy. Evasion was high if both power and trust were at a minimum. In addition, perceptions of high power boosted enforced compliance, whereas high trust was related to strong voluntary compliance. Williams and Horodnic (2017b), examining 2013 Eurobarometer survey data from 28 European countries, find that combining both direct and indirect tools is the most effective means of encouraging formalisation. However, when the asymmetry between formal and informal institutions is low, deterrence measures have little impact on the level of informality and it is only when the incongruence between formal and informal institutions widens that raising the

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level of deterrents has a significant impact, with increasing the perceived risks of detection in such contexts being more effective at promoting formality than increasing the perceived punishments. Meanwhile, Horodnic and Williams (2022) evaluate the changes over time in Europe examining the 2007 and 2013 Eurobarometer surveys. A fixed-effects logistic regression analysis reveals that although both deterrents and improving vertical and horizontal trust reduce participation in the informal economy, the strength of the impact of deterrents on the likelihood of participation has weakened between 2007 and 2013 but the impacts of vertical and horizontal trust have strengthened. Batrancea et al. (2019) study trust and power as determinants of tax compliance across 44 nations from five continents in a series of experiments. Overall, they find that trust and power are important determinants of tax compliance across all nations. In general, the power effect is larger than the trust effect. More specifically, trusted authorities (those perceived as benevolent and enhancing the common good) register the highest voluntary compliance; powerful authorities (those perceived as controlling evasion effectively) register the highest enforced compliance; and in countries with already high levels of trust and compliance, too strict enforcement (e.g., high audit rates and severe fines) provokes non-compliance. Therefore, the finding of these studies is that businesses, employers, workers, and consumers follow the formal rules of the game either because they fear detection and fines due to the power of authorities (enforced compliance) or because they feel a commitment to be honest because they have trust in the authorities (voluntary compliance). When enforced compliance is ineffective and voluntary compliance low, the informal economy is extensive. This finding has had impacts on the practices of governments. It is now widely recognised that power and trust are both essential for good governance (European Commission, 2016; OECD, 2013, 2017). Indeed, the European Platform Tackling Undeclared Work, comprising 28 EU member states as well as Norway and Iceland, have reached a consensus that such a “full policy operationalisation model” is required, combining policy tools to improve both enforced compliance and voluntary compliance (Williams, 2016a, 2017c; Williams and Horodnic, 2022). This combines these direct and indirect policy tools concurrently, based on the above evidence that a high-trust, high-power approach is the most effective approach in tackling the informal economy. In a recent attempt to examine which specific policy initiatives are most effective, Jessen and Kluve (2019) evaluate the effectiveness of different policy measures in low- and middle-income countries. Compiling a database of 157 impact estimates from 32 academic studies in 13 countries that evaluate different policy initiatives, first, they find that the intervention type (i.e., information, simplification/registration, tax incentives, labour inspection/ enforcement interventions, financial incentives) is not a strong predictor of

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intervention effectiveness, though tax incentives and labour inspection are most likely to display significant positive effects. Second, examining six outcomes, namely (1) firm registration, (2) worker registration, (3) wages, (4) firm profitability, (5) tax revenue, and (6) investment, they find that interventions targeting the formalisation of workers are more effective than those targeting the formalisation of firms and other outcomes. And third, they find that interventions at scale and that are longer term (greater than 24 months) are more effective on average than singular programmes and short-term interventions. Therefore, it is not simply a case of introducing concurrently direct policy tools to improve enforced compliance and indirect policy tools to engender voluntary compliance. It is more complex. Specific direct and indirect policy tools need to be selected, some of which will be more effective in some contexts than others. Therefore, a more detailed review of the different direct and indirect tools available to stakeholders involved in tackling the informal economy will be the subject of the next chapters.

CONCLUSIONS This chapter has introduced the different hypothetical objectives available when addressing the informal economy. Given that it is no longer believed that the informal economy will gradually disappear, five potential goals are available to stakeholders interested in tackling the informal economy. These are to take no action, informalise the formal economy, grow the informal economy, eradicate the informal economy, or formalise the informal economy. This chapter has reviewed each in turn in terms of their disadvantages and advantages. This has revealed that if no action is taken, the disadvantages far outweigh the advantages. Meanwhile, if eradication of the informal economy is pursued, the disadvantages again outweigh the advantages, as is also the case when informalising (de-regulating) the formal economy or growing the informal economy. In consequence, this chapter has contended that formalising the informal economy is the most viable goal. Indeed, this has also been the conclusion of supra-national agencies and national governments when deciding what should be done about the informal economy (European Commission, 2016; ILO, 2015; OECD, 2016; World Bank, 2020). Turning to how this goal of a transition to formality can be achieved, this chapter has outlined the holistic integrated strategic policy approach adopted over the past decade by most supra-national institutions involved in tackling the informal economy, including the European Platform Tackling Undeclared Work (European Commission, 2016), the ILO in its Recommendation No. 204 (ILO, 2015) and the report of the Global Commission on the Future of Work (ILO, 2019), and the OECD (OECD, 2016). All these supra-national institutions, along with many governments, recognise that a fragmented and

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uncoordinated approach has been adopted across the multifarious state bodies responsible for the transition to formality and that there has been a limited involvement of social partners, as well as an incomplete range of policy initiatives employed. Their response has been to adopt what is variously called a “holistic” or “integrated strategic” approach where the transition to formality is facilitated using a whole-government approach to (1) achieve the inclusive structural transformation required, (2) join up the fields of labour, tax, and social security law, and fully involve social partners, and (3) use the full range of direct and indirect policy measures available to enhance the power of and trust in authorities respectively (Lapeyre and Williams, 2020). Given that the inclusive structural transformation required has been discussed in Chapters 2 and 4 and joining up governance will be examined in Chapter 11, this chapter has focused upon introducing what is meant by the full range of direct and indirect policy tools. On the one hand, there are direct policy tools. These dissuade participation in the informal economy and/or incentivise and encourage participation in the formal economy. The intention is to directly increase the costs and reduce the benefits of participation in the informal economy and reduce the costs and increase the benefits of engaging in the formal economy. On the other hand, there are indirect policy tools. These include not only awareness-raising campaigns to change the norms, values, and beliefs of citizens, worker, employers, and businesses about the acceptability of engaging in the informal economy, but also policy tools that modernise formal institutions. Such policy tools include initiatives to join up governance and process innovations that enhance the perceived level of procedural and redistributive justice and fairness of government, to reduce institutional asymmetry, but also indirect policy tools that address wider macro-level economic and social conditions associated with greater participation in the informal economy, which Chapter 2 revealed are significantly associated with greater institutional asymmetry. These two sets of policy tools are not mutually exclusive. Both are needed to address participation in the informal economy. To outline how these can be combined, two different approaches have been reviewed. First, there is a responsive regulation approach that temporally sequences these two sets of tools, starting with the indirect policy tools and, if these do not elicit compliant behaviour, following them with direct incentives to formalise the informal economy and to change behaviour, eventually using deterrents but only when all these other tools have failed. Second, there is a slippery slope framework approach which contends that the most effective approach is to concurrently increase both the power of authorities (using direct policy tools) and trust in authorities (using indirect policy tools). If either the power of or trust in authorities is low, then governments will be on a slippery slope towards continuing participation in the informal economy.

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Therefore, the overarching consensus is that the goal is to formalise the informal economy, and a holistic integrated strategic approach is being widely used to achieve this. Until now, however, there has been little if any attempt to synthesise what is known about the effectiveness of different individual policy measures within the direct and indirect toolsets for tackling the informal economy. Until this is known, it will be difficult for stakeholders to decide which specific policy tools to use to tackle different types of informal work in various contexts. Therefore, in the next four chapters, a review will be undertaken regarding what is known about the effectiveness of different deterrence policy tools (Chapter 8), supply- and demand-side incentive tools (Chapter 9), education and awareness-raising tools (Chapter 10), and the multifarious initiatives to reform formal institutions in order to join up governance, make them more trustworthy, and deal with the structural conditions required to achieve inclusive structural transformation (Chapter 11).

8. Deterring participation in the informal economy The aim of this chapter is to review the range of policy tools available to deter participation in the informal economy. These tools seek to increase the actual and/or expected costs of engaging in the informal economy for participants. The rationale is that this will change the cost–benefit ratio confronting participants and they will choose to operate in the formal economy. Two sets of policy tools are used to achieve this deterrence objective. First, there are tools that improve the actual and/or perceived sanctions for those caught and, second, there is an array of tools that increase the perceived and/or actual probability of detection. Each is reviewed here in turn. Before doing so, it is necessary to state that deterring engagement has been conventionally viewed as the main means of tackling the informal economy. As Chapter 7 highlighted, grounded in classic utilitarian theory, Allingham and Sandmo (1972), Srinivasan (1973), and Yitzhaki (1974) in the 1970s asserted that non-compliance happens when the benefits of non-compliance exceed the costs, so the solution is to increase the costs of engaging in non-compliant behaviour to alter the cost–benefit ratio. A deterrence approach was subsequently widely adopted as the chief means of tackling non-compliance across the world (Hasseldine and Li, 1999; Richardson and Sawyer, 2001). Indeed, a 2017 survey of the official government representatives on the European Commission’s European Platform Tackling Undeclared Work found that the enforcement authority representatives from 30 European countries ranked penalties as the most important and effective policy tool for tackling the informal economy, followed by improving the probability of detection (Williams and Puts, 2017; Williams, 2019d). Despite the widespread belief in this deterrence approach by enforcement authorities across the world, the evidence that increasing the costs of participation in the informal economy prevents engagement is mixed. One body of literature, often based on laboratory experiments, finds that increasing the costs of participation in the informal economy reduces engagement (Blackwell, 2010; Dubin and Wilde, 1988; Feld and Frey, 2002; Friedland, 1982; Friedland et al., 1978; Klepper and Nagin, 1989; Kluge and Libman, 2017; Kogler et al., 2022; Mas’ud et al., 2015; Mazzolini et al., 2017; Schwartz and Orleans, 1967; Slemrod et al., 2001; Webley and Halstead, 1986; Witte and Woodbury, 1985), 181

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with most of the studies finding that increasing the risk of detection is more effective than increasing the penalties (Alm, 1999; Friedland, 1982; Webley and Halstead, 1986; Williams and Horodnic, 2016c, 2017b). However, other studies find no association between increasing the costs of participation in the informal economy and the likelihood of engagement (Hartl et al., 2015; Horodnic and Williams, 2022; Shaw et al., 2008; Williams and Franić, 2016a, 2017; Williams and Horodnic, 2017f, 2021a,b). Yet other scholarship finds that increasing the costs of participation in the informal economy increases the likelihood of engagement, due to the resultant breakdown of the social contract between the state and businesses, employers, workers, and citizens (Chang and Lai, 2004; Hofmann et al., 2017; Kaplanoglou and Rapanos, 2015; Mohdali et al., 2014; Murphy, 2005, 2008; Murphy and Harris, 2007). Hence, it is far from clearcut whether deterrents reduce the likelihood of participation in the informal economy in all contexts. Indeed, Dularif et al. (2019), in a meta-analysis synthesising 478 outcomes from articles published between 1978 and 2018, find that audits and penalties are not significant in influencing tax evasion. In another meta-analysis, carried out by Alm and Malézieux (2021) on 70 papers that use laboratory experiments to examine compliance behaviour, the finding is that audits and fines have a negative impact on the intensive margin (i.e., compliance from evaders) but a positive impact on the extensive margin (i.e., the probability of full compliance). As such, although the evidence is mixed about the effectiveness of deterrence measures, they cannot be written off. They appear effective in some contexts. It is also the case that some deterrence tools will be more effective than others in different contexts. To see this, a finer-grained evaluation is undertaken here of, first, the various types of sanction tools and, second, the policy tools to increase the probability of detection, to evaluate their effectiveness in encouraging formalisation.

SANCTION TOOLS Enforcement authorities widely believe that sanctions are the most important and effective way of tackling the informal economy (Williams and Puts, 2017; Williams, 2019d). However, there is little supporting evidence. As Table 8.1 reveals, many studies on European countries do not even show a significant association between increasing sanctions and reducing the likelihood of participation in the informal economy. Instead, there are mixed findings. Although some display a significant association, most find no significant correlation between the perceived level of sanctions and participation in the informal economy.

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Table 8.1

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Impact of perceived sanctions on participation in the informal economy: European studies

Finding

Study and coverage

Those perceiving the expected

Feld and Frey, 2002 (Switzerland); Horodnic and Williams, 2019

sanctions as high are less likely to

(EU-27); Putniņš and Sauka, 2015 (Baltic countries); Williams

engage in the informal economy

and Horodnic, 2017b (EU-28)

compared with those perceiving the sanctions as low No relationship between increasing

Feld and Larsen, 2012 (Germany); Franić, 2018 (EU-27/EU-28);

sanctions and likelihood of

Franić, 2019a (EU-28); Hartl et al., 2015 (Austria); Horodnic

participation in the informal economy

and Williams, 2018, 2019, 2021, 2022 (EU-28); Webley and Halstead, 1986 (UK); Williams and Bezeredi, 2017b, 2018b,e,f (North Macedonia); Williams and Franić, 2015, 2017 (Croatia); Williams and Franić, 2016a,b (Bulgaria); Williams and Franić, 2017 (Bulgaria, Croatia, North Macedonia); Williams and Horodnic, 2016c (UK); Williams and Horodnic, 2017b, 2020a, 2021a (EU); Williams and Kayaoglu, 2020a (Turkey); Williams and Oz-Yalaman, 2021b (Western Europe); Williams and Yang, 2017b, 2018 (Bulgaria)

Whether this is similarly the case in other global regions is unknown. In Europe, extensive Eurobarometer surveys in 2007, 2013, and 2019 have analysed perceptions of the expected sanctions for participating in the informal economy and the likelihood of participation in the informal economy. In other global regions, no such extensive survey data is available. Therefore, no firm conclusions can be reached about this relationship in these regions. Even if it is not clearcut that increasing the expected sanctions has a significant impact on participation in the informal economy, it is evident that doing so has a significant impact on the likelihood of some groups participating in the informal economy. Increasing the perceived severity of penalties in populations where social norms conform to the law has been found to increase participation in the informal economy, not decrease it. This is because in these populations it erodes the social contract that the state trusts them, which leads to greater non-compliance (Alm et al., 2012; Ayres and Braithwaite, 1992; Job et al., 2007; Mohdalia et al., 2014; Murphy, 2005; Murphy and Harris, 2007; Wenzel, 2004) and the opposite behaviour from that sought. Schildberg-Hörisch and Strassmair (2010) thus find that the reaction to the severity of punishment depends on the motivational postures of people. Where individual ethics are strongly in favour of compliance and/or social norms favour compliance, greater sanction severity increases non-compliance (Górecki and Letki, 2021; Wenzel, 2004b). This suggests that penalties

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should be used only with the non-compliant. This is reinforced in Malaysia by Mohdalia et al. (2014), who find that the threat of punishment has no positive impact on compliant taxpayers and even triggers their intention to be less compliant. Therefore, it is not the case that sanctions are universally effective at encouraging formalisation among all population groups. Neither is it clearcut that all sanction tools are equally effective. To see this, six types of sanctions are considered here in turn: 1. 2. 3. 4. 5.

Sanctions to deter participation in the informal economy. Sanctions to facilitate the transition to the formality. Sanctions for buying goods and services from the informal economy. Non-compliance lists. Excluding sanctioned businesses from public procurement contracts, subsidies, and licences. 6. “Naming and shaming” lists. Sanctions to Deter Participation in the Informal Economy The first and most common type of sanction that enforcement authorities use are fines to deter participation in the informal economy. This type of sanction exists in all countries across the world. It involves issuing fines for businesses found to be employing informal workers or for self-employed people or employers identified as participating in the informal economy. These fines are often set in legislation and may have upper and lower limits for different types of informal work (e.g., for employing an unregistered worker). An intention is that such sanctions will function as a deterrent to those considering engagement in the informal economy. Their level needs to be proportionate in terms of the type of misconduct involved and compared with other criminal acts if they are to be accepted. For example, severe sanctions could be issued for major violations or wilful violations but lighter sanctions for unintentional mistakes and omissions, and minor violations. Sanctions to deter participation in the informal economy can involve progressive fines for repeat offenders, reduced penalties for early payment of fines, and the substitution of fines with training for managers and staff (Williams, 2021f). Indeed, most of the studies cited above in Table 8.1 refer to this sanction tool and show that this type of sanction does not always reduce participation in the informal economy. Sanctions to Facilitate the Transition to Formality In contrast to sanctions to deter participation, very few countries have designed sanction systems to facilitate the transition to formality. This is perhaps

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because it is only relatively recently that enforcement authorities have started shifting towards this goal. To show how sanction tools can facilitate the transition to formality, the new sanctions system adopted by the Hellenic Labour Authority in Greece can be outlined. Before new sanctions were introduced in 2018, a conventional penalty system existed. When a labour inspector found an employer using unregistered workers, they could impose an administrative penalty of €10 549 (i.e., 18 times the minimum wage) for employees over 25 years old or €9197 (i.e., 18 times the minimum wage) for those aged under 25 years old. In the case of repeat offences by the employer, temporary or permanent closure could be imposed, in addition to the fines. Recognising that these penalties could lead to the closure of the business when the goal is to encourage the transition to formality, the Hellenic Labour Authority introduced a new sanctions system. The fine for employers is €10 500 for each unregistered employee. However, if the employer hires them within ten days as a registered employee, the fine reduces to €7000 if they are hired for three months, €5000 if hired for six months, and €3000 if hired for a year or more. In 2017, before this new penalty system, only 32 per cent of detected unregistered workers were subsequently hired as formal employees by the employer (two-thirds on a part-time basis and one-third full-time). After the new sanctions system, for the six-month period following its introduction, 45 per cent of detected unregistered workers were hired as registered workers by the employer, all on a full-time basis, with 91 per cent hired for a year or more, 3 per cent for six months, and 6 per cent for three months. This displays its effectiveness at encouraging the formalisation of informal work (European Platform Tackling Undeclared Work, 2020a). Another example of a sanction to facilitate the transition to formality is the reclassification of employment relationships when bogus self-employment is identified. This occurs when labour courts do not declare the employment relationship invalid, but instead alter it to dependent employment retroactively since the start of the employment relationship. All the rights (including minimum wage and pension contributions) associated with the real contractual relationship are applied to the employee, as if the relationship had been correctly designated since the outset, and the costs of doing so are borne by the employer. This occurs, for example, in Czechia, Finland, France, Germany, Ireland, Luxembourg, Portugal, Sweden, the UK, and the Netherlands (Eurofound, 2016a). Many countries also apply fines to employers (e.g., Spain, the Netherlands, the UK) in addition to the penalty of making them retroactively reclassify the employment relationship (Hauben et al., 2020; Heyes and Hastings, 2017).

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Sanctions for Buying Goods and Services from the Informal Economy Few governments have sanctioned citizens for buying goods and services from the informal economy. This is largely because the assumption is that it is difficult for a customer to know if the goods and services are being sold on such a basis. However, if there is evidence that a citizen requests “how much for cash?”, there could be a case for sanctioning such consumers. However, this has not been implemented so far as is known. Nevertheless, this is not the case in relation to business-to-business transactions. Some governments impose reverse supply chain responsibility on businesses. Businesses at the top of the supply chain are responsible for compliance further down the supply chain. An example is the value added tax (VAT) reverse charge in the construction industry, which shifts liability and responsibility for paying VAT onto the main contractors purchasing services, instead of the smaller businesses and self-employed supplying services. This has been implemented in Italy and Sweden since 2007 and Finland since 2011 (Cremers et al., 2017). Another option is to make purchasers responsible for information reporting to the authorities and to sanction them if they fail to file the reports. This has been used in the construction sector in Finland. To ensure that the enforcement authorities know which workers are on a construction site, responsibility lies with the main contractor to report the contract and employee details of all parties in the supply chain, namely the purchaser, developer, main contractor, and subcontractors. If the contractor fails to complete a report, they pay a negligence penalty. The maximum fine is €15 000 (European Platform Tackling Undeclared Work, 2018c). Non-Compliance Lists Non-compliance lists are another tool that provides a sanction for suppliers found to be operating in the informal economy, and these non-compliance lists may or may not be made public. Previously termed “blacklists”, which is no longer acceptable due to its racist connotations, non-compliance lists compiled by enforcement authorities list the businesses and/or suppliers that have violated tax, labour, and/or social security law in the recent past. If not made public, they can be used in an enforcement authorities’ risk assessment processes, such as to prioritise the business, employer, or sole trader for more regular audits and inspections than those without previous violations. Indeed, whether a business, employer, or sole trader has previous violations is a common criterion used when risk assessing businesses. The sanction is therefore that they receive greater attention from enforcement authorities. When these non-compliance lists are made public by enforcement authorities,

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the additional sanction is that it reduces the legitimacy of the businesses named and purchasers can decide not to purchase from them. Of the 30 European countries surveyed in 2022 by the European Platform Tackling Undeclared Work (Williams and Horodnic, 2022), 33 per cent responding had used non-compliance lists (no Northern, 50 per cent of Western, 44 per cent of East-Central, and 40 per cent of Southern European countries). Social partners and other stakeholders can also compile non-compliance lists. In Czechia, for example, the Czech-Moravian Confederation of Trade Unions (CMKOS), together with the Czech Metalworkers’ Federation (OS KOVO), produced a non-compliance list of fraudulent temporary work agencies (TWAs) and employers were informed not to use them to employ temporary workers. Such a list thus acts as a sanction by encouraging employers not to purchase from the businesses named. Excluding Sanctioned Businesses from Public Procurement Contracts, Subsidies, and Licences Those on non-compliance lists can be further sanctioned by excluding them from the right to bid for public procurement contracts, which is a major source of funding for businesses in many countries. If used for this purpose, then non-compliance lists need to be up to date, and decisions must be taken on how long a business remains on a non-compliance list after a violation as well as on which violations result in them being listed. Of the 30 European countries surveyed in 2022 by the European Platform Tackling Undeclared Work (Williams and Horodnic, 2022), 71 per cent responding had excluded sanctioned businesses from bidding for public procurement contracts (50 per cent of Northern, 75 per cent of Western, 67 per cent of East-Central, and all Southern European countries). Businesses can also be sanctioned by not providing them with access to state subsidies. At the time of writing, a proposal in the European Union (EU) is to exclude agricultural holdings from Common Agricultural Policy (CAP) subsidies if they violate workers’ rights and participate in the informal economy. This would make CAP subsidies for farmers conditional upon not only environmental, public health, and animal welfare standards as at present, but also conditional upon compliance with labour, tax, and social security laws. The intention is to prevent informal work and raise labour standards in European agriculture (EFFAT, 2021a; ETUC, 2021; Foote, 2021). Business can be also sanctioned by withdrawing their rights to the necessary licences to operate in their trade (Blank, 2014). However, using this non-monetary penalty of licence revocation, such as in the taxi industry or for market traders, is here cautioned against since it does not facilitate the transition to formality but, rather, quite the opposite.

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“Naming and Shaming” Lists Finally, “naming and shaming” lists can be used as a sanction. By making public the businesses, workers, and/or self-employed sanctioned for working in the informal economy, the intention is to shame them as a sanction. Shaming can either simply shame the offender, or it can shame them and then offer reintegration. Coricelli et al. (2014) show that when the name of somebody fined for cheating is made public and the perpetrator is not successfully reintegrated, the amount of cheating significantly increases compared with when cheating is made public but is followed by reintegration. Despite this, until now the former has been mostly used. Indeed, of the 30 European countries surveyed in 2022 by the European Platform Tackling Undeclared Work (Williams and Horodnic, 2022), 17 per cent responding had used naming and shaming lists (no Northern, 50 per cent of Western, 11 per cent of East-Central, and 20 per cent of Southern European countries). Again, this sanction of naming and shaming is not limited to state authorities. Both trade unions and employer federations can use naming and shaming lists, such as on a sectoral level. So too can civil society organisations. An example can be seen in the city of Bologna in Italy, where a 2017 government report identified that three-quarters of jobs in the city’s food and hotel sector were in the informal economy. In response, a civil society organisation, Padron di Merde (“crappy bosses”), has taken direct action, staging protests outside the premises of these businesses. This has proven an effective form of direct action, receiving widespread publicity, and has stopped customers using these restaurants, cafes, and hotels. In sum, many types of sanctions can be used to increase the real or expected costs of participation in the informal economy and deter engagement. Fines are just one type of sanction. In many enforcement authorities, these have traditionally been a source of revenue, and the amount generated in fines has been a key performance indicator (KPI). Shifting away from solely using fines to using additional sanction systems (e.g., non-compliance lists, naming and shaming, excluding businesses from bidding for public procurement contracts and receiving subsidies and licences) requires a rethinking of the strategic objectives and performance indicators used in enforcement authorities. However, it is not solely the improvement of sanction systems that can increase the real and/or perceived costs of participation in the informal economy. Improving the probability of detection can also do so. Indeed, in recent years, this has become a focus of attention in enforcement authorities across the world. It is to this issue that attention now turns.

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TOOLS TO INCREASE THE LIKELIHOOD OF DETECTION Increasing the real and/or expected likelihood of detection is widely perceived by enforcement authorities as an important and effective way of tackling the informal economy (Williams and Puts, 2017; Williams, 2019d). However, akin to sanctions, whether increasing the probability of detection is effective in preventing participation in the informal economy is not clearcut. Some studies find that increasing the probability of audit and detection reduces informality, at least for some income groups (Alm et al., 1992, 1995; Beron et al., 1992; Dubin and Wilde, 1988; Dubin et al., 1987; Kinsey and Gramsick, 1993; Klepper and Nagin, 1989; Mazzolini et al., 2017; Putniņš and Sauka, 2015; Slemrod et al., 2001; Varma and Doob, 1998; Witte and Woodbury, 1985). However, other studies display that increasing the probability of detection does not reduce informality (e.g., Franić, 2017, 2020a; Shaw et al., 2008; Webley and Halstead, 1986; Williams and Bezeredi, 2018e,f; Williams and Franić, 2017; Williams and Horodnic, 2017f, 2020a, 2021b). Yet other studies discover that it results in increased non-compliance, especially in environments where strong social norms towards compliance prevail, due to a breakdown of trust between the state and businesses, employers, workers, and citizens (Ayres and Braithwaite, 1992; Erard et al., 2019; Job et al., 2007; Mohdalia et al., 2014; Murphy and Harris, 2007; Tyler et al., 2007; Wenzel, 2004b). Whether improving the probability of detection, and thus the perceived or real power of authorities, is effective at facilitating the transition to formality depends not only on the context in which this is pursued (e.g., a high- or low-compliance culture), but also on the type of policy measure being evaluated. Given that it is far from clearcut that improving the probability of detection is universally effective at preventing participation in the informal economy among all population groups, and given that it is also unclear that all types of detection tools are equally effective, a finer-grained analysis is undertaken here. To do so, the following types of policy tools to improve the likelihood of detection are considered here in turn: 1. 2. 3. 4. 5. 6. 7. 8.

Inspections of workplaces. Registration of workers prior to first day at work. Workplace identity cards. Business registration and certification schemes of tax and social contribution payments. Data collection, sharing, and analysis tools. Notification letters. Complaint reporting tools. Certified cash registers.

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9. Supply chain responsibility tools. Inspections of Workplaces The most prominent and popular tool used to increase the expected or real likelihood of detection is the physical inspection of the workplace (European Labour Authority, 2020; ILO, 2013b, 2017b). Many, if not all, labour authorities use this as their core tool. To improve the effectiveness of workplace inspections at detecting work in the informal economy, initiatives can range from simply increasing the number of physical inspections to improving the targeting of “at-risk” or “suspect” businesses. Moreover, in recent years, alternatives to the traditional unannounced physical workplace inspection have been adopted, including online/desk-based inspections and announced physical inspections where a locality and/or sector is informed in advance about an inspection visit. Joint inspections with other enforcement authorities both on a national level and less commonly on a cross-border level have also been used. So too is there a shift away from conducting regular random inspections and towards a more risk-assessed targeted approach, although it is widely accepted that random inspections cannot cease since these have a strong deterrent effect. Finally, there has been the advent of advisory inspections where inspectors provide information to help businesses comply with the law. Until now, little evidence has been collected on the effectiveness of physical workplace inspections in preventing engagement in the informal economy. Instead, the assumption is that such physical inspections are necessary and essential, and the core activity of enforcement authorities, reflected in the fact that they are often called “inspectorates” or “inspection authorities” and the staff of enforcement authorities are called “inspectors”. However, whether (physical workplace) inspections are the most effective means of tackling the informal economy is seldom, if ever, discussed or evaluated. Neither is the relative effectiveness of different types of inspection evaluated, such as online/desk-based inspection and announced physical inspection. Yet these alternatives to the unannounced physical inspection are being adopted in many countries. Of the 30 European countries surveyed in 2022 by the European Platform Tackling Undeclared Work (Williams and Horodnic, 2022), 83 per cent responding had used online/desk-based inspections (all Northern and Western, 67 per cent of East-Central, and 80 per cent of Southern European countries) and 79 per cent had used announced inspections (83 per cent of Northern, 75 per cent of Western, all East-Central, and 40 per cent of Southern European countries). Here, the scant evidence currently available on the effectiveness of inspections at deterring informal work is reviewed. One study conducted a randomised controlled field experiment to assess the response of businesses to

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an inspection visit in the city of Belo Horizonte, Brazil. It finds a significant effect, leading to a 21–27 percentage point increase in formalisation (De Andrade et al., 2013). It is often assumed that regular random inspections are less effective than targeted inspections. However, there is again scarce evidence. An exception is a study in Hungary where the labour inspectorate in 2012 focused inspections on two sectors (food processing and the private and property security sector) in which informality was considered more prevalent. No more violations were identified, however, than in random inspections in other sectors (Bakos, 2012a,b). Nevertheless, even if targeted inspections are not more effective than random inspections if specific sectors are targeted, the development of data mining enables individual risky businesses to be targeted. Such evidence cannot be used as proof that data-driven targeted inspections of individual risky businesses is not more effective than random inspections. This will be returned to below. Recent years have also seen the advent of more joint and concerted inspections by enforcement authorities (European Platform Tackling Undeclared Work, 2018d; Markota, 2021; Williams, 2019c). Concerted inspections are those conducted by two or more authorities simultaneously in relation to the same case, but in different places. Joint inspections are those performed concurrently by two or more authorities at the same workplace. Again, there is little evidence on whether these approaches, although more business-friendly, are more effective. Nevertheless, of the 30 European countries surveyed in 2022 by the European Platform Tackling Undeclared Work (Williams and Horodnic, 2022), 92 per cent responding use joint and concerted inspections (all Northern and Western, 89 per cent of East-Central, and 80 per cent of Southern European countries). A key issue with inspections, of whatever type, is that even if they are effective at deterring participation in the informal economy, they might be less effective at facilitating the transition to formality. New KPIs for measuring the effectiveness of inspections at facilitating formalisation are therefore required, such as the number of workers who, after a workplace inspection, start formal employment out of the total number of workers found working informally. Despite the lack of empirical evidence on the effectiveness of physical inspections, and even less evidence comparing the effectiveness of different types of inspection (e.g., physical versus desk-top; announced versus unannounced; targeted versus random), especially at facilitating formalisation, inspections, especially physical onsite ones, remain the core policy tool used by enforcement authorities to tackle the informal economy. Indeed, an International Labour Organization report (ILO, 2006), often used by labour inspectorates to lobby for an increase in the number of inspectors, claims that there should be one labour inspector per 10 000 employed persons in developed countries and one inspector per 20 000 employed persons in developing

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countries. This is often used as a guideline by labour inspectorates. However, it is important to recognise that these ratios of inspectors to employed persons do not constitute a formal ILO recommendation, despite the way labour inspectorates throughout the world use them to lobby for an increase in inspectors. Indeed, in recent years, it has been recognised that greater attention needs to be paid to improving the effectiveness of workplace inspections rather than lobbying for more inspectors. The effectiveness of inspections can be improved by enforcement authorities adopting many of the policy tools discussed below, namely registration of workers prior to first day at work; mandatory identity cards in the workplace; business registration and certification schemes of tax and social contribution payments; engaging in effective data collection, sharing, and analysis to identify and target risky businesses; notification letters; complaint reporting tools (e.g., telephone hotlines); certified cash registers; and supply chain responsibility tools (e.g., joint and several liability, due diligence). Compared with evaluations of the effectiveness of workplace inspections by labour inspectorates, there is more evidence on the effectiveness of audits by tax authorities. Kleven et al. (2011) find that conducting random audits significantly improves the self-reported income of Danish taxpayers in the following tax year. Advani et al. (2017) similarly reveal the enduring positive impact of audits on reporting behaviour, revealing that self-employed UK taxpayers increase their income reporting for at least five years following a random audit. DeBacker et al. (2018) also display the sustained pro-deterrent effect of audits, finding that taxpayer reporting behaviour improves for three years following a random audit before reverting to previous levels of compliance. Beer et al. (2020) examine the effects of tax audits on the future reporting behaviour of 7500 self-employed US taxpayers. They find that taxable income increases by 15 per cent one year after an audit. However, among those receiving an additional assessment, reported taxable income is 64 per cent higher in the first year after the audit (and 44 per cent higher after three years) than in the absence of the audit. In contrast, reported taxable income among those not receiving an additional assessment is 15 per cent lower the year after the audit (21 per cent lower three years later) than if the audit had not taken place. This intimates that the improved targeting of audits towards the non-compliant not only yields more direct audit revenue but pays dividends in terms of future tax collection. Mendoza et al. (2017), using country-level data from 2003 to 2014, evaluate the relationship between the intensity of auditing in a country (assessed by the number of verification actions pursued by tax authorities per 100 taxpayers in each nation) and tax compliance (assessed by business executives’ perception of tax evasion). They find that compliance increases until a certain auditing level is reached, and decreases beyond that level, because it

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backfires and destroys the social contract between the taxpayer and state that leads to voluntary compliance. Registration of Workers Prior to First Day at Work Employers can claim during an inspection visit that the employee started work that day unless it is mandatory for workers to be registered before their first day at work. Examining the prevalence of this in Europe, of the 30 European countries surveyed in 2022 by the European Platform Tackling Undeclared Work (Williams and Horodnic, 2022), 75 per cent responding had compulsory registration of workers prior to the first day at work (83 per cent of Northern, 25 per cent of Western, 78 per cent of East-Central, and all Southern European countries). If such registration is mandatory, this needs to be accompanied by a comprehensive real-time register of employment for detection to be effective. Indeed, although mandatory registration of workers prior to starting work and real-time employment registers exist in many countries, there are often gaps in coverage. A 2019 survey of the 30 European countries represented on the European Platform Tackling Undeclared Work finds that enforcement authorities in only 43 per cent of the countries responding have introduced licensing/ authorisation of service providers on digital labour platforms. Furthermore, where this exists, it is usually confined to online transport services (Williams et al., 2020b). This is an example of a gap in mandatory registration of workers that needs to be addressed. A way forward is to make it compulsory for digital platforms to send information on service providers registered with them to the tax authorities (Hauben et al., 2020). In Estonia, for example, platforms transfer data on the transactions and income of service providers to the tax authorities. The tax authority then issues pre-filled income tax returns for the individuals (Williams, 2021g). Workplace Identity Cards Another means of improving the detection of informal work is workplace identity cards to register and monitor workers in workplaces. Of the 30 European countries surveyed in 2022 by the European Platform Tackling Undeclared Work (Williams and Horodnic, 2022), 62 per cent responding had mandatory identity cards in the workplace (67 per cent of Northern, 50 per cent of Western, 56 per cent of East-Central, and 80 per cent of Southern European countries). Workplace identity cards have been popular on construction sites due to the mobile labour involved, since these cards confirm not only who is working on a construction site as well as who employs them but also other

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information about the worker (e.g., health and safety certificates, training successfully undertaken, driver licences). In a review of workplace identity cards in the construction industry across 10 European countries, Williams (2022b) identifies that all are used as a tool for worker identification and to detect and prevent informal work. They are additionally increasingly used for wider purposes, such as recording vocational training, educational qualifications, and work experience in the sector, as an electronic key to gain access to a construction site, and as a “stamping machine” to ensure people sign in and out, and record working hours. In most countries, such cards commenced as voluntary initiatives organised by social partners, often on a small scale (e.g., Belgium, Finland, Sweden), and then transitioned into mandatory universal initiatives, often with a legal basis. Williams (2022b) finds that they are mandatory in seven countries (Finland, France, Iceland, Italy, Luxembourg, Norway, and Sweden) and voluntary in three countries (Belgium, Lithuania, and Spain). They are not a substitute for workplace inspections. They are complementary, making inspections more efficient. However, the cards must be readable by inspectors during workplace inspections and connected to up-to-date employment registers so that the worker can be verified. In consequence, such cards are only effective if there are accessible databases that inspectors can use in the field to verify the status of workers. Until now, and like for many other policy tools, there has been little post hoc formal evaluation of the outcomes of using such cards. In Finland, one proxy measure of their effectiveness is that after the tax number was put on the cards, the tax authorities found that in the first 18 months (after September 2012) tax revenues increased by €500 million and salary payments by 9 per cent compared with a year earlier. In the same period, construction activity was declining (Williams, 2022b). This tentatively reveals how the introduction of the tax number on the cards resulted in a decline in informal work as construction businesses became aware of who was employed on their worksites. However, no detailed evaluations have been conducted of the impact of identity cards on the formalisation of informal work in any country introducing these cards. Business Registration and Certification Schemes of Tax and Social Contribution Payments It is not just worker registration that improves the probability of detection of participation in the informal economy. So do forms of mandatory registration and licensing, such as business registration, trading licences, tax and social security registration, registration of service providers on sharing economy platforms, and so forth. Of the 30 European countries surveyed in 2022 by the European Platform Tackling Undeclared Work (Williams and Horodnic,

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2022), 42 per cent responding had business registration and certification schemes of tax and social contribution payments (33 per cent of Northern, 50 per cent of Western, 44 per cent of East-Central, and 40 per cent of Southern European countries). A particular focus recently has been upon registering the broker in triangular relationships involving an employee, employer, and a third party (discussed in Chapter 5). For example, national registers have been developed for TWAs (e.g., Bulgaria, Germany, Ireland, Poland, Spain, Norway). In Norway in 2010, Eastern European workers accounted for 22 per cent of those employed in TWAs and had substandard wage and working conditions. The labour inspectorate introduced a compulsory business registration scheme for TWAs. In January 2011, there were 1362 businesses registered and 86 per cent of trade union representatives from businesses that use temporary workers state that their employer checks that the agencies are on the register (Vennesland, 2013). Another example is the registration of “gangmasters” in the agricultural sector. In the UK, the Gangmasters (Licensing) Act 2004 was implemented following concerns over the exploitation of workers in agriculture, forestry, horticulture, shellfish gathering, and the food processing and packaging industries by labour providers known as “gangmasters”. This established the Gangmasters Licensing Authority (GLA) to regulate labour providers and employment agencies in relation to pay and tax matters, prevention of forced labour and mistreatment of workers, working conditions, and subcontracting. Compliance officers enforce the licensing requirements, including through random inspections. It is an offence for gangmasters to operate without a licence. It is also an offence for labour users to employ workers supplied by unlicensed labour providers. Quarterly impact reports on the performance of the now renamed Gangmasters and Labour Abuse Authority (GLAA) reveal that since 2006, 284 licences have been revoked, with the number of revocations reducing from 38 in 2008/09 to 12 in 2017/18, and 247 applications have been refused. Since 2008, there have been 66 prosecutions for acting as an unlicensed gangmaster (the maximum penalty for operating without a licence is ten years in prison and/or a fine) and 24 prosecutions for using an unlicensed gangmaster (carrying a maximum penalty of six months in prison and/or a fine). The outcome is better protection of workers’ rights. This licensing approach has been extended in the UK to car wash businesses (Clark et al., 2022). There are also payment certification schemes displaying that tax and social contribution payments are in order. In Norway, the Confederation of Norwegian Enterprise (NHO) created a voluntary certification scheme in the cleaning industry, where informal work was rife. All participating cleaning businesses provided documentation that their accounts and tax records were in order. User companies were then given a list of compliant enterprises (see

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compliance lists in Chapter 9). However, by 2008, just 27 certified businesses were registered, which was a tiny fraction of all businesses in this sector (Sissel et al., 2011). In 2012, in consequence, a compulsory certification scheme was introduced. Approved business had to meet the requirements for residence permits for all employees, the registration and reporting obligations on public registers for all employees, and health and safety standards, and all employees had to carry identity cards received from the labour inspectorate. A central register lists the approved companies which customers can employ. In 2012, the government allocated 20 million NOK (€2.69 million) to implement this approval scheme (Sissel et al., 2011). Data Collection, Sharing, and Analysis Tools The major way in which enforcement authorities have sought to increase detection in recent years is by improving (1) data collection, (2) data sharing, and (3) risk analysis tools. Each facet of this data-driven approach towards the detection of informality is considered here in turn. Data collection tools A first step to improve detection of the informal economy using data-driven risk assessment is to collect data. To achieve this, business and employment registers have been introduced. This enables the selection of businesses for workplace inspections; businesses and workers to whom notification letters can be sent; and businesses, workers, and citizens to target with educational and awareness-raising materials. Business and employment registers require the development of an information technology system that collects and stores comprehensive and high-quality up-to-date individual-level data, and databases (e.g., employment registers, business registers, tax registers) that collect the data/fields/variables required to detect informality, provide real-time data, and are available to all relevant levels of enforcement authorities who need the data, including inspectors. The major challenges when developing registers are that enforcement authorities need the financial resources to develop them, the technical skills to develop and use them, appropriate legislation on personal data and privacy safeguards to enable access to such data for enforcement authorities (ENISA, 2014, 2015); and political support to develop them. An example is the electronic register of employment in Estonia introduced in 2014, in which employers are required to register employees before the employee starts work. The initial cost was €403 200 and the annual running costs amount to €33 000. In the year following its introduction, €11.8 million additional tax revenue was collected, and the share of unregistered employment decreased from 10 per cent to 6.3 per cent of total employment (European

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Platform Tackling Undeclared Work, 2019a). Other examples of national employment registers include the Revisal employment register in Romania (European Platform Tackling Undeclared Work, 2019b) and the incomes register in Finland (European Platform Tackling Undeclared Work, 2019c). There are also more specific registers in sectors prone to informality, such as Checkin@​Work in Belgium for the registration of workers in the construction and meat processing industries (European Platform Tackling Undeclared Work, 2019d). Besides employment and business registers, enforcement authorities are shifting case management databases of audit/inspection outcomes from paper-based to electronic forms that can be merged with other electronic databases, are up to date, and are fully accessible to those who need them. Web scraping is also starting to be used to collect data on specific businesses and individuals, as is third-party data, including individual or business bank account information, information from telecommunications providers on individual businesses or employees, and information from internet service providers (ISPs) on the activity of businesses or employees. For example, during the COVID-19 pandemic, to evaluate whether employees were still being asked to work while in receipt of short-term state support, the Spanish labour inspectorate used information from telecommunication providers and ISPs on their telephone and internet activity to check if they were still working (Williams, 2021c). Data sharing tools Besides internal data, enforcement authorities rely on external data from other public or private sources to detect participation in the informal economy. Sharing data from and with other bodies, especially administrative data, is often problematic and an impediment to the effective detection of informal work. If data is shared electronically, it requires a cross-government information technology infrastructure with electronic systems that are compatible across authorities. This is often not the case. It also requires legislation to protect personal data and safeguard privacy that does not hinder data exchange or usage. This requires the use of privacy by design, or its variation “data protection by design” (ENISA, 2014, 2015). Finally, it requires the political will in enforcement authorities to share data with each other. Of the 30 European countries surveyed in 2022 by the European Platform Tackling Undeclared Work (Williams and Horodnic, 2022), 54 per cent responding had pursued initiatives to coordinate data mining and sharing across government departments (83 per cent of Northern, 50 per cent of Western, 33 per cent of East-Central, and 60 per cent of Southern European countries). In most countries, there is the lack of a fully coordinated approach to data sharing. Many enforcement authorities have difficulties accessing data

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from other enforcement authorities. An exception is Belgium, which has the Crossroads Bank for Social Security (CBSS). Social security in Belgium consists of three insurance systems (workers, self-employed workers, and civil servants) covering seven social risks (incapacity for work, industrial accident, occupational disease, unemployment, old age, childcare, and holiday pay), and four assistance systems (subsidies for the handicapped, guaranteed family allowance, minimum income, and income guarantee for the elderly). The CBSS, despite its name, is not a databank, but a network for data flows across different state institutions. Each institution holds its own data. In 2016, 1.1 billion electronic data exchanges occurred with a response time for the online messages of less than four seconds in 99.27 per cent of the cases. The Belgian Planning Bureau calculate that the information exchange processes have led to an annual saving of €1.7 billion per year. The CBSS made possible the provision of services of better quality and new types of services, such as automated granting of social benefits without citizens or employers having to make requests (European Platform Tackling Undeclared Work, 2019e). A similar example is Finland, which has overcome the traditional problems with sharing data by creating one central unit for state authorities involved in tackling informality. Established in 2011, the Grey Economy Information Unit (GEIU) provides a single point of access for permitted public authorities to gain information on organisations and individuals within organisations suspected of engaging in informality. The service is automated with a full web interface, meaning that compliance reports are produced automatically and delivered to the information system of the requesting authority. There are 24 employees. The GEIU has produced 2 million compliance reports since it was established in 2011. From receipt of a request for a compliance report, it takes the GEIU one day to complete. Currently, 21 authorities have permission to request compliance reports from the GEIU (European Platform Tackling Undeclared Work, 2019f). Data analysis tools Once data has been collected and shared, data analysis in the form of risk analyses of businesses and workers is then required to detect informality (European Platform Tackling Undeclared Work, 2018a). Data analysis takes two forms: data matching, where there is the large-scale comparison of records or files collected or held for different purposes, with a view to identifying potential instances of informality; and data mining, which is a set of automated techniques used to extract buried or previously unknown pieces of information from large databases (De Wispelaere and Pacolet, 2017). Of the 30 European countries surveyed in 2022 by the European Platform Tackling Undeclared Work (Williams and Horodnic, 2022), 75 per cent responding used data matching to identify risky businesses (all Northern, 75

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per cent of Western, 56 per cent of East-Central, and 80 per cent of Southern European countries) and 71 per cent used data mining to determine risky businesses for inspection (83 per cent of Northern, 25 per cent of Western, 78 per cent of East-Central, and 80 per cent of Southern European countries). Many data mining tools are available either as open-source or commercial software (Altalhi Abdulrahman et al., 2017; European Platform Tackling Undeclared Work, 2017, 2018b; Mikut and Reischl, 2011; Rangra and Bansal, 2014). An example is the MiningWatch data analytics tool in Belgium, which uses predictive modelling to define fraud risks in three different sectors: construction, cleaning, and the hotels and catering sector. Launched in 2015, average detection rates have risen from a 16 per cent inspection success rate prior to MiningWatch to a 45 per cent success rate using MiningWatch (European Platform Tackling Undeclared Work, 2019j). A similar example is the Anti-Fraud Tool that has been used in Spain since 2015 (European Platform Tackling Undeclared Work, 2019g). In the UK, the tax authority (Her Majesty’s Revenue and Customs, HMRC) conducts data mining using its Connect data system, which brings together 40 datasets with 22 billion lines of data and 600 million documents. There are 250 data analysts and 4000 users, who have conducted 13 million searches. HMRC uses Connect not only to detect non-compliance but also to prevent non-compliance by identifying targets for education and awareness-raising campaigns. Evaluating the revenue-to-cost ratio, HMRC has spent £90 million developing this tool and it has secured an additional £3 billion in tax revenue (a 33 to 1 revenue-to-cost ratio). More than 70 per cent of enquiry case selections are generated by Connect (European Platform Tackling Undeclared Work, 2019k; HMRC, 2017a). A specific example from the hotel sector is that turnover to credit card transaction ratios are used to identify outlier hotels whose ratio deviates from the norm. This dynamic benchmarking of the hotel sector occurs on a city level and for different types of accommodation providers (e.g., small hotels), since credit card to turnover ratios are higher in cities and larger hotels than in smaller towns and smaller hotels. Notification letters are then sent to outlier businesses notifying them of the discrepancy identified and the need to put their affairs in order. The Australian Tax Office (ATO) similarly uses dynamic benchmarking, or what it calls a “nearest neighbour” model. This compares a taxpayer’s work-related deduction claims against those in similar jobs and earning similar incomes to determine how far they differ from the norm. A pilot programme launched in 2014 issued letters to 2000 taxpayers whose work-related expenses were higher than their peer group. Adjustment rates for those potential risk tax returns exceeded 80 per cent. Since then, the nearest neighbour model has been used extensively by the ATO to select higher-risk candidates (OECD, 2017).

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Some enforcement authorities have experimented with making public their risk analysis tools and risk rating assessments of businesses. This has had a positive effect on voluntary compliance. For example, in June 2020, the Estonian Tax and Customs Board launched a service allowing businesses to see their tax behaviour rating online (Estonian Tax and Customs Board, 2020; European Platform Tackling Undeclared Work, 2022), enabling businesses to correct many simple and honest mistakes (Õun, 2021). In Italy, Redditest, launched in 2009 and using the risk assessment tool of the tax authority, allows taxpayers to self-diagnose whether they are at risk of inspection (Williams, 2020c). Making available to the public the risk assessment tool used is therefore a means of encouraging voluntary compliance and reducing the need for inspections. Notification Letters One outcome of a data-driven approach to detection is that enforcement authorities have increasingly used notification letters. Notification letters are either postal or email communications sent by tax, social security, and labour authorities to businesses or workers providing various information to “nudge” them towards compliant behaviour. They are a cheap means used by tax authorities to encourage compliant behaviour (Beeby, 2017; Hasseldine et al., 2007) and compliance with labour and social security laws (Alm et al., 2019; Williams, 2019e). Usually, they are sent as a follow-up to data mining exercises that identify “outliers” on various indicators, with the aim being to “nudge” changes in behaviour (European Platform Tackling Undeclared Work, 2019h,i, 2021a). Of the 30 European countries surveyed in 2022 by the European Platform Tackling Undeclared Work (Williams and Horodnic, 2022), 63 per cent responding used notification letters (50 per cent of Northern, 75 per cent of Western, 56 per cent of East-Central, and 80 per cent of Southern European countries). The effectiveness of notification letters depends in part on the content of the letter (Beeby, 2017; Behavioural Economics Team of the Australian Government, 2018; Biddle et al., 2018; Bott et al., 2020; Chung and Trivedi, 2003; Drago et al., 2020; Hasseldine et al., 2007, 2017; Pomeranz, 2015; Vainre et al., 2019). For example, examining 8000 taxpayers owing taxes who were sent varying letters in Canada, Beeby (2017) finds that the friendly nudge letters collected 12 per cent more taxes owed than the standard punitive letter. However, in March 2016, an analysis involving 6877 taxpayers found the opposite: those receiving the punitive letter paid more than those receiving the friendly nudge letter. Hasseldine et al. (2007) examine the impact of five different letters ranging from a simple offer of assistance to a letter advising that their tax return had been already pre-selected for audit, sent to 7300

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self-employed without employees in the UK. Letters threatening sanctions were more effective than normative appeals to do the right thing. A further UK study investigates the comparative effectiveness of three different messages, namely, “nine out of ten people pay their tax on time”, “nine out of ten people in the UK pay their tax on time”, or “nine out of ten in the UK pay their tax on time. You are currently in the very small minority of people who have not paid us yet.” Improvements in timely payments resulted with all three messages, but the third message that highlights how the person is in the minority of non-compliant people had the greatest effect (Hallsworth et al., 2017). However, this is in a context where the state is perceived as an all-knowing “big brother” figure. It would be a different outcome in developing countries where the perception is that the state is less all-knowing and institutions weaker. In Costa Rica, the effectiveness of personalising email notifications was assessed. In 2014, 12 515 firms failing to submit their 2014 income tax declarations were sent either no email, a personalised email including a deterrence message and containing a direct web link, or the same email but including examples of transactions the recipient firm made. The results show that the personalised email reminder nearly tripled the rate of declaration by firms from 11.5 per cent for businesses not sent an email to 32.5 per cent. Including in the email third-party information on their transactions increased declaration further still, to 34.2 per cent. The emails also increased declaration and payment in the next tax year without any further intervention (Brockmeyer et al., 2016). Mascagni and Nell (2022) report a field experiment in 2016 where the Rwanda Revenue Authority sent 9000 taxpayers a message. They find friendly messages are more effective than deterrence communications, and that the latter have a backfiring effect among higher-income taxpayers, but the expected effect for others. This backfiring effect is identified elsewhere. Castro and Scartascini (2015), in a field experiment targeting property tax taxpayers in a municipality in Argentina, find that those receiving a deterrence message were 5 percentage points more likely to comply compared with the control group. So did reciprocity and peer-effects messages improve compliance. However, the compliant reacted negatively to information on others’ compliance rates. This reveals how notification letters can backfire when sent to intrinsically motivated compliant taxpayers. Therefore, notification letters need to be data-driven letters sent to risky entities who are likely to be non-compliant.

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Complaint Reporting Tools Many governments use peer-to-peer surveillance tools and encourage “whistle blowing” by asking people to directly report instances of informality, via telephone hotlines, text messages, and online reporting portals. Of the 30 European countries surveyed in 2022 by the European Platform Tackling Undeclared Work (Williams and Horodnic, 2022), 83 per cent responding used complaint reporting tools (83 per cent of Northern, 75 per cent of Western, 89 per cent of East-Central, and 80 per cent of Southern European countries). A more in-depth analysis of this issue in a 2018 survey of members of the European Platform Tackling Undeclared Work revealed that of the 82 per cent using complaint reporting tools, 81 per cent have a website, 68 per cent an email address, 58 per cent a postal address, and 55 per cent a telephone hotline. Only 71 per cent of these authorities use a risk assessment or sifting process for complaints received. For 24 per cent of authorities, all complaints reported lead to inspections (Williams and Puts, 2018). For example, in the UK, a telephone hotline and online reporting system was introduced by HMRC, costing £700 000 per annum to staff the hotline and £3 million per annum to investigate the complaints received. In 2006, to encourage reporting to the hotline, a £4.5 million television, press, and radio campaign was used, focused upon specific trades such as hairdressers, home repair and maintenance workers, taxi drivers, and motor vehicle repairers. In 2006/07, 120 000 calls and emails were received, costing on average £6 each to handle. One-third of the reports lacked relevant information. Of the 76 300 subjected to risk assessment, no further action was taken on 12 400, and 8400 people were dealt with by offering education and support. HMRC was awaiting the tax returns from 9800 further cases as no tax was yet due. By 31 March 2007, there had been no decision on the remaining 25 900 cases. Of the 19 800 cases where HMRC had taken investigations further, 3500 cases had been opened, and 2000 completed, generating additional tax of £2.6 million (National Audit Office, 2008). Social partners can also use complaint reporting tools. In Sweden, Fair Play Bygg was established in 2016 by a trade union and employers’ organisation. A website was developed through which workers can anonymously report cases of informal work, tax evasion, or abuses of workers by construction companies. If irregularities are found, they report the case to the Swedish Work Environment Authority. Over 90 per cent of cases submitted have resulted in uncovering and prosecuting cases of informal work (Fair Play Bygg, 2022). A key lesson is that complaint reporting tools generate a high number of leads that need to be followed up and this can be time-consuming and costly, especially if it is legally mandated that all complaints should be investigated. It also means that little resource is available to conduct strategic data-driven

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workplace inspections or random inspections. In part, this arises because there is no risk assessment and sifting process using pre-defined criteria to decide which complaints should be inspected/audited and which should not. Nevertheless, complaint reporting tools are an option that can be pursued to increase the expected or actual risk of detection. Certified Cash Registers In an increasing number of countries, certified cash registers are used to deter transactions in the informal economy. These cash registers have a black box which directly reports transactions to the tax authority. The intention is to reduce non-declaration of turnover and the amount of cash available to businesses to pay, for example, “envelope” wages. Electronic data on issued receipts is stored so that it can be examined by the tax authorities and compared with declared turnover. In Croatia, legislation mandating businesses from 2013 to use certified cash registers resulted in an increase of over €1 billion in declared revenue in 2014, which was 17.8 per cent higher than 2012 (OECD, 2017). In Hungary, similarly, 2013 legislation introducing certified cash registers resulted in a 11.8 per cent increase in VAT revenue in 2014, of which 6.7 percentage points (0.6 per cent of gross domestic product [GDP]) could be attributed to tax compliance improvements (OECD, 2017). In Belgium, certified cash registers not only record all transactions but also the staff using them. This enables employment records to be checked. The disadvantage of the current system is that an app must be used onsite to retrieve this data (Mortelé, 2021). To improve the effectiveness of certified cash registers in detecting informal work, making their use mandatory is necessary. In addition, including time registration for each worker using the certified register allows working hours to be monitored, preventing quasi-formal employment. There is also a need to encourage customers to request receipts so that all turnover is recorded (see Chapter 9). One problem with certified cash registers is that software has been produced, known as zappers and phantom-ware, enabling sellers to avoid declaring all transactions. Zappers are physical devices that prevent sales transactions appearing on financial records, eliminating transactions (including cash tips) from point-of-sale (POS) systems. They use software frequently run from a flash drive to access POS system records and allow the owner to change transaction records. Phantom-ware is software that creates virtual sales terminals. While zappers are commonly used on the server in a POS system, phantom-ware is more commonly used on individual cash registers.

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Supply Chain Responsibility Tools The use of the informal economy in supply chains, such as in agriculture and construction, is often a major problem. One option is to make those at the top of supply chains responsible for policing their chains by adopting joint and several liability in subcontracting chains. Of the 30 European countries surveyed in 2022 by the European Platform Tackling Undeclared Work (Williams and Horodnic, 2022), 50 per cent responding used supply chain responsibility tools, such as joint and several liability and due diligence initiatives (50 per cent of Northern, 75 per cent of Western, 33 per cent of East-Central, and 60 per cent of Southern European countries). For example, in Belgium, in the agricultural sector, there is joint and several liability for the contractor to monitor the chain of (sub)contractors, such as ensuring the subcontractor correctly pays wages (Williams, 2019c). Indeed, Ethical Trading Initiative Norway (IEH), Ethical Trading Initiative (ETI), and Danish Ethical Trading Initiative (DIEH) (2015) have called for food retailers to perform a due diligence assessment of their direct suppliers, namely the food processing companies. More widely, the UN Guiding Principles on Business and Human Rights state that a business has a responsibility to respect human rights and shall put into place measures that ensure that its activities and relationships do not have negative impacts on people’s rights. Supply chain due diligence is therefore a method, or process, through which a business can assure stakeholders that it is not infringing upon the rights of others.

CONCLUSIONS This chapter has reviewed the range of deterrence tools used to dissuade participation in the informal economy by increasing the real and/or expected costs of participation in the informal economy. The basis of this approach is that participants in the informal economy are rational economic actors and that by increasing the costs of participation the net outcome will be to change the cost–benefit ratio confronting them so that they choose to operate in the formal economy. As this chapter has highlighted, two sets of policy tools have been used to increase the perceived or actual costs of participation in the informal economy. On the one hand, there are tools to improve the actual and/or perceived sanctions for those caught and, on the other hand, tools to increase the expected or real probability of detection. Each set of tools has been reviewed in turn. Before this, however, the empirical studies on whether using deterrents is effective at tackling the informal economy have been reviewed. This has shown the mixed evidence on whether increasing the costs of participation in the informal economy reduces engagement. Reinforcing the widespread adoption of deter-

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rent tools by enforcement authorities across the world, some studies find that increasing the costs of participation in the informal economy reduces engagement, with most of the scholarship written from within this approach finding that increasing the risk of detection is more effective than increasing the penalties. However, other studies find no association between increasing the penalties and risk of detection and participation in the informal economy, and yet other studies that increasing penalties and risk of detection increases participation in the informal economy, due to the resultant breakdown of the social contract between the state and businesses, employers, workers, and citizens. It is therefore far from clearcut whether deterrence is always effective at preventing participation in the informal economy. Here, therefore, a finer-grained analysis has been undertaken of, first, the different types of sanction tools and, second, tools to increase the probability of detection, in different contexts, to evaluate their effectiveness in preventing participation. First, the various sanction tools have been reviewed. It is again not clearcut from empirical studies whether increasing the expected sanctions has a significant impact on participation in the informal economy, although it is evident that it does for some groups, especially those whose social norms conform to the law, suggesting that penalties should not be used as a threat wielded towards all, but only to individuals whose ethics are weak. Neither is it clearcut that all types of sanction tools are effective. Here, the effectiveness of six types of sanction tools have been evaluated, namely sanctions to deter participation in the informal economy; sanctions to facilitate the transition to formality; sanctions applied to citizens or businesses who buy goods and services from the informal economy; non-compliance lists; sanctions that exclude non-compliant businesses from bidding for public procurement contracts and receiving subsidies and licences; and naming and shaming lists. This has revealed that despite the standard practice in enforcement authorities across the world of using sanctions to tackle the informal economy, the empirical evidence to support their effectiveness is weak. Second, the tools used to improve the actual or perceived probability of detection have been reviewed. Akin to sanctions, there is little conclusive evidence that increasing the probability of detection is effective in reducing participation in the informal economy. Some studies reveal that raising the likelihood of detection reduces informality, particularly for some groups. However, a large volume of scholarship finds that raising the risk of detection does not reduce participation. Rather, it can result in greater non-compliance, largely because of the breakdown of trust between the state and businesses, employers, workers, and citizens. Whether improving the probability of detection, and thus the perceived or real power of authorities, is effective at reducing participation in the informal economy depends not only on the context in which this is pursued (e.g., a high- or low-compliance culture), but also on

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the type of detection tool evaluated. Here, a finer-grained analysis has been undertaken of the effectiveness of various tools to improve the likelihood of detection, namely inspections of workplaces; registration of workers prior to first day at work; workplace identity cards; business registration and certification schemes of tax and social contribution payments; data collection, sharing, and analysis tools; notification letters; complaint reporting tools; certified cash registers; and supply chain responsibility tools. This has revealed that despite their widespread usage across the world, the empirical evidence to support their effectiveness is weak. Indeed, of note is the lack of empirical evidence of the relative effectiveness of workplace inspections in detecting the informal economy compared with other policy initiatives. Given that the vast majority of resource in enforcement authorities is dedicated to physical workplace inspections, especially in labour inspectorates, there is perhaps a need in future for greater evidence to be produced on whether this is the most effective use of their resource, whether more resource could be dedicated to complementary initiatives (e.g., data collection, sharing, and analysis), or whether alternatives to the physical workplace inspections require greater resource (e.g., measures to improve the benefits of operating in the formal economy). Indeed, in recent decades, the emphasis of enforcement authorities on deterrents has been called into question. On the one hand, there is the lack of conclusive evidence of the effectiveness of deterrence both as a whole and in relation to many specific deterrent tools, as this chapter has highlighted. On the other hand, the shift in the overarching objective of state authorities away from eradicating the informal economy and towards the formalisation of informal work has highlighted the need to move beyond the emphasis on deterrence measures. Although useful for eradicating the informal economy, this is less useful for facilitating the transition to formality. This explains the emergent focus upon incentives to make operating in the formal economy easier as well as more beneficial, which is the subject of the next chapter.

9. Incentives to operate in the formal economy The recognition by both governments and supra-national organisations that the goal is to transform informal work into formal work has led to tools to deter participation in the informal economy being supplemented with tools to make operating in the formal economy easier and more beneficial. To improve the benefits of operating in the formal economy, two types of formalisation incentives have been used. On the one hand, there are supply-side formalisation incentives to make it easier and/or more beneficial for businesses, employers, and workers to operate in the formal economy. On the other hand, there are demand-side formalisation incentives targeting customers with rewards for purchasing formal goods and services rather than those from the informal economy. Akin to deterrence tools (see Chapter 8), the effectiveness of incentive-based policy tools is not clearcut (Bazart and Pickhardt, 2011; Brockmann et al., 2016; Fochmann and Kroll, 2016; Kastlunger et al., 2011; Lisi, 2022). Here, therefore, the intention is to evaluate the effectiveness of the plethora of formalisation incentive tools. This is important because a major reason for a continuing emphasis on deterrence tools in enforcement authorities and the lack of adoption of formalisation incentives is the lack of evidence on the latter’s effectiveness at tackling the informal economy. Indeed, in a survey of senior representatives of enforcement authorities in 31 European countries, Williams and Puts (2018) find that this lack of available evidence on their effectiveness is the major reason for their non-adoption and the continuing use of deterrence tools. As Chapter 8 showed, although evaluations of deterrence tools show that they can either reduce, have no effect on, or even increase participation in the informal economy, at least there are evaluations. It is the lack of collated evidence on the effectiveness of incentives that hinders their adoption. Therefore, in this chapter, a review is undertaken of the evidence available on their effectiveness at tackling the informal economy. First, the different types of supply-side formalisation incentives to make it easier and/or more beneficial for businesses, employers, and workers to operate in the formal economy are evaluated in terms of their effectiveness at tackling the informal economy. Second, the various demand-side formalisation incentives that make 207

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it easier and/or more beneficial for consumer to purchase from the formal economy are evaluated in terms of their effectiveness.

SUPPLY-SIDE INCENTIVES One of the few evaluations of the effectiveness of supply-side formalisation incentive measures is a meta-analysis by Floridi et al. (2021). This examines access to information, education and awareness-raising initiatives (on banking, registration, etc.), financial incentives to register, reduced registration costs and time required, reduced tax burden, less burdensome legal and tax statuses, enforcement reforms, access to finance, and their various combinations. They find small benefits to the firms themselves of formalisation in terms of their performance, largely by way of increased revenues. When they compare policy-induced formalisation with self-induced formalisation, they find policy-induced formalisation is more effective, intimating the need for formalisation incentives. A further study by Jessen and Kluve (2021) examines 32 academic studies that have evaluated one or more formalisation interventions. Among the narrow range of incentive tools reviewed, they find that tax incentives and simplifying worker registration were often the most effective, and that full policy initiatives were more effective than singular one-off programmes such as a small pilot experiment. Ohnsorge and Yu (2021) reinforce this finding when they assert that comprehensive policy packages tailored to country circumstances offer the greatest chance of success in preventing informality. Here, to provide a more in-depth review, the following supply-side formalisation incentives are reviewed and evaluated in turn: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Simplifying the formal regulations. Advisory inspections. Society-wide amnesties. Voluntary disclosure schemes. Direct tax and social security incentives. Targeted indirect tax incentives. Formalisation support to start-ups. Formalisation support and advice to existing informal enterprises. Help with record-keeping. Compliance lists.

Simplifying the Formal Regulations Simplifying the formal regulations and procedures required to comply is important because complexity increases the likelihood of misreporting

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(Alstadsæter and Jacob, 2013), Indeed, examining 45 economies, Richardson (2006) reveals that regulatory complexity is the most important determinant of non-compliance. The less the regulatory complexity, the higher is the rate of compliance. Indeed, simplifying the formal regulations is the most popular tool used by countries to make compliance easier and more beneficial for employers, the self-employed, and workers. Of the 30 European countries surveyed in 2022 by the European Platform Tackling Undeclared Work (Williams and Horodnic, 2022), 83 per cent responding had simplified procedures for complying with existing regulations (all Northern, Western, and Southern and 56 per cent of East-Central European countries). This simplifying of the formal regulations takes a variety of different forms. To review these different tools, first, tools to simplify business registration are considered, second, tools to simplify employment registration, and third, tools to simplify tax returns. Before commencing, two brief general comments are required. First, even if countries use regulatory impact assessment (RIA) for new regulations and administrative processes (Hart et al., 2005), few if any conduct “informal economy impact assessment” to evaluate the extent to which regulations influence formalisation. Second, simplifying compliance is different from reducing regulations (i.e., de-regulation). Simplifying business registration Across the world, governments have sought to simplify the procedures for starting up and registering a formal business, such as virtual one-stop shops and electronic registration services, which reduce the time required and increase compliance. These initiatives often join up government by putting in one place the various obligations of different institutions. According to the World Bank (2021), electronic services to register businesses are available in more than 90 per cent of high-income economies but only 40 per cent of low-income economies. In Estonia, for example, since 2011 an e-business register has existed for registering businesses online and the time taken for registration has reduced from five days to two hours (Divald, 2021). Meanwhile, in Greece, starting a business used to require visiting several government offices, completing 15 procedures, filling out numerous forms, waiting more than a month, and paying fees totalling more than 20 per cent of income per capita. Over time, this has been simplified. Since 2018 there has been an online company registration portal. Starting a business now takes three or four days to complete and the registration fee is €250 (or 30 per cent less if done online). The minimum amount to be deposited in cash before incorporation, as paid-in capital, is a nominal €1 (World Bank, 2019b).

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Evaluating whether simplifying business registration is effective at formalising the informal economy, there have been mixed findings. In Mexico, in 2002 the Rapid Business Opening System (SARE) reduced the number of days, procedures, and office visits to register a business. The outcome was a 5 per cent increase in the number of registered firms, attributable to the simplified business registration procedures (Bruhn, 2011, 2013). However, the increase in registration was only temporary, occurring mainly at the beginning of the reform (Kaplan et al., 2011) and led to a 2.2 per cent increase in employment, but due to former wage earners starting up businesses, not due to formalisation of existing unregistered firms (Bruhn, 2011). In Kenya, Devas and Kelly (2001) find that the introduction of a simplified single business permit for small firms led to some degree of formalisation, while Sander (2003), reporting a similar pilot project in Entebbe, Uganda, asserts that reforms reducing registration costs led to a 43 per cent increase in firm registration. In Bolivia, Garcia-Bolivar (2006) report that reducing registration costs led to a 20 per cent increase in firm registrations, and similar increases in Vietnam. Van Elk and de Kok (2014) find that initiatives to increase firm registration by reducing the cost need to offer a high reduction of the registration payment of at least 50 per cent for there to be significant effects on the number of registered businesses. De Andrade et al. (2013) assess the effect of free registration for informal firms in Brazil and find no positive impacts on registration rates, while Jaramillo (2009) in Lima in Peru finds that only one in four formalised when offered free business licences and support. Olomi et al. (2018) similarly find in Ghana, Kenya, Rwanda, and Tanzania that most unregistered enterprises are unlikely to formalise even when regulations are simplified. In Peru, Mullainathan and Schnabl (2010) nevertheless find that when the time to get a licence was reduced by 60 per cent and the cost by 42 per cent, four times more firms obtained a licence, resulting in a 43 per cent growth in businesses with a municipal licence. Reviewing the literature from randomised and non-experimental studies, Bruhn and McKenzie (2013) find that lowering the cost of registration and simplifying the process does not affect smaller unregistered enterprises, as did a later review (Bruhn and McKenzie, 2018). De Mel et al. (2012), in an experiment in Sri Lanka, find that free registration had no influence on behaviour but offering financial inducements had a positive impact. Offering between one-half to one month’s median profits led to the registration of 20 per cent of informal enterprises and offering two months’ profits resulted in 50 per cent registering. Reinforcing this, Khamis (2014) finds that providing information on how to register needs to be accompanied by simplifying the registration process and paying unregistered firms to encourage registration. These experiments display that simplifying processes and reducing the costs of registration are insufficient alone to encourage formalisation (Altenburg

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and von Drachenfels, 2006; Arruñada, 2007). Offering financial inducements is required, but even large inducements fail to attract the majority to register, doubtless due to the limited benefits of formalisation in many countries, mistrust of governments, and fear of the high recurrent costs of formalisation in the medium to long term (Zinnes, 2009). A recent example of offering an incentive to formalise occurred in response to the COVID-19 pandemic when it was advocated that the temporary financial support available to formal businesses could be made available to informal businesses if they came forward to register (Narula, 2020; Williams and Kayaoglu, 2020b,c). In a survey of firms in 65 municipalities in Bolivia, Brazil, Honduras, Nicaragua, and Peru, 47 per cent of the firms state the top reason for formalising is to comply with the law, 29 per cent to avoid fines or bribes, 14 per cent to expand their client base, 8 per cent to access credit, and 1.5 per cent to access the courts. However, the benefits of registration are often limited in many countries. In Vietnam, McCaig and Nanowski (2019) reveal that acquiring a licence does not result in an increase in profits, revenue, or employment. This was similarly found in 17 African states where a simplified legal status called the “entreprenant” was introduced to help them formalise, which is free to obtain, takes one business day, and includes the possibility of applying for banking services and government contracts (Benhassine et al., 2016). Examining businesses adopting the entreprenant status, Benhassine et al. (2016) find that while the businesses paid lower taxes due to a tax exemption, over the next two years they were not more likely to have bank accounts, new customers, higher profits, or additional workers. Recognising that the transition to formality is a process and that there are degrees of formalisation (see Chapter 5), the World Bank (2020) advocate not only simplified registration but also intermediate or temporary legal/tax statuses for informal businesses making the transition to full formal status. This intermediate status could make such businesses eligible for certain targeted technical assistance to improve the benefits of formalisation. Similarly, a temporary legal status could provide a grace period when an informal business could receive the benefits of formalisation without the associated costs, to help them recognise the potential benefits. This would function as an up-front investment on the part of the government. For example, in Mexico, the Regimen de Incorporación Fiscal (RIF) status offers tax, insurance, social security, and credit benefits that gradually phase out over ten years (González, 2015). Such simplified legal or tax statuses help firms access government support, credit, and market linkages and are more attainable for many micro-entrepreneurs who would otherwise not consider formalisation, such as those not pursuing growth. This might help the formalisation of most businesses who operate in the middle of the spectrum between fully formal and fully informal (see Chapter 5).

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Simplifying employment registration Another initiative is to simplify the registration of employment. Many governments across the world, as Chapter 8 displayed, have introduced employment registers, and made it easier to register employees. Today, in most countries, the focus is upon developing initiatives to simplify the processes for registering forms of employment that tend not to register, such as temporary and smaller jobs, and service providers on digital labour platforms. For example, several countries have simplified the regulations for registering odd jobs. In Belgium, a standard 10 per cent tax rate has been applied to service providers operating through a digital platform and earning less than €5000 per year. In the UK, similarly, individuals earning less than £1000 gross per annum from occasional work and property lets can retain the income without declaring it for tax purposes (Heyes and Newsome, 2017). In Hungary, the 2010 Simplified Employment Act made it easier for seasonal and temporary employment to be conducted in the formal economy. Before this Act, employers had to complete in duplicate, in a temporary work booklet, an official attendance sheet with 18 pieces of information for every seasonal worker. The 2010 Act introduced simplified registration, and since 2017 a mobile app can be used enabling a simplified work contract to be notified either by a simple text message (SMS) or online after registering in the system (European Platform Tackling Undeclared Work, 2019l). A similar example is the simplified registration of short-term seasonal contracts in agriculture in Bulgaria since 2015. In 2016, 199 173 employment contracts of this kind were used, and 210 000 by 2018, with 2000 farmers making use of this scheme (European Platform Tackling Undeclared Work, 2019m). Another example is the “mini-jobs” scheme in Germany. This simplifies registration for odd jobs previously conducted in the informal economy due to the complex compliance required to operate formally (Baumann and Wienges, 2003; Schneider, 2008). In 2002, three types of mini jobs were recognised: (1) jobs with earnings up to €400; (2) mini jobs in the household sector; and (3) “midi jobs” with earnings between €400 and €800 (Williams and Renooy, 2009). By 2004, the number registered as engaged in such work was 7 million. Some 1.21 million were already in a formal job, and 580 000 were estimated to have transferred their work to the formal economy under this scheme (Baumann and Wienges, 2003). Schneider (2008) argues that this scheme reduced the informal economy by €9 billion. The scheme was updated in 2012 and the earnings threshold increased to €450, effective from 2013. From 2014, an online platform was created. Minijob-Zentrale operates like other household service platforms, but is free of charge, unlike private household service platforms who charge purchasers intermediary fees for sourcing household service workers (European Platform Tackling Undeclared Work, 2019o).

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Another initiative to simplify employment registration, mostly in agriculture, is what is variously termed employee sharing, joint employment, employee groups, or co-employment. This is where the same worker, under a single employment relationship, works for more than one employer. From a regulatory perspective, there are two parties to the employment relationship (employer and employee), although the contract has multiple individuals legally classified as employers (European Platform Tackling Undeclared Work, 2019n; GEOPA-COPA and EFFAT, 2017). An employment relationship where similar simplification has been necessary recently is teleworking. During the COVID-19 pandemic, this increased. In many countries, no legislation was in place to protect workers’ rights and set out employers’ responsibilities. In Spain, for example, Royal Decree-Law 28/2020 (22/09/2020) provided clarity on workers’ (and employers’) rights in relation to teleworking by introducing the registration of remote work agreements which must be provided in writing and must include, for instance, the working hours, the rules of availability, and the means of corporate control of the activity. This has provided a new legal basis for the investigation of violations of labour rights (European Platform Tackling Undeclared Work, 2021b). Simplifying tax and social contribution payments It is not only simplifying business and employment registration that makes operation in the formal economy easier. Paying taxes and social contributions can also be simplified. As Ohnsorge and Yu (2021: 272) find, in the average developing economy with above-median informality during 2010–18, the average firm spent 33 hours longer and required statistically significantly more payments, estimated at 11 per year, to comply with tax regulations than in the average developing economy with below-median informality. As a result, personal and corporate income tax revenues were statistically significantly lower, by 0.6 and 0.8 percentage points of gross domestic product (GDP) respectively, than in the average developing economy with below-median informality. They find that for every one-point increase in the ease of paying taxes, informal output reduces by 0.1 percentage point of GDP and is statistically significant. Similar findings that simplifying tax administration reduces informality have been produced by White and Fortune (2015) and Boly (2015). What tools, therefore, have been used to simplify tax and social contribution payments? One remarkably simple tool is to send simplified tax filing reminders. De Neve et al. (2021) find that this increases subsequent tax filing by 8 per cent (relative to the standard reminder), with the increase for late payers being 23 per cent. In a laboratory experiment, Alm et al. (2010) show that uncertainty over what is owed reduces the degree of both filing and compliance while information provision by the tax authority to reduce uncertainty has a positive impact on both. McKee et al. (2018) also show the positive effects

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of information services to reduce uncertainty about tax liabilities. The outcome has been the provision of e-services to help taxpayers calculate their liabilities and reduce uncertainty, as is found in Finland where two online calculators are available for workers and employers to calculate their tax and social contribution liabilities, namely the Gross Income Calculator and the Tax Percentage Calculator (European Platform Tackling Undeclared Work, 2019p). Other common tools used are to pre-fill tax returns and enable electronic submission. Denmark was one of the first countries to pre-populate tax returns in 1998. Since then, pre-filling has become a core component of the e-services and e-government strategy of many tax authorities (Jensen and Wöhlbier, 2012). In Estonia, it now takes taxpayers an average of three minutes to complete their tax return due to pre-filling. One-click tax returns have been possible since 2015 (Williams, 2021g). In Australia, Australian Tax Office (ATO) clients can choose to have their individual tax returns pre-filled, and in 2015/16, the ATO pre-filled 96 million pieces of information (OECD, 2017). In the Nordic nations, tax administrations produce fully completed personal income tax returns for most taxpayers (OECD, 2011). Kleven et al. (2011) in Denmark find that while over 90 per cent of all employees’ incomes can be pre-filled, for the self-employed this is less than 10 per cent. The result is that while only 2 per cent of employees report too low incomes, 40 per cent with self-employment income do so. Fochmann et al. (2021), in an experiment, show how correct pre-filling of tax returns influences future compliance. If pre-filled income is below real income, pre-filling does not improve compliance. It remains at the same level as no pre-filling. If pre-filled income is more than real income, pre-filling improves compliance and is at the same level as correctly pre-filled forms. In Brazil, the government started the integrated system for the payment of taxes and social security contributions of micro and small enterprises (SIMPLES) in 1996 to simplify the tax system for smaller enterprises. This streamlined six federal taxes and social security contributions into a single monthly payment, varying from 3 to 5 per cent of gross revenues for micro-firms and from 5 to 7 per cent for small firms. One study found that in the retail sector this initiative led to a 13 percentage points increase in formalisation (defined as possession of an official licence) but not in other sectors (Monteiro and Assunção, 2012). Another study found that this programme had an effect on formalisation across all dimensions measured depending on the estimation method used: a 7.1–11.6 per cent increase in licensing rates, a 6.4–7.5 per cent increase in the number of firms registered as legal entities, a 5.7–6.3 per cent increase in micro-firm registration, a 2.8–7.2 per cent (not significant) increase in tax registration, a 3.1–4.6 per cent increase in tax payments, and a 1.4–4.3 per cent (not significant) change in social security contributions. The effect on formality was twice as large for firms with employees,

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with formality rates being highest for retail businesses. Overall, formalisation improved firm performance, resulting in 55–57 per cent more revenue and 45–49 per cent higher profits (Fajnzylber et al., 2011). Simplifying the payment of tax and social contributions has in some countries meant using standard deductions for expenses (Elffers and Hessing, 1997; Slemrod and Yitzhaki, 1994), exemplified by the US federal income tax system where it has operated for many decades (Gross, 1990). From a revenue-to-costs viewpoint, it is ineffective and inefficient for tax administrations to check every deductible item on a self-assessment form. Consequently, standard deductions can reduce the workload of tax administrations, allowing resources to be shifted towards other initiatives to facilitate formalisation. It could also be revenue neutral. Through an audit of historical tax returns to calculate the mean or median deductions claimed in different sectors and/or occupations, this mean or median deduction could be applied. Another initiative to simplify tax and social contributions targets micro-enterprise start-ups, which are more likely to engage in the informal economy. In Estonia in 2019, the LHV bank established a business account primarily for micro-enterprises providing personal and household services (e.g., personal cleaners, gardeners, nannies). The bank automatically and free of charge deducts tax from their business bank account and sends it to the tax authority. The 20 per cent tax (or 40 per cent if over €25 000; the maximum amount of income on this account is €40 000) is automatically deducted from the income that is transferred to the account. By October 2020, over 3000 entrepreneurial accounts had been created with more than €1 million of payments to the accounts (LHV Bank, 2020; Estonian Tax and Customs Board, 2021). Tax and social contribution simplification can also target other groups where non-compliance is problematic. An example is service providers on digital labour platforms. In Estonia, an initiative to encourage service providers on digital labour platforms to voluntarily report their earnings from digital platforms to the tax authority, who then pre-fill their tax returns, was not successful. A legislative initiative is now being pursued to make this mandatory from 2023 (European Platform Tackling Undeclared Work, 2021c). On a wider level, the Directive on Administrative Cooperation (DAC 7) at an EU-level is pursuing a similar initiative to oblige digital platforms to report income earned by platform service providers, which will enter into force in 2023, with the first reporting of data in 2024. This mandatory reporting could be also a solution for the 120 countries where “home restaurants”, “meal sharing”, and “dark kitchens” are undercutting conventional restaurants (HOTREC, 2018a,b). Two further simplifications of tax and social contributions are that tax and/ or social contribution payments could be the same for full-time and part-time employment to tackle quasi-formal employment, and for dependent employ-

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ment and self-employment to tackle bogus self-employment. There would then no longer be cost advantages for employers. Romania introduced policy initiatives in this regard. In 2017, the level of social contributions paid for employees when their gross monthly income from part-time employment is below the level of the national minimum gross wage (calculated for full-time contracts) became equivalent to that paid for the national minimum gross wage. When implemented in 2017, there was an 11 per cent reduction in part-time employment in August compared with July, with about half the number moving to full-time employment. One might assume that the remaining half moved from quasi-formal employment into unregistered employment (Williams and Horodnic, 2017g, 2020c). On bogus self-employment, in Romania in 2016, the financial costs of employers outsourcing to the self-employed were made equal to those when using dependent employment. The result was a significant decline in self-employment immediately following its introduction, and the number of formal employees increased, but insufficiently so to compensate for the decline in self-employment. Thus, there are reasonable grounds for assuming that some self-employed became employees, with the remainder moving into informal self-employment or unregistered employment (Williams and Horodnic, 2017g). Advisory Inspections Besides measures to simplify the regulations to make it easier and more beneficial to operate in the formal economy, initiatives have sought to support and advise businesses on what is required to comply, in order to reduce the level of unintentional informality. One such initiative is advisory inspections to provide advice and support to businesses on what is needed to comply with tax, social security, and labour law. Workplace inspections advise businesses on what is required and are often followed up by a further inspection later on to ensure compliance. In Belgium, since 2015, announced advisory inspections have taken place with the timetable put on the ministerial website two weeks in advance and given to social partners for distribution. For instance, in 2019, six days of these announced advisory inspections involving several enforcement authorities occurred in nine sectors where informal work is prevalent (e.g., taxis, cleaning, restaurants, construction, road transport). Businesses were provided with a checklist of what is needed to comply. Between 2016 and 2018, the outcomes do not show a clear correlation between announced inspections and reduced participation in the informal economy. However, several shortcomings were identified, including the need for better advertising of these inspections, a lack of training of inspectors in undertaking more advisory and supportive

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inspections, and the need for more customer-friendly checklists in an easily understandable format (Williams, 2019e). Until now, physical workplace inspections to provide advice and support for formalisation have been little used across the world. This is an initiative that could be further developed and evaluated, although recognition is required of the culture change needed among inspectors when conducting such advisory inspections. Society-Wide Amnesties In many countries, society-wide amnesties have been used to encourage formalisation (e.g., Doğan and Abdurrahmani, 2021; Franzoni, 2000; Hasseldine, 1998; López Laborda and Rodrigo, 2003; Macho-Stadler et al., 1999; Mouloud, 2014; Okoye, 2019; Torgler and Schaltegger, 2005; Villalba, 2017). An amnesty enables a specified group (e.g., employers or workers) who participate in the informal economy to come forward and comply and not to incur the sanctions that would be ordinarily incurred. Much of the previous research in relation to amnesties has been on tax amnesties. Tax amnesties have a long history, with the first on record being by Ptolemy V Epiphanes in Egypt (circa 200 BC) and reported on the Rosetta Stone (Mikesell and Ross, 2012). These are always advertised as a limited-time opportunity to come forward without punishment and become compliant (Aspa, 2017; Baer and LeBorgne, 2008; Villalba, 2017). One of the key dilemmas is that if amnesties are perceived by the already compliant as offering the non-compliant a special deal that is seen as unfair, the compliant may deem themselves as unfairly treated and this may affect their future compliance. Given that most tax revenue is collected based on voluntary compliance, this is potentially problematic. Indeed, it is why most countries are now reluctant to offer amnesties. Indeed, of the 30 European countries surveyed in 2022 by the European Platform Tackling Undeclared Work (Williams and Horodnic, 2022), just 4 per cent responding used society-wide amnesties. No Northern, Western, or Southern European countries had done so and just 25 per cent of East-Central European countries. The empirical evidence on the effectiveness of amnesties suggests that it is indeed appropriate for state authorities to be wary of them. As Luitel and Sobel (2007) find, repeated amnesties reduce the level of revenue collection due to the compliant viewing government as violating the above-mentioned fairness principle. Nevertheless, Alm et al. (1990) suggest that if an amnesty is one-off and new tougher penalties for the non-compliant follow the amnesty period, resultant non-compliance by those normally compliant, stemming from a perceived violation of the equity and fairness principle, can be negated. Torgler

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et al. (2003) conclude the same in laboratory experiments in Costa Rica and Switzerland. As Mikesell and Ross (2012) nonetheless display, most evidence is that amnesties do not increase tax revenue in the long run. At best, amnesties have zero impact on long-term revenue. They do not have a positive effect. Nevertheless, amnesties can generate short-term revenue. As they identify, those better at generating a return have an amnesty period of less than 60 days, while holding an amnesty in the third quarter of the calendar year also increases the gross revenue collected. Moreover, states which do not regularly tax sales, have low federal audit rates, and do not operate a voluntary disclosure scheme, have higher revenue rates from amnesties. They also assert that the level of revenue collection declines with each successive amnesty and increases with the amount of time since the last amnesty, holding constant the other structural features (see also Villalba, 2017). Given that amnesties at best have zero impact on long-term revenue, the objective of amnesties has changed. During the 1980s and 1990s, governments focused more on combining amnesties with follow-up sanctions to enhance compliance (Parle and Hirlinger, 1986). For the past two decades, the objective has shifted towards short-term revenue generation, and raising the penalties after the amnesty period has been used to try to reduce longer-term revenue loss. In Nigeria, for instance, Okoye (2019) finds that tax compliance increased when taxpayers were aware that there would be an unannounced ad hoc tax audit following the amnesty. However, reviewing 70 papers that use laboratory experiments, Alm and Malézieux (2021) find that tax amnesties have unambiguous negative impacts on tax compliance and should not be used. Voluntary Disclosure Schemes Voluntary disclosure schemes allow individuals voluntarily disclosing to enforcement authorities their past participation in the informal economy to have the penalties that would have applied waived (or reduced) if they are compliant in the future (Gould and Rablen, 2020; OECD, 2015; Williams, 2014a). These schemes can also provide incentives (rather than waive penalties) for individuals to voluntarily disclose their previous engagement in the informal economy. Of the 30 European countries surveyed in 2022 by the European Platform Tackling Undeclared Work (Williams and Horodnic, 2022), 8 per cent responding used individual-level amnesties for voluntarily disclosing informal work (17 per cent of Northern, no Western, 11 per cent of East-Central, and no Southern European countries). An example from the UK is the 2003 voluntary disclosure scheme offered to businesses who had not registered for value added tax (VAT). This gave them the opportunity to register, with penalties being waived if they complied

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for one year. The cost to advertise the scheme was £500 000 and the penalties forgone from businesses who would have registered anyway was estimated at £2.7 million. The 3000 registrations received raised £11.4 million in tax and interest. Some 55 per cent did not subsequently submit a VAT return, resulting in the imposition of penalties amounting to £2.5 million. The return-to-cost ratio of this scheme was 23:1 compared with 4.5:1 overall for all informal economy compliance activity in the UK at the time (National Audit Office, 2008). A further UK voluntary disclosure initiative on offshore bank accounts in 2007 resulted in an additional £400 million in taxes at a cost of £6 million, or a return-to-cost ratio of 67:1 (National Audit Office, 2008). The Belgian and Australian tax offices have run similar voluntary disclosure schemes for offshore banking (Gould and Rablen, 2020). They are deemed an effective means of formalising the informal economy. Voluntary disclosure schemes can be generic or more targeted schemes and implemented either across the whole economy or in specific sectors, such as the accommodation rentals sphere via digital platforms. Although usually implemented by tax administrations, there is no reason labour inspectorates could not use them for those violating labour laws. There is also a rationale for incentives being used to make it beneficial for businesses, employers, and workers to voluntarily disclose their past misdemeanours. For example, during the COVID-19 pandemic, voluntary disclosure schemes were launched offering the short-term financial support available to the formal economy to informal businesses, employers, and workers as an incentive to formalise and disclose their previous misdemeanours. In Kosovo, the short-term financial support to formal businesses paid salaries for two months at the minimum wage, as well as pension contributions, and for small and medium-sized enterprises, up to half the cost of renting premises. The Kosovo tax authority, through a voluntary disclosure scheme, offered this support to businesses employing unregistered employees if they came forward and employed the workers on formal contracts for at least one year. The Kosovo Minister of Finance reports that 10 597 new employees were registered, representing an increase of 2.6 per cent in official employment (Bami, 2020) at a time when official employment rates were falling in most countries of the world. A similar voluntary disclosure scheme using the short-term financial support schemes made available to formal businesses as an incentive to formalise was offered in Jamaica, with early data showing an increase in licence applications and business registrations (Ricketts, 2020). During the pandemic, voluntary disclosure schemes also used the short-term financial support available to the formal economy to incentivise migrant workers in the informal economy to come forward, following calls by trade unions for such schemes (EFFAT, 2020; ETUC, 2020; Holland, 2020). This occurred, for example, in Ireland, Italy, and Spain. In Italy, requests for regu-

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larisation could be submitted by June 2020 by irregular migrant workers and Italian nationals working in the informal economy in agriculture and domestic services. The duration of the employment contract and the agreed remuneration had to be indicated (D’Ignoti, 2020; Salvi, 2020). A website and helpline were launched to provide support. By April 2021, of the 220 000 applying for a work permit, just 11 000 (5 per cent) had received one (Jones, 2021). This was because although the May 2020 decree envisaged hiring 800 temporary workers to help process the applications, the first ones were not employed until March 2021 (and only 721 were deployed by June 2021), and the procedures were complex, involving multiple agencies (Follain, 2020; Follain and Rotondi, 2020; Galgliardi, 2020; Jones, 2021). Direct Tax and Social Security Incentives A common assumption is that the most basic way to tackle the informal economy is to reduce overall tax rates. However, this is not valid for two reasons. First, as Chapter 2 displayed, there is little evidence that lowering overall tax rates reduces the size of the informal economy. Indeed, quite the opposite is the case. The informal economy is larger in countries with lower tax rates, not least because in such countries there is a lower trust in government (Bird and Zolt, 2008; Vanderseypen et al., 2013; Williams, 2014a, 2017a; Williams and Horodnic, 2020c). Second, the problem with using general tax reforms to tackle the informal economy is that they have broader impacts. For this reason, more targeted measures have often been used. For example, in Colombia, a 2010 law aimed at formalising informal jobs and businesses included an initiative to exempt small firms with fewer than 50 employees and total assets under $5000 from income taxes, parafiscal contributions, business registration fees, and social contributions (Lapeyre and Williams, 2020). Meanwhile, in the Netherlands, venture and start-up capital tax rules were altered to tackle the informal economy. Given that many business start-ups secure venture capital from informal sources such as family, friends, and acquaintances, and that this can be arranged on an informal basis, this can lead start-ups to view informal practices as part of the culture of the business. To address this, a scheme called the “Rich Aunt Agatha Arrangement” was introduced, later relabelled the venture and start-up capital tax rules initiative. To encourage those making the loans to declare them, these private moneylenders were given tax reliefs, thus putting these loans on the radar of the tax authority. This helped stop these start-ups seeing themselves as engaged in informal arrangements, which might carry over into their trading practices (Williams, 2014a). There was no formal evaluation of this initiative. Tax and social security incentives to facilitate the transition to formality do not always have to be government initiatives. Social partners can also provide

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such incentives, as exemplified by the Construction Workers Leave and Severance Pay Fund (BUAK) in Austria and the Builders Social House (Casa Socială a Constructorilor, CSC) scheme in Romania. The latter, established in 1998 by the main trade union and employer association in the construction industry, is a privately run welfare organisation. It provides welfare payments during the winter season (1 November–31 March), when the construction sector does not operate, to workers in registered formal employment, and in doing so provides an incentive for workers to be in the formal rather than informal economy in the construction sector. Employers pay 1.5 per cent of their turnover into the CSC scheme, and employees contribute 1 per cent of their gross basic salary. Allowances are equal to 75 per cent of the average gross salary for the last three months of the worker and are granted for up to 90 calendar days. In 2008, CSC had 573 member organisations accounting for 40 per cent of all formal employment in the construction industry. From 1998 to 2015, 412 286 employees of the member companies received these welfare payments, which amounted to €65 million (Casa Sociala a Constructorilor, 2015). This could be transferred to other countries and other sectors, such as agriculture and tourism where work is also seasonal. Importantly, it shows what can be achieved by employer and employee representative organisations working together, and that tax and social security incentives to formalise the informal economy are not solely the province of state authorities. Targeted Indirect Tax Incentives Besides direct tax and social security incentives, indirect tax incentives can be used to make formality easier and more beneficial. It is again not the case that simply reducing the level of VAT is the way to tackle the informal economy. Akin to the research on direct taxes, there is little conclusive evidence that reducing indirect taxes results in a formalisation of the economy. Early studies display that the introduction of VAT had little effect on the size of the informal economy (Bhattacharya, 1990; Capital Economics, 2003; Feige, 1990). Reflecting the present-day mixed views regarding the impacts of VAT, Ohnsorge and Yu (2021: 270) assert “the introduction of VAT may strengthen incentives to register in order to qualify for VAT refunds – or conversely, may strengthen incentives to operate informally to offer lower prices excluding VAT”. One of the few recent analyses on VAT evasion, by Carfora et al. (2020), adopts the rational actor view that this depends exclusively on the individual monetary incentives to evade and the probability of being audited. As such, policy initiatives need to offer incentives to comply and/or increase the perceived and/or actual risk of detection. Given the lack of evidence that VAT reduction prevents the informal economy, it is unsurprising that where this has been used, more tailored policy

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initiatives have been adopted in relation to indirect taxation. Indeed, of the 30 European countries surveyed in 2022 by the European Platform Tackling Undeclared Work (Williams and Horodnic, 2022), 29 per cent responding used targeted VAT reductions (33 per cent of Northern, 50 per cent of Western, 33 per cent of East-Central, and no Southern European countries). One of the most common policy tools used in relation to indirect taxation is the introduction of reverse charges for VAT whereby the buyer, not seller, must file and pay the VAT. For example, to tackle VAT fraud and informal work in the construction sector in Sweden, the government legislated in 2007 that a company selling construction services must pay VAT for its subcontractors. According to the Swedish Tax Agency (2011), not only do 39 per cent of surveyed companies believe that the reverse charge has reduced the size of the informal economy in the construction sector, but the reverse charge has had actual positive effects, resulting in an increase in the total reported output tax in the construction sector of SEK 700 million (€82.3 million) in 2008. Reverse charges for VAT have since been introduced in many other countries, notably Belgium and Finland (Cremers et al., 2017). Formalisation Support to Start-Ups As Chapter 5 highlighted, entrepreneurs do not always start up a fully legitimate business before trading. Instead, they often “test-trade” their new ventures fully or partially in the informal economy before fully formalising (Ketchen et al., 2014; Siqueira et al., 2016; Thai and Turkina, 2014; Webb et al., 2009, 2013; Williams, 2017a). There is thus a transition to formality over time. One measure to facilitate this transition is to provide formalisation advice to new ventures. Of the 30 European countries surveyed in 2022 by the European Platform Tackling Undeclared Work (Williams and Horodnic, 2022), 50 per cent responding offered formalisation advice to start-ups (67 per cent of Northern, 75 per cent of Western, 44 per cent of East-Central, and 20 per cent of Southern European countries). Another initiative is to provide support, rather than just advice, to make this transition. This support has been most common in relation to the unemployed wanting to make the transition to self-employment. Examples include the business start-up programme for the unemployed in Austria, JobYourself in Belgium, and business start-up grants in Estonia (Naticchioni et al., 2012). Indeed, of the 30 European countries surveyed in 2022 by the European Platform Tackling Undeclared Work (Williams and Horodnic, 2022), 67 per cent responding used tools to ease the transition from unemployment to self-employment (83 per cent of Northern, 75 per cent of Western, 56 per cent of East-Central, and 60 per cent of Southern European countries).

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For example, the start-up premium (Gründungszuschuss, GZ) in Germany eases the transition from unemployment to self-employment. This was created in 2006 by merging two previous public subsidies, making a subsidy available to recipients of unemployment benefit wishing to start up a business venture. In addition to their unemployment benefit, they receive a monthly grant of €300 for the first six months. If after operating for six months success can be displayed, an additional €300 is received for another nine months. To qualify, the recipients must still be entitled to 150 days of unemployment benefit on the day of the company’s foundation, they must show that they are capable of self-employment, and they must provide a viable business plan. Bernhard and Wolff (2011) find that between 119 000 and 147 000 recipients of unemployment benefit enrolled annually in the GZ scheme in the period spanning 2007 to 2010, and that the recipients found the scheme simple and transparent. Meanwhile, Caliendo et al. (2011) find that 19 months after their start up, 75–84 per cent of GZ recipients were still in business. This scheme, therefore, does appear to help smooth the transition from unemployment to self-employment. Without it, there would be no legitimate way of making this transition in Germany; the unemployed person would have to withdraw from benefits before even test-trading their business venture (Baas, 2012). However, no explicit evaluation has been conducted of the scheme’s effectiveness in making easier the transition to formality undertaken by the unemployed when moving into self-employment. Initiatives to smooth the transition from unemployment to self-employment can also occur at the local government level. In 2017, the municipality of Zagreb in Croatia launched “work cleanly – be employed”. Based on the view that 90 per cent of cleaning jobs are in the informal economy, this initiative for unemployed persons (registered at the Croatian Employment Service) enabled them to start their own business by providing non-refundable support to start the activities of cleaning and maintaining the landscape. The grant was for up to HRK 20 000 (€2700) and covered the cost of registration of trades, social contribution payments for one year, payment of book-keeping services, and the acquisition of fiscal cash registers (Williams et al., 2017e). No evaluation was conducted. Nevertheless, it provides an interesting example of how local governments can facilitate the transition from unemployment to self-employment to prevent informality, and could be replicated in other sectors, such as wider home improvement, maintenance, and repair work. Compared with smoothing the transition from unemployment to self-employment, fewer initiatives have sought to ease the transition from employment to self-employment. Of the 30 European countries surveyed in 2022 by the European Platform Tackling Undeclared Work (Williams and Horodnic, 2022), 42 per cent responding had offered initiatives to ease the transition from employment to self-employment (83 per cent of Northern,

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75 per cent of Western, 11 per cent of East-Central, and 20 per cent of Southern European countries). However, in many countries, the numbers of newly self-employed making the transition from employment are greater than the numbers of those making the transition from unemployment, and many “test-trade” the viability of their start-up on an unregistered basis in the first instance (Williams and Martinez-Perez, 2014a,b). The relative lack of emphasis and resource devoted to policy initiatives to smooth the transition from employment to legitimate self-employment (compared with initiatives to smooth the transition from unemployment to self-employment) therefore needs addressing. Formalisation Support and Advice to Existing Informal Enterprises Besides helping business start-ups to operate in the formal economy, by offering formalisation support and advice, measures can also make it easier for, or incentivise, existing enterprises to make the transition to the formal economy. The advice and support needed to formalise informal enterprises is different from what is needed by formal enterprises (Caianello and Voltura, 2003; Copisarow, 2004; Copisarow and Barbour, 2004; Meldolesi and Ruvolo, 2003; Williams, 2005a). Indeed, bespoke formalisation services for businesses operating in the informal economy have been developed in Italy (Caianello and Voltura, 2003; Meldolesi and Ruvolo, 2003), the UK (Barbour and Llanes, 2013; Evans et al., 2006; Small Business Council, 2004; Williams, 2004b, 2005a, 2006d), the USA (Jurik, 2005), and Nigeria (Sutter et al., 2017). The rationale is that support and advice on how to formalise is not widely available (Barbour and Llanes, 2013; Copisarow and Barbour, 2004; Small Business Council, 2004; Williams, 2005a). This includes simple advice about how to formalise an existing business venture, for example in the form of flow charts of what needs to be done. Instead, entrepreneurs are confronted with the citation of complex labour and tax codes when approaching labour and tax administrations, which acts as a barrier to establishing legitimate business ventures. Of the 30 European countries surveyed in 2022 by the European Platform Tackling Undeclared Work (Williams and Horodnic, 2022), 62 per cent responding offered formalisation support services to existing informal enterprises (83 per cent of Northern, 75 per cent of Western, 44 per cent of East-Central, and 60 per cent of Southern European countries). Moreover, just 17 per cent of countries offered gradual formalisation schemes (33 per cent of Northern, no Western, 22 per cent of East-Central, and no Southern European countries). An example of a formalisation service is Street (UK), established in 2000 to offer loans, advice, and business support to self-employed people and micro-enterprises who have displayed an interest in making the transition to

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formalisation (www​.street​-uk​.com). Their approach is to monitor the progression of clients on 12 issues: transitioning from part-time to full-time work; relocating from home to business premises; possessing basic-level records; maintaining higher-level accounts; obtaining employer and public liability insurance; hiring employees; opening a business bank account and/or a separate bank account for the business; getting the requisite licences and permits to operate (e.g., health and safety inspection certificates); moving off non-work benefits; transitioning from cash to invoiced revenues; having a formal business tax liability; and registering for VAT. Street (UK) seeks that in a 12-month period at least three of these steps will be taken by a client. Between 2000 and 2003, Street (UK) distributed 259 loans, with the average loan being £2300. Its advisory service helped more than 1000 clients, who were mostly sole traders previously operating unregistered (Williams, 2006d). Another formalisation advice and support service is the CUORE initiative in the city of Naples in Italy, which started in 1999. Based on a joint research project between the municipality of Naples and the University Frederico II to examine the local business environment, the finding was that the key local labour market issue was the informal economy. The response was the development of neighbourhood service centres to provide support services to low-income neighbourhoods, targeting small and micro-sized businesses in the informal economy with the potential for growth. The CUORE centres offer formalisation support and advice, including custom-made pathways (Bàculo, 2006). The project workers then monitor whether the entrepreneurs are following the agreed path towards formalisation and whether the path remains suitable. In addition, incentives are provided, including the provision of marketing support, free access to trade fairs, training, the provision of free intellectual property advice, and help with accessing customers to enable the internationalisation of their markets. This provision of incentives, such as free marketing, is important so that businesses can see the benefits of formalisation. Of the 30 European countries surveyed in 2022 by the European Platform Tackling Undeclared Work (Williams and Horodnic, 2022), 29 per cent responding offer free marketing (33 per cent of Northern, 75 per cent of Western, 11 per cent of East-Central, and 20 per cent of Southern European countries). For example, in Greece, the employer federation for small businesses, the Hellenic Confederation of Commerce and Entrepreneurship (ESEE), developed a “business walking routes” initiative, co-financed by Greek and EU funds, providing six different marketing pamphlets to tourists and citizens each containing a walking route in the city centre of Athens themed for specific goods, namely gifts, books, music, footwear and leather, clothes, and food. Only registered enterprises with no outstanding compliance issues were included (ILO, 2016b). A more modern approach would be to use a smartphone app for tourists, developed by

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university students by having a competition for the best app with a small prize awarded. This is transferable to additional sectors and countries as an incentive for businesses to become legitimate. Viewing such advice and support services through the lens of institutional theory (see Chapter 2), Sutter et al. (2017) argue that the support and advisory services provided by a non-governmental organisation (NGO) to 1800 dairy farmers in rural Nicaragua to help them transition from the informal to formal economy were important. They helped them transition from one institutional framework (informal markets) to another (formal markets), which requires fundamental alterations in the operation of their businesses. Help with Record-Keeping Another tool to make it easier to comply, and to incentivise compliance, is to offer businesses help with record-keeping. Such help might involve providing businesses with free record-keeping software, providing fact sheets on how to keep records, and/or the provision of free advice via, for example, telephone hotlines and free training through educational courses. Of the 30 European countries surveyed in 2022 by the European Platform Tackling Undeclared Work (Williams and Horodnic, 2022), 50 per cent responding provided fact sheets on record-keeping requirements (67 per cent of Northern European, 75 per cent of Western European, 44 per cent of East-Central European, and 20 per cent of Southern European countries), 38 per cent provided free advice/training on record-keeping (33 per cent of Northern, 50 per cent of Western, 33 per cent of East-Central, and 40 per cent of Southern European countries), and just 8 per cent provided free record-keeping software to businesses (33 per cent of Northern, but no Western, East-Central, or Southern European countries). Indeed, help with record-keeping reduces uncertainty regarding tax liabilities, which Alm (2011) finds leads to a reduction in non-compliance. Providing free software to businesses to keep records, online training courses on how to keep records, fact sheets, and advice is therefore an effective means of facilitating formalisation. This help needs to be marketed at, and tailored to, businesses more likely to be engaged in the informal economy, which can be identified through data-driven risk assessment (see Chapter 8). Compliance Lists An alternative to a non-compliance list (discussed in Chapter 8) is a compliance list (previously termed a “whitelist”) composed of businesses with no tax, labour, or social security law sanctions against them in the recent past. Those on a compliance list can then be offered benefits such as fewer inspections, the

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right to bid for public tenders, and improved legitimacy if such lists are made public. Of the 30 European countries surveyed in 2022 by the European Platform Tackling Undeclared Work (Williams and Horodnic, 2022), 55 per cent responding used compliance lists (83 per cent of Northern, 50 per cent of Western, 56 per cent of East-Central, and 20 per cent of Southern European countries). For example, in Italy, since 2016, the Quality Agricultural Work Network has put enterprises operating in the agriculture and fishing sector that fulfil their statutory obligations on its business certification list (European Platform Tackling Undeclared Work, 2019p). Meanwhile, in Belgium, there is a social contribution payment certification list operating in the mushroom growing sector. Employers who sign up (i.e., they must sign a declaration each year) to respect Belgium’s social legislation and not resort to bogus self-employment, and who agree to keep the number of permanent workers at 2011 levels, are entitled to use each seasonal worker they take on for up to 100 days per year instead of the normal 65 days (Williams, 2019c). In the mushroom growing sector again, but this time in the Netherlands, Fair Produce, which has been established since 2011, certifies companies pursuing fair working conditions that meet the legal and extra requirements set out by social partners in the Dutch mushroom growing supply chain. If accepted, the companies receive the Fair Produce label (Williams, 2019c). Compliance lists are also used by tax authorities by making the granting of licences for trades conditional upon a successful tax check that the applicant is on the list of compliant taxpayers. For example, in the UK, from 2022 renewal of a licence to drive a private hire vehicle (taxi or minicab) or operate a private hire business is conditional upon a successful tax check that the person is registered for tax and has been reporting income from the licensed activity to the tax authority (Her Majesty’s Revenue and Customs, HMRC). An operational problem in introducing this is that for first-time applicants the licensing authority can only signpost applicants to guidance about their tax obligations and obtain confirmation that the applicant is aware of them. A concern is that this may lead to “phoenixism”, whereby traders change the name or status of their business when a renewal is due, so that each application appears to be a first one and thus escapes the check. It is also important to note that such conditionality does not tackle the issue of traders underreporting income. Nevertheless, HMRC estimates that this measure will result in £155 million of additional revenue between 2022/23 and 2025/26. Indeed, following an evaluation of its impacts on the taxi industry, the UK government is intending to extend the principle of conditionality to other sectors (HMRC, 2016, 2017b, 2020).

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DEMAND-SIDE INCENTIVES Besides making it easier and more beneficial for businesses, employers, and workers to operate in the formal economy, many countries have also sought to encourage and incentivise purchasers to acquire goods and services in the formal economy. Here, the following demand-side incentive tools will be evaluated in turn: 1. 2. 3. 4. 5. 6.

Direct tax incentives. Service voucher schemes. Indirect tax incentives. Incentivising electronic payments and deterring cash payments. Incentives for encouraging customers to request receipts. Social label initiatives.

Targeting Purchasers Using Direct Tax Incentives Direct tax incentives, such as income tax reductions or subsidies, can be provided to purchasers of formal goods and services where the informal economy is prevalent. Of the 30 European countries surveyed in 2022 by the European Platform Tackling Undeclared Work (Williams and Horodnic, 2022), 38 per cent responding used direct tax incentives targeting purchasers such as an income tax reduction/subsidy (67 per cent of Northern, 25 per cent of Western, 33 per cent of East-Central, and 20 per cent of Southern European countries). In Sweden, since 2008, citizens have been able to apply for a tax deduction of up to 50 per cent of the labour cost for the renovation, conversion, and extension of homes (ROT), and for household services (RUT) including cleaning, laundry, basic gardening, and babysitting. The company doing the work requests the outstanding sum from the Swedish Tax Agency. As a result, the customers only pay half the labour cost at the point of purchase of the service. Today, for RUT (cleaning, maintenance, and laundry), a deduction of 50 per cent of the labour cost up to €2500 per year can be used by everyone over 18 years old and, for ROT, (repairs, conversion, extension) a deduction of 30 per cent of the labour costs is allowable up to €5000 each year. An agency with 120 staff deals with these tax rebates. The Swedish Tax Agency (2011) claims that informal work has decreased by about 10 per cent within the activities covered by the ROT- and RUT-deduction due to this scheme (Brunk, 2013). By 2019, around 5 million applications a year were made, amounting to €1.5 billion paid out annually to businesses by the tax authority (Williams, 2019f). In Denmark, from June 2011 until the end of 2013, each adult household member could deduct from their taxes up to DKK 15 000 (€2000) for the costs of employing craftspeople and domestic helpers, under a pilot project

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called “private family residence job plan” (Bolig-Jobplan). This tax rebate was claimed as a deduction on their taxable income (self-assessment) for expenses related to private household services, such as house cleaning, childcare, garden work, home repair, maintenance, or improvement work. The level of expenses and name of the company involved was reported digitally by the buyer of the services to the tax authorities, who then deducted 15 per cent of the amount from the annual tax or fiscal income. Some 270 000 people used the deduction in 2011, mostly for home improvement, maintenance, and repair, reporting average deductions of DKK 9800 (€1315) per person, which came to DKK 2.7 billion (€362 million) in total (Jørgensen, 2013). Those using the scheme increased to 570 000 by 2015, while the costs of reimbursing the by now 26 per cent of the costs increased from €147 million in forgone taxes in 2011 to €213 million in 2015. In 2015, the deduction was reduced to a maximum per annum of €800 for services (e.g., house cleaning, babysitting, garden work) and €1650 for home maintenance and improvement, but still with 26 per cent of the costs reimbursed. In both 2016 and 2017, 425 000 used the scheme, with €106 million reimbursed each year (Williams, 2019f). In Finland, since 2001, similar direct tax incentives have been used to bring household services into the formal economy. Here, 20 per cent of the wage paid (including social security contributions), or 50 per cent of the work compensation paid to an entrepreneur or enterprise, is tax deductible, with the maximum amount of tax deductible being €2400 in 2018. This scheme limits payment to labour costs only, not goods and materials and travel costs. This deduction is personal, so it can be received by both individuals in couple households. In 2006, there were 243 000 users claiming tax deductions totalling €165 million. By 2014, 383 000 users claimed €364 million, while in 2016 406 500 users claimed €393 million and in 2017 426 000 users claimed €444 million (Williams, 2019f). In sum, effective tax rebate schemes have three important characteristics. First, they focus on sectors where the informal economy is prevalent (e.g., household cleaning, home repair, and maintenance). Second, the level of the tax rebate is sufficiently high to ensure that sourcing from the formal economy is cheaper than sourcing from the informal economy. And third and finally, the reporting of transactions to the authorities is easy (e.g., using digital solutions and self-declarations). Moreover, although the large amounts of money involved make such schemes appear costly, once the additional tax income from formalisation is included, these schemes are cost neutral, although there can be concerns over equity as, depending on the tax system, they may be not equally beneficial for all taxpayers (Williams, 2019f).

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Service Voucher Schemes Service vouchers can act as another demand-side incentive, one which targets purchasers of goods and services in the informal economy to formalise their purchasing behaviour. A service voucher is a means of payment that is subsidised by public authorities and used by private users to pay employees for conducting various types of work. By providing service vouchers to those employing labour, who then only have to cover the portion of the fee payable to the worker that is not covered by the vouchers, the intention is to encourage them to purchase services on a formal rather than informal basis (Michalopoulos, 2017). Service voucher schemes have advantages for both the worker and their employer. The worker has access to social security benefits (pensions, health insurance, accident cover, etc.) and is guaranteed at least the legal minimum wage, and in the case of a problem with the employment relationship, both the employee and the employer have somebody from whom they can get advice. Of the 30 European countries surveyed in 2022 by the European Platform Tackling Undeclared Work (Williams and Horodnic, 2022), 25 per cent responding used service vouchers (33 per cent of Northern, 25 per cent of Western, 22 per cent of East-Central, and 20 per cent of Southern European countries). In an earlier 2010 survey of European Economic Area (EEA) countries, in the 26 per cent of EEA countries using service vouchers, 58 per cent of the expert stakeholders interviewed viewed this as an effective means of tackling the informal economy, while 42 per cent viewed service vouchers in neutral terms as neither effective nor ineffective. No stakeholders viewed this instrument as ineffective (Dekker et al., 2010). Service voucher schemes differ across countries in terms of their objectives, the users, the providers, the types of employment models used, the range of services provided, the price of the service voucher, and the level of public sector subsidy provided. Two broad types of service voucher schemes can be identified: social voucher (SV) schemes which are used by households and enterprise voucher (EV) schemes which are used by companies. SV schemes are used to pay for regular and occasional labour, to formalise household services (including caring services), with service vouchers usually paid for tasks where informal work is prevalent. Here, two examples of such schemes are provided. In Belgium, service vouchers were introduced in 2004 to pay for everyday personal services (Gerard, 2012; IMPact, 2016a,b). Every voucher pays for an hour of work from certified companies. Costing €22 per hour, the household pays €10 and the regional government the remaining €12. The total subsidy is €1 billion gross, or €400 million net. In 2016, there were 3500 certified companies and 11 per cent of Belgians used the scheme, buying 129 million

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vouchers (Willems, 2018). Although early studies found that customers previously sourced some 44 per cent of the work conducted using service vouchers from the informal economy (De Sutter, 2000), later evaluations find that only 25 per cent of customers reported they would purchase these services in the informal economy if vouchers did not exist and 46 per cent of workers assert that service voucher work is a means of exiting the informal economy (IMPact, 2016a; Idea Consult, 2011, 2012; Willems, 2018). Adriaenssens et al. (2021), using multiple methods, find that personal and household services purchased from the informal economy halved with this scheme. In France, the Chèque Emploi Service Universel (CESU) was introduced in 2006, replacing earlier schemes dating back to 1993 (Adjerad, 2003, 2005; DARES, 2012; Finger, 1997; Labruyere, 1997; Le Feuvre, 2000; Marbot, 2008; Windebank, 2004, 2006, 2007). The home-based services that can be bought include cleaning, ironing, small maintenance tasks, yard work, childcare in the home, study help, information technology or administrative assistance, assistance to the elderly, assistance to the disabled, and childcare for sick children. The services outside the home that can be bought include the preparation of meals, delivery of meals and groceries, laundry collection, transport for the disabled, company for the elderly or disabled, and care for domestic animals. By 2017, 1.9 million people employed 600 000 CESU workers who undertook 119 million hours of work amounting to a total of €1.2 billion in vouchers (Darnaud, 2018). An evaluation of the scheme via tax returns coupled with information from the household expenditure survey finds that two-thirds of the increase in households using the scheme between 1996 and 2005 is households moving informal work into the formal economy, and that the proportion of domestic work conducted in the informal economy fell from 50 per cent of all domestic service provision in 1996 to around 30 per cent in 2005 (Marbot, 2008), and to 20 per cent in 2010 (IMPact, 2016b). Oliver Wyman (2012) finds that the proportion of paid domestic workers who operate in the informal economy has declined from 40 per cent in 2005 to 30 per cent in 2010. However, as Darnaud (2018) highlights, there is no consensus with a 2011 DARES study suggesting there is 25 per cent less informal work, with a 2013 TNS SOFRES survey reporting a figure of 40 per cent and a 2015 survey for the Ministry of Economy and Finance reporting 20 per cent. EV schemes, meanwhile, are used by companies rather than households. They only pay for occasional labour, and usually target the agricultural sector. Here, two examples are provided of such schemes. In Croatia, in 2012, to reduce the informal economy in agriculture, a voucher scheme began for seasonal and occasional work in this sector, allowing the unemployed and pensioners to work up to 90 days per year. In 2012, 3363 businesses acquired 325 295 vouchers. By 2016, 2059 businesses obtained 406 595 vouchers. Markota (2018) reports that the outcome was a drop in

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informal work in agriculture, measured by the reduction in the number of complaints received by those working in this sector. In Italy, meanwhile, buoni lavoro (labour vouchers) were created in 2003. Over time, voucher usage increased from 500 000 vouchers in 2008 to 1.5 million in 2011, with the number of vouchers issued rising to 115 million in 2015 when 1.7 million workers (8 per cent of the labour force) received these voucher payments. This scheme was stopped and replaced in 2017 by a new voucher scheme (contratto di prestazione occasionale) only covering occasional work. Agricultural employers with no more than five employees can use vouchers for occasional work by specific categories of workers (i.e., students under 25 years old, retirees, unemployed people, beneficiaries of income support). New income limits for workers have also been introduced (€5000 annually from all their employers and no more than €2500 annually from any one employer) and each employer can pay no more than €5000 annually to all their workers combined. The employer also has to provide insurance against accidents at work, pay social security contributions, provide a rest break when working longer than six hours per day, adhere to a maximum weekly working time, and pay the minimum wage (De Camillis, 2018). In an evaluation of how service vouchers could better tackle the informal economy, the European Platform Tackling Undeclared Work conclude that both SV and EV schemes could target only spheres where the informal economy is prevalent and labour inspection is difficult (e.g., households); limit the number of service vouchers an employer can purchase, not the level of income of a service voucher worker; and allow users to acquire and submit vouchers online. They also suggest that the service voucher price should be the minimum price an employer pays for one hour’s work; research should be conducted to calculate the service voucher price for a user (and level of subsidy required), so that they are competitively priced compared with the informal economy; and the schemes must allow workers to access to social security benefits comparable to other employees, and cover unemployment benefits, accident insurance, pension benefits, sickness benefits, maternity leave, and health benefits (Williams, 2018, 2019a). A variant of service voucher schemes is the holiday voucher scheme in Romania, which has operated since 2015 (Banes et al., 2019; Eurofound, 2014; Romanian Insider, 2019). Public sector employers can provide holiday vouchers to public sector workers to be spent in registered tourist accommodation. Prior to this, many accommodation providers were not registered and did not fully declare their earnings. Public sector institutions can now issue vouchers to their employees each year to a maximum value of RON 5400 (€1219), equivalent to six basic minimum gross salaries, currently set at RON 900 (€203). In 2018, 1.2 million public sector workers received vouchers. This resulted in a 60 per cent increase in the number of accommodation providers

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applying for a licence in 2018, and in the first quarter of 2019, a further 65 per cent growth compared with 2018. This registration of accommodation providers is likely to have formalised the informal economy in this sector. The scheme ceased during the pandemic but recommenced in 2022. Indirect Tax Incentives for Purchasers Indirect tax subsidies can also be used to formalise the informal economy. Of the 30 European countries surveyed in 2022 by the European Platform Tackling Undeclared Work (Williams and Horodnic, 2022), 33 per cent responding used targeted indirect tax incentives such as VAT reductions (67 per cent of Northern, 50 per cent of Western, 22 per cent of East-Central, and no Southern European countries). This can involve reducing VAT on specific goods and services in sectors where the informal economy is rife. Whether this leads to a formalisation of the informal economy is open to debate. One study evaluating the impacts of reducing VAT on the informal economy looks at the UK household repair, maintenance, and improvement sector (Capital Economics, 2003). This argues that lowering the VAT rate at that time from 17.5 per cent to 5 per cent would encourage consumers to move into the formal economy but that, assuming no change in the level of activity in response to this change, the outcome would be a loss of £1.6 billion in net government tax revenue. However, including the extra revenue from income tax and social security contributions of the estimated 282 000 informal construction workers moving into the formal economy, and using the average tax paid by a full-time male worker, if 100 per cent of informal work shifts into the formal economy then a net increase of £400 million in tax receipts would be achieved despite the reduction in the rate of VAT. Incentivising Electronic Payments and Deterring Cash Payments Given that transactions in the informal economy are often, albeit not exclusively, paid in cash, incentivising electronic payments, and deterring cash payments, is another demand-side tool used to tackle the informal economy. This is being actively encouraged at present by the large global multinational corporations involved in electronic payment systems, exemplified by the decision of India in 2016 to curtail cash transactions in what has been widely referred to as the “demonetisation” of the Indian economy to tackle its large informal economy (Chodorow-Reich et al., 2020). To transfer from cash to

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electronic payments, several options exist for countries pursuing this demonetisation approach: 1. 2. 3. 4.

Introduce a ceiling for cash transactions. Introduce point-of-sale (POS) terminals across all sectors. Governments shift more fully towards electronic payments. Dissuade easy access to cash, such as no-fee automated teller machines (ATMs). 5. Provide incentives for using cards at the point of sale. The Foundation for Economic and Industrial Research (2015) finds that tax revenue increases by 0.24 percentage points for each percentage point growth in the use of electronic payments in Greece. More widely, according to Schneider and Kearney (2013), increasing electronic payments by an average of 10 per cent annually for at least four consecutive years can reduce the size of the informal economy by up to 5 per cent. Promoting electronic payments and limiting the use of cash particularly addresses informal activities in which one party of the transaction (typically a consumer) does not benefit from not reporting the transaction (and may not even be aware that they are contributing to the expansion of the informal economy through the cash payment). The promotion of electronic payments may have a more limited impact where both parties of the transaction benefit from not reporting (Ernst Young, 2017). One tool is to introduce a ceiling on cash transactions. For example, nearly all European countries have a ceiling for cash transactions, such as €500. Another tool is to introduce POS terminals across all sectors (see the discussion on certified cash registers in Chapter 8). Yet another tool is to move towards electronic payments for all transactions, and indeed make electronic transactions mandatory. For example, in Saudi Arabia, electronic payments are compulsory in sectors covering 70 per cent of retail businesses. For the remaining 30 per cent of establishments, electronic payments must be made available as an option. There are penalties of up to a five-year jail term and a fine of SAR 5 million (€1.28 million) for violators. Consumers who function as whistle blowers, notifying the Ministry of Finance of violations, receive a reward of 30 per cent of the fine collected from the violators after the issuance of the judgment (Saudi Gazette, 2021). Another tool is to prevent easy access to cash, such as banning no-fee ATMs which would then prevent easy access to cash and thus subsequent cash payment at the point of sale. Some countries have even imposed penalties to discourage cash transactions. In Greece, taxpayers incur a penalty if they do not make enough electronic payments. From 2017, if they do not spend a certain percentage of their annual income using electronic payments, a penalty of 22 per cent is imposed on the gap between the minimum required payment and the

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actual payment. For a taxable income up to €10 000, at least 10 per cent of their income must be spent via electronic payments. For a taxable income between €10 001 and €30 000, the minimum percentage increases to 15 per cent; above €30 000, the percentage increases further to 20 per cent. In addition, tax allowances and tax deductions are available only for electronic payments. On the other hand, the cap for cash transactions fell from €1500 in 2016 to €500 in 2017. Any purchase of goods or services must be paid electronically now if it amounts to more than €500 (Deloitte, 2016). In Sweden, moreover, cash payments will not be accepted as a means of payment from 2023, the country becoming the world’s first cashless society (Fourtané, 2020). One way forward might be to charge for the withdrawal of cash from cash machines and not to charge for electronic payments, to incentivise the use of electronic payment methods. Contactless cards, rather than keying in one’s pin number, has made the use of electronic cards simple, and the increase in the maximum amount for which contactless cards can be used has further encouraged the use of electronic means of payment. In most countries, a new emerging partially related trend is the use of cryptocurrencies, on which there has been little research in terms of their usage in relation to the informal economy. They are widely believed to be used in criminal transactions, not least as a substitute for cash (OECD, 2017). Yet Europol (2015) report that despite the growth in non-cash payment methods, the demand for high denomination notes, such as the €500 note, has been sustained. Approximately €1 trillion in such banknotes were in circulation at the end of 2014. The €500 note alone accounts for over 30 per cent of the value of all euro banknotes in circulation. As the Organisation for Economic Co-operation and Development (OECD, 2017) points out, this can be attributed to the function of money as a store of value, although some may be due to informal economic activity and the broader criminal economy. Given that there is an oligopoly of multinationals through whom most global credit and debit card transactions take place, some caution is required by national governments when deciding whether to pursue demonetisation. These corporations have a financial interest in economies shifting from cash-based to card-based transactions, and some care needs to be taken by governments before moving towards greater dependency on such corporations. Initiatives for Encouraging Customers to Request Receipts A further demand-side initiative is to encourage purchasers to request receipts so that transactions are recorded. Of the 30 European countries surveyed in 2022 by the European Platform Tackling Undeclared Work (Williams and Horodnic, 2022), 33 per cent responding used initiatives for encouraging customers to request receipts (no Northern, 25 per cent of Western, 56 per

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cent of East-Central, and 40 per cent of Southern European countries). When combined with the use of certified cash registers (see Chapter 8), a higher proportion of transactions are recorded and reported. A remarkably simple tool in this regard is found in Romanian restaurants, where it is a statutory responsibility for restaurant menus to include on their front page a statement that it is compulsory for the restaurant to issue a cash register receipt for the price of the meal. If this is not done, the purchaser has the right not to pay for the meal. A similar initiative exists in Greece, where the consumer does not have to pay unless they are given a valid receipt (“apódixi”). This policy initiative is easily transferable to other countries. Another means of encouraging consumers to ask for receipts is to give them a reason for requesting them. If they can say to businesses that they want a receipt “to win the lottery”, then this does so. This is the simple idea underpinning a receipt lottery (Lourenço et al., 2016). Consumers are incentivised to request a receipt in business-to-consumer transactions because the receipt acts as a free-of-charge ticket to enter the lottery and win a prize. The intention is to encourage consumers to get into the habit of asking for receipts. After a time, citizens will develop this habit (e.g., by making asking for receipts socially acceptable and desirable, or by raising awareness of the benefits of combating the undeclared economy) and will continue to request receipts even if there is no additional incentive. Receipt lotteries currently operate in countries such as Croatia (Croatian Tax Administration, 2015), Greece, Romania (European Platform Tackling Undeclared Work, 2019r), and Portugal (Wilks et al., 2019). Bazart and Pickhardt (2011), in a laboratory experiment, reveal how positive rewards in the form of individual lottery winnings significantly improve tax compliance, particularly for men and in countries with low levels of compliance. Larsen et al. (2019) evaluate the Georgian receipt lottery experience which commenced in 2012. The initial plan was to keep the lottery running until 1 January 2013. However, the lottery ended prematurely on 12 November 2012 on the grounds of inefficiency, although no analysis exists, at least publicly, to justify this. To participate, customers had to check receipts provided by any shop or service provider for a chance to win up to GEL 50 000 (€17 660) The Revenue Service, for its part, promoted the campaign. The quantitative analysis by Larsen et al. (2019) examines Revenue Service data of cash receipts for 2012 and 2013, which shows that the reported aggregate weekly sales rose by 11 per cent during lottery weeks compared with non-lottery weeks. The average sales per cash register also rose by 7.7 per cent in lottery weeks. In interviews with stakeholders directly or indirectly involved in the lottery, they reveal the key reason that the lottery was prematurely terminated was an insufficient budget allocation. There were not enough funds to maintain a high enough perceived chance of winning and therefore hold public interest and encourage participation, as daily receipts decreased significantly

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from 2.5–2.8 million in the first months of the lottery to only 300 000 by the end. Boosting the budget to keep consumers engaged was not a priority of the newly elected government, and considering that the project did not appear to pay off, the decision was made to discontinue it. In Romania, at the beginning of 2015, the tax authority launched a toll-free telephone number that be used by customers to report cases where they have not received a receipt for their purchases. The receipts lottery in 2015 built on this by encouraging consumers to ask for receipts. This lottery takes place monthly and on other special occasions (usually Easter and Christmas). A press release by ANAF (September 2015) reveals an increase in declared VAT of 5.85 per cent in the cumulative seven months in 2015 when the lottery was in place compared with the same period in 2014, prior to the lottery. Moreover, the consumption of paper rolls for cash registers increased by 80 per cent after this receipts lottery began (European Platform Tackling Undeclared Work, 2019r). In Mongolia, a lottery was introduced in 2016 by printing a lottery ticket on every retail receipt when the 10 per cent VAT is paid. This resulted in consumers insisting on a receipt to win the jackpot. To enter this draw, it was necessary to download an app on a smartphone and then scan the bar codes which were on the receipts. Taxpayers get the bonus of a 2 per cent tax refund the following year from all the receipts they have scanned. The lottery, in 2016, paid out MNT 5.05 billion (€1.4 million) in prizes to 119 254 citizens and the National Statistics Office reported a 32.7 per cent expansion in VAT paid over the previous year (Edwards, 2018). Social Label Initiatives A final demand-side initiative encourages consumers to purchase formal goods and services using social label marketing campaigns which highlight where workers’ rights are being respected. Social partners and NGOs are using this tool. For example, Oxfam has launched the Supermarkets Scorecard in the UK, which encourages the largest supermarkets to pay attention to their supply chains by raising awareness among consumers about working conditions in them. The intention is to encourage retailers to perform a due diligence assessment of their direct suppliers and their supply chains (Oxfam, 2021). This is one example of a wider trend of encouraging retailers to perform due diligence assessments of their direct suppliers, that is, the processing companies (Ethical Trading Initiative Norway (IEH), Ethical Trading Initiative (ETI), and Danish Ethical Trading Initiative (DIEH), 2015). Social label schemes have also been used in the hotel sector to identify and promote establishments that respect workers’ rights, differentiating them from those that do not so that purchasers can make an informed decision. For

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example, the European Federation of Trade Unions in the Food, Agriculture and Tourism (EFATT) and the International Union of Food, Agricultural, Hotel, Restaurant, Catering, Tobacco, and Allied Workers’ Associations (IUF) have launched the website “Just Tourism” to help tourists select hotels respecting workers’ rights. Hotels whose employment practices achieve pre-determined criteria for decency and fairness receive a “seal of approval”. This social label initiative exists in Croatia, Denmark, Ireland, the USA, Canada, Norway, Slovenia, and Sweden (EFFAT, 2021b). No evaluation has yet been conducted. It is transferable to many countries, and for hotel chains it fits their corporate social responsibility agendas. Such demand-side social label initiatives are likely to be very attractive to Millennials and Gen-Z. Similar social label tools on labour standards could be developed for food and beverage serving businesses (akin to existent social label initiatives for food quality standards, such as Michelin stars, and the existent quality assurance initiatives on hygiene standards). It is also important to note that, conventionally, when studying the informal economy, digital platforms are seen in a negative light, as facilitating the informal economy by acting as intermediaries for putting potential suppliers and consumers of informal goods and services in touch with each other, but also as promoting bogus self-employment. However, this “Just Tourism” trade union initiative shows how digital platforms can be used in a positive manner as a tool for tackling the informal economy.

CONCLUSIONS This chapter has reviewed the range of tools used to make it easier and more beneficial to participate in the formal rather than informal economy. Two types of formalisation incentives have been used. On the one hand, there are supply-side formalisation incentives to make it easier and/or more beneficial for businesses, employers, and workers to operate in the formal economy. Here, the following supply-side incentive measures have been evaluated in terms of their effectiveness at tackling the informal economy: simplifying the formal regulations; advisory inspections; society-wide amnesties; voluntary disclosure schemes; direct tax and social security incentives; targeted indirect tax incentives; formalisation support to start-ups; formalisation support and advice to existing informal enterprises; help with record-keeping; and compliance lists. On the other hand, there are demand-side formalisation incentives targeting customers with rewards for purchasing formal goods and services rather than those from the informal economy. Here, the following demand-side incentives have been evaluated in terms of their effectiveness at tackling the informal economy: direct tax incentives; service voucher schemes; indirect tax incen-

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tives; incentivising electronic payments and deterring cash payments; incentives for encouraging customers to request receipts; and social label initiatives. This has revealed the evidence available on the effectiveness of supply- and demand-side incentives at tackling the informal economy. This is important because a survey of senior representatives of enforcement authorities in 31 European countries reveals that it is a lack of evidence available on their effectiveness that is the major reason for their non-adoption (Williams and Puts, 2018). Therefore, this chapter has begun to bridge this gap in the knowledge by gathering the evidence. It has revealed that when a finer-grained analysis is conducted of the different types of supply- and demand-side incentives, there is a considerable amount of evidence that many of these tools are effective at formalising the informal economy. However, it also reveals the need for far more evaluation of these supply- and demand-side policy tools than has so far been conducted. Moreover, it is important to recognise that the policy tools reviewed in this chapter and the previous one have all been interventions that seek to either increase the costs and reduce the benefits of participation in the informal economy, or to reduce the costs and increase the benefits of participation in the formal economy. The problem with using such policy tools is that participants in the informal economy are not always rational economic actors, many countries have limited resources to increase the power of authorities, and these measures only address one type of formal institutional failure, namely what was referred to in Chapter 2 as formal institutional powerlessness. To address the recognition that participants in the informal economy are also social actors, and the issue of trust in authorities, as well as the other formal institutional failures that lead to an asymmetry between formal and informal institutions, the next chapters turn their attention to more indirect policy tools that seek to reduce the asymmetry between formal and informal institutions by first changing the informal institutions through education and awareness raising and second reforming the formal institutions so as to build trust.

10. Education and awareness raising to encourage formalisation In the previous two chapters, the policy tools reviewed all seek to either increase the costs and decrease the benefits of working in the informal economy, or decrease the costs and increase the benefits of operating in the formal economy. However, participants in the informal economy are not always entirely rational economic actors whose behaviour can be changed by altering the cost–benefit ratio confronting them, as Chapter 7 highlighted. In this chapter, the aim is to start addressing the recognition that participants in the informal economy are also social actors, and the asymmetry between formal and informal institutions. To do so, this chapter examines the more indirect policy tools that seek to change the informal institutions through education and awareness raising in order to reduce the asymmetry between formal and informal institutions. The next chapter will then analyse the other side of the coin, namely the reforms of formal institutions that can be pursued to build trust and reduce this incongruence between the formal and informal institutions. At the outset, it is important to recognise that over the past decade or so, as Chapter 2 revealed, a large volume of research has revealed a strong significant correlation between participation in the informal economy and (1) a lack of trust in the state and/or not understanding or believing in what the state is seeking to achieve (i.e., a of lack “vertical” trust) and (2) a belief that many others are operating in the informal economy (i.e., a lack of “horizontal” or interpersonal trust) so they see no reason to operate in the formal economy themselves. Education and awareness-raising campaigns thus can play a key role in encouraging formalisation. The focus upon education and awareness raising is based on the premise that many businesses, employers, workers, and citizens often either unintentionally do not comply, because they do not understand the formal rules of the game, or intentionally do not comply. On the one hand, intentional non-compliance occurs when their norms, values, and beliefs do not align with the formal laws and regulations. On the other hand, it occurs when they believe that others are not complying and so see no reason why they should do so. Education and awareness raising seeks to overcome these rationales for non-compliance. This pursuit of voluntary compliance, rather than enforced compliance, is 240

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potentially a far cheaper, more effective, and sustainable means of encouraging formalisation than having an army of inspectors to police non-compliant behaviour and using incentives to effectively “bribe” the population to operate in the formal economy. To commence, the next section reviews the key issues to consider when designing effective education and awareness-raising campaigns. Following this, specific education and awareness-raising campaigns found in lived practice will be evaluated. This will differentiate campaigns into four types according to their target group and key message, namely campaigns that are (1) targeted at suppliers and highlight the costs and risks of participation in the informal economy, (2) targeted at suppliers and convey the benefits of formality, (3) targeted at purchasers of informal goods and services and set out the costs and risks of participation in the informal economy, and (4) targeted at purchasers of informal goods and services and display the benefits for them of purchasing in the formal economy. The final section then draws some conclusions on using education and awareness raising to encourage formalisation.

DESIGNING EFFECTIVE EDUCATION AND AWARENESS-RAISING CAMPAIGNS Awareness-raising campaigns are organised communication activities which aim to create awareness about an issue and thus produce behavioural change. This section discusses the design of effective education and awareness-raising campaigns in the realm of tackling the informal economy. First, it discusses the identification of a target group for a campaign. Second, it discusses decisions that need to be made on the objectives and the messages to be conveyed, including how messaging needs to overcome the neutralisation techniques participants use to rationalise their behaviour. Third, it discusses the options on the channels that can be used and, fourth and finally, the issues involved in evaluating campaigns. Target Groups The first decision when designing a campaign involves choosing the target group and identifying the key characteristics of that target group. This could be a specific group of people more at risk of participating in the informal economy, a group that needs more information to comply, or a group who needs to be informed about new legislation. The decision on the group to target can be evidence-based (using datasets to identify a group more likely to engage in the informal economy) or it can be the result of a political decision taken. When it is an evidence-based decision, sources of data that can be used to identify the target group include records of inspections and their outcomes (i.e.,

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inspection registers or case management databases), enforcement authority databases (e.g., business and employment registers, complaint reporting hotlines, tax return data, social insurance datasets, frequently asked questions at advice hubs), and surveys of the informal economy (such as the Eurobarometer surveys conducted in 2007, 2013, and 2019 on undeclared work). Once the target group is decided, then knowledge is required on the type of informal work they engage in, their motives for doing so, their socio-economic characteristics, the sectoral and geographical coverage, what they know about operating in the formal and informal economy, and what information still has not reached them. This will shape the messages to be conveyed. As Chapter 6 highlighted, participants in the informal economy sometimes engage intentionally, but others do so unintentionally because they do not know the formal laws and regulations. Moreover, intentional participants can be rational economic actors who engage in such activity because the benefits outweigh the costs, but also social actors whose norms, values, and beliefs do not align with the formal rules of the game. Some engage in the informal economy out of economic necessity, but others do so out of choice, such as due to a belief that the state is corrupt or that they receive nothing back in terms of public goods and services for what they pay in. Understanding the reasons of the target group for participating in the informal economy is important if the messages are to be appropriate. Hence, it is necessary for empirical research to be conducted to understand the reasons of the target group selected for engaging in the informal economy. This might involve quantitative surveys on a representative sample of the target group, or qualitative research (such as focus group research) on a smaller sample to gain a more in-depth, richer understanding. Research is also required to establish the socio-economic characteristics of the target group, the sectoral and geographical coverage, and the specific information needs of the group. The types of informal work that the target group carry out also need to be known. Unless this research is undertaken, it cannot be known what messages need to be conveyed. Based on this research, “personas” can be created of the target group. A persona is a semi-fictional character who has the key characteristics of a large segment of the target group. It provides insights into what those in the target group think and do. The personas need to reflect the type of informal work in which they engage, their reasons for doing so, and their socio-economic (e.g., age, gender, education, formal employment status, income), sectoral, and spatial characteristics. Creating personas helps in defining the target group, shaping what messages to communicate, and selecting the appropriate dissemination channels. Developing several personas can help when having to make decisions on priorities. Alternatively, political priorities and/or the needs of the work situation could be first established, and then personas built to better

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understand how to approach the different audiences identified for action in the target group. Objectives and Messages Once the target group is clear, the next step is to decide the objectives of the campaign and the messages to be conveyed. When considering the objectives, any decisions on these need to be based on the characteristics of the target group. If decision of the target group to engage in the informal economy is unintentional, then the objectives will be related to reaching them with the relevant information to help them comply. If the decision is intentional, then based on an understanding of their motives, a decision needs to be taken on whether the objective of the communication to this target group is informing suppliers or consumers about the costs of engaging in the informal economy or whether it is informing them of the benefits of formalisation, in both cases the aim being to change their behaviour. These objectives should be SMART, that is, specific, measurable, achievable, relevant, and time bound. Once the objectives have been established, then the appropriate message/s can be considered. These must be relevant to the target group, not least in terms of their reasons for engaging in the informal economy. These messages are of two types. First, there is the overall slogan for the campaign and, second, the individual key messages conveyed to the target group. A slogan is a simple catchy phrase that makes a campaign memorable and recognisable across its various activities. An effective slogan prompts the target group to remember the campaign and to act, and it evokes positive feelings. A recent European-wide campaign, which had the overall objective of highlighting the benefits of formalisation, adopted two slogans reflecting this objective, namely “earn, declare, benefit” and “fair work, fair play”. Slogans normally appear alongside the social media campaign hashtag and can function as a call to action. For the European-wide campaign launched in 2020, the hashtag used was #EU4FairWork. Similar hashtags have since been adopted by other countries, such as #Kosovo4FairWork. Key messages are those the target audience should hear and recall. They create meaning and headline the issues being discussed by the campaign. The messages need to resonate with the target group and to clarify the expected behaviour (e.g., “Use the tax calculator”; “Submit a complaint if your labour rights are not respected”). The message will depend on whether the objective is to highlight the costs and risks of engaging in the informal economy or to highlight the benefits of formalisation. If the former, the message might be “You will lose your health and unemployment benefits, parental leave, pensions, etc. due to working in the informal economy.” If the latter, it might be “You will get health and unemployment benefits, parental leave, pensions, etc.

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due to registering your labour contract.” Therefore, the tone of message can be positive or negative. Positive messaging highlights the benefits of formalisation (e.g., healthcare, parental leave, pensions, better hospitals and schools) rather than the risks and costs of operating in the informal economy, such as the penalties. Indeed, target audiences often switch off to negative messaging but are more responsive to positive informational phrases such as “you might like to know…” or “you can benefit from…” For a campaign whose objective is to highlight the benefits of formalisation, the messages for workers might be: “Check your rights as a worker and what protections you are entitled to”; “Make sure your employer declares your work”; and “Registering your job gives you rights to social security, paid holiday, working time rules, and protection against accidents and unfair dismissal.” For employers, they might be: “Declaring your income and workers makes you a trusted employer”; “Reputations can be made and lost. Ensure the legitimacy of your business.” The conveyor of the message is also important. One approach is to use well-known celebrities, influencers, and/or opinion leaders. If such as approach is taken then, as Lessing and Park (1978) identify, it is necessary to differentiate three types of campaigns. These are: 1. Information campaigns where the target group lack understanding and refer to opinion leaders, such as economic experts, for knowledge. 2. Utilitarian campaigns where the target group are motivated by hearing about others being rewarded or punished, such as when names are published of those who pay taxes and those who do not. 3. Value-expressive campaigns where the target group are encouraged to associate themselves with positive role models, such as by publicising the tax payments of famous actors, sports stars, scientists, politicians, and business tycoons, holding them up as role models for law-abiding citizens to follow. For example, if employers or entrepreneurs are targeted, given that the entrepreneur is often portrayed as an ideal-type heroic figure, then value-expressive campaigns might be employed using positive role models. Such value-expressive campaigns can publicise the formal entrepreneurship of famous entrepreneurs and business tycoons who can function as role models and heroic figureheads for these others who may be operating partially or fully in the informal economy. Commercial advertisers, politicians, and charities commonly use opinion leaders and celebrities to endorse their campaigns. Learning from such advertising campaigns, tax, social security, and labour authorities have similarly started to use celebrities and/or opinion leaders for their campaigns. An early

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example was the Internal Revenue Service (IRS) in the USA, who in 2007 sponsored a rap video contest, with an award of $25 000 for the best tax video. The contest was introduced in a rap video called Turbo Tax Mojo by Vanilla Ice (available at http://​www​.youtube​.com/​watch​?v​=​eMudXTz4NuQ), which urged the public to pay their taxes on time and to use Turbo Tax to do so. Humour is a means of getting the attention of the target group. Belgium’s multilingual Student@​work campaign aimed to help students and employers know exactly how many hours young people could legally work each year, and used short funny video adverts involving both Flemish and Walloon personalities. Another approach is to appeal to the dark side in the tone of messages. The “Grey Economy, Black Future” campaign in Finland, targeted at young adults, used images of skulls to illustrate the dark side of working in the informal economy and withholding funds for public services, such as hospitals. In Latvia, a warning sign was used for a campaign on the informal economy (#Atkrapies!), while in Bulgaria the tagline “Think about tomorrow, come into the light” was accompanied by an image of companies and workers in a dark room, inviting them to come through the door into the light. Messages also often involve a call to action for the target group. For example, this might involve asking them to submit a complaint about a case of informal work, use tax calculators, correct declarations already submitted by a certain deadline, visit and use the services of an advice centre or helpline, adjust salary levels that are inexplicably low and have been marked as suspicious, or apply for a registration certificate (if a foreign worker plans to take up employment). Neutralisation techniques When designing messages, it is important to recognise and address the various rationalisations participants use to neutralise their guilt about their participation in the informal economy. This builds on a long-standing literature regarding how those engaged in non-compliant behaviour justify their actions (Eckhardt et al., 2010; Sykes and Matza, 1957). Sykes and Matza (1957), in a seminal paper, proposed five neutralisation techniques which the non-compliant use to rationalise their behaviours: denial of responsibility, denial of injury, denial of victim, appeal to higher loyalties, and condemning the condemners. As Table 10.1 reveals, this list has since been extended by various scholars (Cromwell and Thurman, 2003; Henry, 1990; Minor, 1981; Rosenbaum et al., 2011). Campaign messaging needs to overcome these neutralisation techniques (or rationalisations) that the non-compliant use to justify their behaviour and neutralise their guilt (Apostolidis and Haeussler, 2018; McKercher et al., 2008). If the campaign messages do not, the campaign will not be effective in changing behaviour.

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Table 10.1

Neutralisation techniques used by the non-compliant to justify their actions

Neutralisation technique

Explanation

Author

Denial of responsibility

The non-compliant person is not accountable, but rather

Sykes and

external factors outside their control are to blame

Matza (1957)

Denial of injury

Non-compliant actions are justified because nobody has suffered

Denial of victim

Non-compliant behaviour resulted in injuries, but the violated parties deserved what happened to them

Appeal to higher

Non-compliant actions are necessary to achieve some higher

loyalties

loyalty

Condemning the

Blame is deflected as the individuals condemning them engage

condemners

in similar actions

Defence of necessity

Non-compliant actions are the result of having no choice in the

Minor (1981)

matter and therefore a necessity Claim of normalcy

Non-compliant actions are not wrong because everybody else

Henry (1990)

also takes them Denial of negative

The non-compliant behaviour is justified as it was not supposed

intent

to cause any harm to anyone

Claim of relative

Blame is deflected as other people are much worse

acceptability Denial of the necessity

Individuals engage in non-compliant behaviour because the

Cromwell

of the law

laws are unfair and unjust

and Thurman

Claim of entitlement

Individuals are entitled to do what they wish and benefit

(2003)

Justification by

The behaviour is still preferable to even worse behaviours the

comparison

individual could engage in

Justification of

Individuals suspend the assessment of morally questionable

postponement

behaviour till a later time

One-time usage

The individual intends to use the product only on a single

Rosenbaum et

occasion and therefore behaviour is acceptable

al. (2011)

First-time, only-time

This is the first and only time that the individual engages in the

crime

specific non-compliant behaviour

Outsmart the system

The individual feels pride at outsmarting the system

Source: Abridged version of Apostolidis and Haeussler (2018: Table 1).

Take, for example, the “denial of responsibility” neutralisation technique. Participants in the informal economy can interpret the negative impacts of the informal economy to be the result of others’ actions, who could be bigger players than them, rather than to be related to their own actions. This means that campaign messages need to advertise the extent of the work in the infor-

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mal economy among the average suppliers of informal work in the sphere targeted (perhaps by providing the average income), so that suppliers do not consider their own activity as minor compared with others, and how many small jobs taken in the informal economy aggregate into a sizeable volume of activity when they are all added up. Similarly, in relation to the “denial of injury” rationalisation, suppliers can deny that their engagement in the informal economy has negative impacts on others. They rationalise their non-compliant behaviour by asserting that without them participating in such transactions, customers would have had to pay a higher price or would have been unable to afford to acquire the services provided. This may therefore require messages that convey the common ways in which customers suffer by purchasing informally. Turning to the “denial of victim” neutralisation technique, suppliers may accept the negative impacts of their informal work but believe that the victims deserve it. This may require that campaigns provide human stories of individual victims through personal storytelling. Alternatively, suppliers can use an “appeal to higher loyalties” approach to rationalise their participation in the informal economy. The supplier may justify their actions in terms of some alternative set of loyalties, believing that this justifies their actions, such as that they are doing it for the benefit of their family rather than society. This can be countered by showing how these “higher loyalties”, such as their family, can be also negatively affected by those supplying informal work, either directly in terms of injury and having no warranty on the quality of the product or service, or indirectly in terms of receiving poorer health or educational services. Related to this, there is the “denial of the necessity of the law” rationalisation used by suppliers. They might believe that the law, lawmakers, and law enforcers are to blame for an unjust system and that the community to which the participant belongs should not succumb to these formal rules and this makes their participation in the informal economy a socially legitimate activity. To tackle this requires, for example, stories of the progress being made towards a just system, and the highlighting of the significant benefits of these suppliers operating in the formal economy. A final example is the “defence of necessity” normalisation technique. Participants in the informal economy may justify their actions as being a result of personal circumstances, such as they cannot access fully declared formal employment, or they engage in self-employment in the informal economy out of necessity and as a method of survival in the absence of alternative means of livelihood. To tackle this may require, for example, that information is provided to such suppliers on any organisations, resources, and/or procedures they can access so they do not have to engage in informal work out of necessity. Educational and awareness-raising initiatives targeted at the suppliers of

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informal work thus need to design their messaging so that the above excuses are not open to participants. To identify which neutralisation techniques are commonly used by the target groups of a campaign, and to construct the correct messages, empirical research is required. To demonstrate this, a survey of Greek, British, and German tourists on holiday in Greece is reported here, where the survey sought to understand the tourists’ rationales for purchasing informal goods and services (Apostolidis and Haeussler, 2018). For the British and German tourists, the main neutralisation technique used to justify their purchases from the informal economy of meals and accommodation was “denial of responsibility”. Greek respondents drew on a wider range of neutralisation techniques to justify the acceptability of their actions. For example, more than half of the Greek respondents argued that hotel owners have for a long time also benefited from the current situation through tax evasion and unethical practices (“condemning the condemners”), while many also claimed that no one directly suffers as a result, as the economy does not lose from such activities (“denial of injury”). To a lesser extent, the Greek respondents asserted the rationale of an “appeal to higher loyalties”, stating that the positive consequences of informal economy purchases, such as supporting the local economy or encouraging healthy competition, outweigh the potentially negative impacts. Finally, using the “claim of normalcy”, they argued that others are doing the same thing. This survey therefore identifies the main neutralisation techniques/rationalisations each group uses, which can be used to design appropriate messaging for each group. Channels Having identified the target audience, objectives, and key messages to communicate, the next step is to identify appropriate channels. One conceptual framework of the channels available is the Paid, Earned, Shared, and Owned (PESO) media model (Ilif, 2014). First, there is paid media, which can include sponsored content or digital native advertising, social media ads or boosted posts, or email marketing. Second, there is earned media, where newspapers, specialised media, radio stations, TV channels, and bloggers cover a story for free. Third, there is shared media, which involves the use of social media channels to reach out to audiences directly, with the possibility of interacting with them and getting direct feedback. And fourth and finally, there is owned media, which is when content is disseminated through one’s own channels, whether newsletters, a website, or leaflets. When deciding on the channels to be used, it needs to be considered that different target groups have different ways of obtaining and engaging with information. An evaluation is therefore needed of which is the most appropri-

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ate means of reaching a target group and who should convey the message (the national government, social partners, celebrities, experts, or influencers such as bloggers or vloggers). Regarding the message senders, the most common sender of information on tackling the informal economy is usually the enforcement authorities. Indeed, the tendency of enforcement authorities to send such messages has grown as tax, labour, and social security authorities shift from being purely enforcement bodies using deterrence measures to being prevention bodies using a more preventative approach. However, social partners can also send messages on the informal economy, either independently or in conjunction with enforcement authorities. Less commonly used to convey messages are influencers. Nevertheless, messages targeted at young people about the benefits of formal work or the costs of participation in the informal economy can be promoted using role models, such as teachers or influencers that young people associate with. In Latvia, the “Fraud Off” campaign, targeting those aged 16–24 searching for their first job, used popular vloggers who normally talk about beauty, travel, food, and so forth, many of whom had personal experience of informal work (European Platform Tackling Undeclared Work, 2019x). To see the importance of selecting the appropriate channels, Cyan et al. (2017) report on the effectiveness of campaigns by the Federal Board of Revenue (FBR) of Pakistan that are delivered through the channels of television and national newspapers in order to increase tax filing and tax morale. They find that exposure to either television advertisements or newspaper advertisements led to improved perceptions towards tax compliance among the respondents, but that the newspaper advertisements were more effective, displaying how the choice of channel is important. Koumpias and Martinez-Vazquez (2019) explore the impact on tax filing of mass media campaigns. They find that newspaper adverts, especially those using positive messages, increased income tax filing more than television adverts and that television adverts using moral suasion and portraying self-employed taxpayers improved tax filing among the self-employed but not the broader population. Evaluating the Effectiveness of Campaigns The final step is to evaluate campaigns, such as whether a campaign has changed behaviour. To do this, it is necessary to develop key performance indicators (KPIs) related to the objectives of the campaign. These are established at the same time as deciding on the objectives of the campaign. Establishing KPIs is important because if the tool is shown to be effective, then it can justify further funding for education and awareness-raising activities. Even if it is sometimes difficult to measure the behaviour change resulting

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from education and awareness-raising activities, it is often feasible to evaluate the target group’s awareness of, or exposure to, the issues raised in a campaign. For example, if the objective is to raise awareness of a topic (e.g., the use of a tax calculator to help employers correctly calculate workers’ tax obligations), the KPIs might be a 25 per cent increase in the number of people visiting the tax calculator website, a 20 per cent increase in the number of employers using the tax calculator, and that 90 per cent of employers using the tax calculator state that they feel better informed about tax obligations. To measure these KPIs, web analytics can be used to determine the change in the number of visitors and the number of newly created accounts, while a follow-up questionnaire on the self-assessment tax calculator tool can be used to assess employers’ views as to whether they feel better informed about tax obligations. Meanwhile, if the objective of an education and awareness-raising tool is to encourage a change in behaviour, then the KPIs adopted could be a 15 per cent increase in the number of employers/employees submitting corrected income tax and social security declarations, a 15 per cent increase in the number of registrations changed from self-employed to dependent employee status, and a 15 per cent increase in the number of employees working at the minimum wage who moved to a higher salary level. To measure these, either business or employment registers can be used. When developing KPIs, it is important to consider both the quantitative and qualitative components of the KPI. The quantitative components focus on numerical data. The qualitative components focus more on insights and explanations. For example, if only 30 per cent of visitors to a campaign website sign some pledge at the end, an online survey at the end can be used to explore whether the reason for not doing so was a lack of interest, it not being the right time, a lack of belief in the action, or a mixture of all these. These qualitative insights could help adjust the format of the campaign. Surveys are often a useful tool to evaluate both quantitative and qualitative aspects of a campaign. A quantitative survey would use closed-ended questions while a qualitative survey would use open-ended questions. Surveys can be taken online, by phone, or even on paper. Online surveys can be included on the website of the campaign and are cost-effective and easily distributed, with data being collected quickly and made accessible in real time. More resources are needed for telephone surveys (e.g., for interviewers), but they have a higher response rate and offer the possibility of asking for clarification or further details about an answer. Although paper-based surveys might seem old fashioned and are more difficult to process, they are still effective in some contexts, such as after an event or conference. They also usually ensure higher response rates than online surveys and may work better for some people who prefer paper over online or phone interviews.

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To measure changes in attitude and/or behaviour, a pre- and post-campaign survey is an effective method. Similar questions are asked to the target audience in each of the two surveys to check how these parameters have evolved due to the information tool or campaign. Omnibus surveys (sometimes termed “piggyback” surveys), where questions are placed within a broader survey managed by a market research agency, are cost-effective and enable a larger sample of responses than might otherwise be the case. To conduct more in-depth qualitative research, focus groups and interviews can be used. They can be used with the target group both prior to the campaign, to identify their channel choice and possible key messages, and post-campaign, to evaluate what worked well and what needs to be improved. Focus groups are preferable when an interaction between the respondents (debating, agreeing, and disagreeing) can generate more ideas. One-to-one in-depth interviews usually work better if the topic is sensitive or confidential. When measuring the effectiveness of web-based and social media campaigns, web and social media analytics can be used such as web traffic data (on the campaign’s website) and social traffic data (for social network platforms, blogs, or comments). The data chosen should support the evaluation of the objectives and KPIs set for the campaign. Popular metrics used are reach and impressions (i.e., the number of times that a given piece of content has been viewed on a website and/or platform), visits and unique visitors (i.e., the number of visits and number of different people who have visited a website), engagement (i.e., the number of likes, dislikes, shares, comments, retweets), and conversions (i.e., when there is a call to action, the number filling in a form, signing a pledge, subscribing to a newsletter, clicking on a link, sending an enquiry). Various tools can be used to obtain data both at an individual level (e.g., Google Analytics, Facebook Analytics, Twitter Analytics, and YouTube Analytics) and across platforms (e.g., Brandwatch Analytics, Crimson Hexagon, or Talkwalker). When analysing impact in the media, the number of newspaper, online, radio, or television reports achieved can be counted, and circulation and audience figures can be evaluated. The choice of media will determine whether the expected target audience is reached. Generalist press, either national or regional, allows a variety of topics to be covered, and the audiences of these types of media are also more varied, both in terms of age and in terms of interests. The political positioning of the media will also determine which social groups will be reached. Business or sectoral press narrows down the target audience and allows more specialised information to be given. Measuring the impact that a campaign has in the media can be costly. Media agencies collect data for advertisement purposes, so that they can determine the cost of publicity in terms of the type of audience and circulation. Official national bodies also make some audience figures publicly available for free. When analysing

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this, however, it is necessary to consider the target audience, and whether the objective is the maximum number of people or a particular audience. Until now, however, the extent to which the effectiveness of campaigns organised by governments and/or social partners has been evaluated remains poor, especially in relation to their effectiveness at changing behaviour relative to other policy tools. One exception is in the UK, where yield-to-cost ratios were used to compare the effectiveness of Her Majesty’s Revenue and Customs (HMRC) advertising campaigns with other compliance initiatives. The finding was that, due to advertising campaigns run by HMRC, 8300 additional people registered to pay tax who would not have otherwise done so, paying tax of £38 million over three years, thus providing a return of 19:1 on the expenditure of £2 million. This compares with a yield-to-cost ratio of 4.5:1 on the £41 million spent on other compliance initiatives in 2006/07 (National Audit Office, 2008). This clearly portrays the cost-effectiveness of education and awareness-raising campaigns compared with other policy initiatives when tackling tax non-compliance. Another exception is the “Know Your Rights” campaign of the Norwegian Labour Inspection Authority and their colleagues in Lithuania, Estonia, Romania, and Bulgaria. The target group was the 500 000 foreign nationals working in Norway and the objective was to inform them about their duties and rights at work. Besides evaluating the digital data, Samfunnsøkonomisk Analyze (2021) conducted qualitative in-depth interviews with 24 foreign workers and a quantitative survey with 2384 respondents. The finding is a change in attitudes and behaviour: one in three of those who saw the campaign said that they have discovered offences at their current workplace. Of these, two out of three said that they will raise it with the employer. A total of 145 000 unique users saw the campaign, 86 per cent of which saw it on Facebook, and 41 500 workers from these countries went to the landing page of the campaign. Prior to the campaign, research was undertaken to understand cultural differences in order to communicate appropriately with the target group using social and digital media, and several workshops were held with people from the four countries. This revealed, for example, how people from these countries consider smiling people to be stupid or as seeking to deceive someone. A report was also commissioned on the working conditions of these workers in Norway (Ødegård and Nergaard, 2020), which revealed that the issue these workers were most concerned about was pay, which led to the campaign slogan and key message “You may be entitled to double pay.” However, as already stated and will become more apparent below, these evaluations are exceptions. To reiterate, there has been a limited evaluation of the effectiveness of education and awareness-raising initiatives, especially when compared with evaluations of other policy tools. To see this, attention now turns to examining four types of education and awareness-raising activity.

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This differentiates campaigns by whether their key message is to educate suppliers or purchasers, and by whether the education is about the costs of engaging in the informal economy or the benefits of formalisation. Each type of campaign is considered here in turn. Before doing so, it is important to recognise that many campaigns do not narrowly define their target group but rather target multiple audiences, including employers, workers, and citizens. Also, key messages have often included information about both the costs of engaging in the informal economy and the benefits of operating in the formal economy. Therefore, many campaigns discussed below are allocated under each heading according to their principal, rather than sole, focus.

EDUCATING SUPPLIERS ABOUT THE COSTS OF ENGAGING IN THE INFORMAL ECONOMY A popular broad target group is suppliers, and a key message for educational initiatives has been to inform them about the costs of participating in the informal economy. Indeed, of the 30 European countries surveyed in 2022 by the European Platform Tackling Undeclared Work (Williams and Horodnic, 2022), 88 per cent responding had undertaken educational initiatives informing employers and/or workers of the risks and costs of engaging in the informal economy. All Northern European countries had undertaken this type of campaign (e.g., European Platform Tackling Undeclared Work, 2019s,t,u), along with 75 per cent of Western European, 89 per cent of East-Central European, and 80 per cent of Southern European countries (e.g., European Platform Tackling Undeclared Work, 2018f). For example, a 2017 campaign in Ireland targeted the equine industry where, grounded in a discourse of a “love of horses”, workers and employers often fail to recognise that labour law applies to the employment relationships, resulting in labour law violations. Using employer briefings, presentations, trade journal articles, and inputs to industry training courses, this campaign sought to educate them about the need for trainers and stable staff to comply with labour law, and that there would be imminent inspections. Criminal convictions resulted from these inspections for those failing to comply, and one outcome was a change in event times and the number of events in the 2019 horse-racing season, due to the long working hours for what were now recognised as “workers” rather than people doing this due to their love of horses (Williams, 2019f). In the UK, a 2012 campaign about the risks and costs of informal work was targeted at sole trader self-employed electricians, and this was combined with a voluntary disclosure scheme (see Chapter 9) and follow-up sanctions for the non-compliant. The campaign’s objective was to improve voluntary compliance among sole trader electricians, and involved sending a letter directly to

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them about voluntary disclosure and placing notices in national trade journals, on outdoor posters, and on the radio. To evaluate its effectiveness, pre- and post-campaign surveys were undertaken consisting of 2000 interviews with a randomly selected sample of sole trader electricians. The finding was that 55 per cent of respondents after the campaign had heard about the campaign. When including electricians who did not recall any publicity but said they had received a letter from HMRC, awareness rises to 66 per cent. Comparing preand post-campaign, the role of perceived penalties and perceived risk of being caught reduced and motivations centred on morality, legality, and fairness to others grew. The proportion of electricians who thought that electricians who evade tax were more likely to get caught than a few years ago rose from 68 per cent pre-campaign to 73 per cent post-campaign (HMRC, 2013). Social partners can also lead such campaigns. An example is in Latvia, where the Latvian Employers’ Confederation (LDDK) organised a 2011 campaign entitled “‘Against the informal economy – for fair competition” which focused on the risks and costs of participation in the informal economy and had the slogan “I spit on it”. It included an online test for measuring an individual’s “shadow”, completed by 12 657 individuals; giving citizens empty white envelopes in the street to highlight that 54.7 per cent of Latvia’s population said they would rather receive more money this way as undeclared (“in envelope”) pay than pay taxes, while inviting the population to use the envelopes for better purposes than paying and receiving undeclared salaries; a discussion with business representatives on fair competition; analysis of the results of an online test; and a discussion in the Latvian Parliament on combating the informal economy in Latvia. A key lesson of the campaign was that using provocative advertisement slogans and methods attracted a wide audience (Karnite, 2013).

EDUCATING SUPPLIERS ABOUT THE BENEFITS OF FORMALISATION The reason for pursuing campaigns on the benefits of operating in the formal economy is that many employers and workers (whether dependent employed or self-employed) do not fully understand why they pay their taxes and/or what these taxes are used for by governments; nor do they fully understand the rationales for abiding by labour laws and social insurance rules. In other words, they do not make the connection between the public goods and services they receive, such as schools, hospitals, fire and rescue services, and transport infrastructure, and the taxes and social contributions they pay. Therefore, if the norms, values, and beliefs of employers and workers are to better align with the laws and regulations of formal institutions, and if there is to be a commitment to paying taxes and social insurance and not violating labour law, educating them about such matters is important. Of the European countries surveyed

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in 2022 by the European Platform Tackling Undeclared Work (Williams and Horodnic, 2022), 62.5 per cent responding had used campaigns that informed suppliers of informal work of the benefits of operating in the formal economy (67 per cent of Northern and East-Central, 60 per cent of Southern, and 50 per cent of West European countries). To inform suppliers of the benefits of operating in the formal economy, two broad forms of education can be pursued. To prevent unintentional non-compliance, employers and workers can be informed about what the current system requires them to do. To prevent intentional non-compliance, employers and workers can be educated about the benefits and value of complying to the formal rules of the game to develop their intrinsic motivation and facilitate greater self-regulation. The first type of educational initiative requires the provision of easily understood information to employers and workers about their responsibilities regarding the formal laws and regulations. A large body of research is critical of the complexity of tax systems and the problems this poses for compliance (Natrah, 2013). A sizeable share of non-compliance is unintentional, which is a direct outcome of a lack of information, misunderstanding, and erroneous interpretations of the rules (Hasseldine and Li, 1999). In consequence, as Chapter 9 discussed, one response is to simplify the regulations so that it is easier to comply. Another response is to provide more easily understood information on the formal laws and regulations and what is required of employers and workers (Internal Revenue Service, 2007; Vossler et al., 2011). A specific example of how employers and workers can be given information to facilitate compliance is found in Ireland in relation to unintentional bogus self-employment instigated by employers. An educational initiative was undertaken drawing attention to Ireland’s code of practice for determining the employment or self-employment status of individuals (Irish Revenue Service, 2018). The Irish Department of Employment and Social Protection ran a one-month campaign in 2018 through online, billboard, and radio advertising. This €167 000 campaign reached out to bogus self-employed workers, explaining the implications for their social welfare benefits (Kelly, 2020). Indeed, many different tools can be used to provide easily understood information. In Lithuania, the labour inspectorate uses Facebook Messenger to consult with employers and workers. In 2017, there were 5663 consultations via Facebook, accounting for 4.4 per cent of all consultations (European Platform Tackling Undeclared Work, 2019w). The second type of educational initiative is that which educates employers and workers about the benefits and value of being compliant. If employers and workers are informed and knowledgeable about the current public goods and services they receive for their money, and possible public goods and services they could receive if more were collected, they are more likely to voluntarily

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comply (Bird et al., 2006; Saeed and Shah, 2011). One simple tool used in the UK is an individually tailored letter provided to the taxpayers showing where their taxes are spent and how much they are contributing to which activities of government. Another simple tool is to use messages at the point of receipt of public goods and services, such as “your taxes pay for this” on ambulances, on fire engines, in doctors’ waiting rooms, on public construction projects such as new roads, and in entrances to schools. Nevertheless, even if employers and workers are informed about the public goods and services received for their taxes and social contributions, they may still disagree with some of public goods and services on which money is spent by government. One potential option is to “hypothecate” taxes and social contributions, giving citizens choices over where their taxes are spent. Another option is to “earmark” tax and social contribution revenues, stating the precise activities on which it is spent. Some limited evidence exists in relation to market traders that earmarking improves compliance (Jibao and Prichard, 2013; Korsun and Meagher, 2014). However, earmarking has the disadvantage of reducing budget flexibility and creating expectations that taxes and social contributions should function on a fee-for-service basis. Social partners can also lead such campaigns on the benefits of operating in the formal economy. A first example is an educational initiative run by the European Migrant Workers Union (EMWU) providing free advisory centres for workers from Eastern European countries working in Germany (Stefanov et al., 2019; Williams, 2019f). A second example is a dedicated service and help desk operated by the Christian Trade Union of Belgium (CSC) to inform informal or undocumented migrant workers about their rights at work and help them access these rights (Christian Trade Union of Belgium, 2022; Stefanov et al., 2019). A third example is the “Back in the Field” campaign of the agricultural trade union in Italy (Stefanov et al., 2019). A fourth example is the free smart card provided by the European Federation of Building and Woodworkers’ (EFBWW) that allows workers to access a website providing information on wages (e.g., minimum salary by work category), working conditions (e.g., maximum working time), and the rights of construction workers in all European Union (EU) member states, with the information being given in all European languages (European Platform Tackling Undeclared Work, 2019v). A fifth and final example is a student competition to improve awareness of the benefits of operating in the formal economy, organised by the Free Trade Union Confederation of Latvia (Karnite, 2013; Romele, 2017; SKDS, 2013). One of the largest campaigns on the benefits of formalisation has been that organised in 2020 by the European Commission’s European Platform Tackling Undeclared Work, which uses the hashtag #EU4FairWork and has two main messages: “earn, declare, benefit” and “fair work, fair play”.

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This campaign was supported by enforcement authorities and social partners across 31 European countries, who developed materials to support European Commission created products, such as an interactive game entitled “Out of the shadows: find your way to fair work” (European Platform Tackling Undeclared Work, 2020b), an interactive quiz entitled “How well do you know undeclared work?” (European Platform Tackling Undeclared Work, 2020c), and videos entitled “Declared work means peace of mind” (European Platform Tackling Undeclared Work, 2020d), “Declared work provides security in uncertain times” (European Platform Tackling Undeclared Work, 2020e), and “Declared work protects your business and your workers in uncertain times” (European Platform Tackling Undeclared Work, 2020f). In addition, two competitions were hosted for workers and employers to make their own social media videos about the benefits of operating in the formal economy (European Platform Tackling Undeclared Work, 2020g,h). The evaluation of this campaign did not measure any change in attitude or behaviour pre- and post-campaign but rather counted interactions with the materials produced.

EDUCATING CONSUMERS ABOUT THE COSTS OF ENGAGING IN THE INFORMAL ECONOMY Without a demand for informal goods and services, there would be no supply. This is the rationale underpinning campaigns that educate consumers about the informal economy. One option is to display the negative impacts, including legal, health and safety, and financial risks, of purchasing goods and services from the informal economy. Of the European countries responding to a 2022 survey of the European Platform Tackling Undeclared Work (Williams and Horodnic, 2022), 50 per cent had organised campaigns informing consumers about the problems of buying products and services in the informal economy (83 per cent of Northern, 60 per cent of Southern, 50 per cent of Western, and 22 per cent East-Central European countries). An example is the “Get it in Writing!” campaign in Canada, which informs users of informal labour in the home repair and maintenance sector of the risks involved in purchasing in the informal economy. Developed by the the Canadian Revenue Agency (CRA) in partnership with the Canadian Home Builders’ Association (CHBA), this campaign focuses on the importance of getting a written contract for renovation projects, so that the buyer has control over the cost and other aspects of the work and is protected from the serious risks, including liability and injury, of having work undertaken informally. Its key message is “the underground economy hurts everyone”, and for purchasers it is that “the underground economy is risky business” and that one should “deal with businesses that play by the rules”. Several waves of this campaign have been undertaken, with a first wave occurring between 2003 to 2005 and

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second wave between 2015 and 2018. The key message in the latter wave was: “Don’t accept offers for cash deals without a receipt. Paying under the table is no deal – it can leave you with no warranty, no recourse for poor workmanship and no liability insurance if an injury takes place on your property.” There has been no known evaluation of this campaign (Williams, 2019e).

EDUCATING CONSUMERS ABOUT THE BENEFITS OF FORMALISATION A final target group and objective is to inform purchasers, or potential purchasers, of goods and services from the informal economy about the benefits of buying from the formal economy. Of the countries responding to the 2022 survey of the European Platform Tackling Undeclared Work (Williams and Horodnic, 2022), 58 per cent had pursued educational campaigns informing consumers of the benefits of declared work, including 67 per cent of Northern and East-Central, 60 per cent of Southern, and 25 per cent of Western European countries. Given that many educational campaigns do not clearly differentiate between whether their objective is raising awareness of the benefits of operating in the formal economy or raising awareness of the costs and risks associated with purchasing from the informal economy, and given also that they do not always clearly focus upon whether users or suppliers are the target audience, let alone on which users and which suppliers, many of the above-mentioned campaigns include some focus upon outlining the benefits to purchasers of acquiring goods and services from the formal economy. For example, the “Get it in Writing!” campaign outlines to purchasers of home repair and maintenance services the benefits of buying these services from the formal economy. Such campaigns targeting purchasers regarding the benefits of buying formal goods and services can also be organised by social partners. For example, in Italy, to prevent supplier businesses on a construction site using informal labour, trade unions launched a direct-action campaign aimed towards the purchaser, namely a fashion house, which immediately pledged its full readiness to restore legality at the two construction sites and to compensate the previous unpaid months to the informal labourers (Stefanov et al., 2019).

CONCLUSIONS This chapter has reviewed the use of education and awareness-raising initiatives to tackle the informal economy. Awareness-raising campaigns can be defined as organised communication activities which aim to create awareness about an issue (e.g., formalisation) to prompt behavioural change. Participation in the informal economy takes place when the norms, values, and beliefs

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differ to the laws, codes, and regulations, resulting in what formal institutions deem to be illegal activities being legitimate in terms of the norms, values, and beliefs of the society or population groups. Therefore, a reduction in this institutional incongruence is necessary to formalise the informal economy. Education and awareness raising seeks to reduce the incongruity between the laws and regulations of formal institutions and the norms, values, and beliefs of informal institutions by changing the informal institutions. This chapter reviewed the key issues to consider when designing effective education and awareness-raising campaigns. This considered how education and awareness-raising campaigns need to, first, identify a target group, second, identify its objectives and key messages as well as how these messages can overcome the neutralisation techniques that actors use to justify their actions, third, identify the channels to be used to convey these messages, and fourth and finally, evaluate the effectiveness of the campaign. Following this, four types of campaigns were differentiated by their key message and target group, namely campaigns that combine a key message highlighting either the costs and risks of participation in the informal economy or the benefits of formalisation with a target group of either suppliers or purchasers. This has revealed that many education and awareness-raising initiatives in the realm of tackling the informal economy have tended to have ill-defined target audiences, to lack well-defined objectives and messages, to use a wide range of channels, and to be poorly evaluated. First, on the target audience, there has been limited evidence-based selection of the target audience and therefore a wide audience has been identified, with political considerations often outweighing risk-assessed evaluations of who should be the target group. Second, the objectives and key messages have often not been subjected to empirical evaluation. For example, the decisions as to whether key messages on the benefits of formalisation should focus upon improved class sizes, better healthcare facilities, or better transport infrastructure are not based on detailed quantitative empirical research or even focus groups. Neither has detailed research been conducted to identify the neutralisation techniques used by the target groups to justify their actions, and messages then constructed that directly counter these rationalisations of their actions. Third, the choice of channels has again not been based on empirical evaluations of the major channels used by the target group, with the choice instead often being based on assumptions about which channels they might use, pragmatic decisions on which can be easily used, and considerations concerning the availability of resources. And fourth and finally, evaluation of the impact of education and awareness-raising initiatives has seldom assessed the change in attitudes or behaviour using pre- and post-campaign surveys among the target group. A final criticism of education and awareness-raising campaigns is that much of the focus until now has been upon resolving the lack of trust in the state and/

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or the lack of understanding of what the state is seeking to achieve (i.e., the lack of “vertical” trust). Less emphasis has been put on changing the belief that many others are operating in the informal economy (i.e., the lack of “horizontal” trust). This needs to be resolved in the future, such as by advertising the high level of compliance among different target groups who may believe that others like them are non-compliant. Nevertheless, even if education and awareness-raising initiatives improve their effectiveness and thus the potential for bringing into symmetry the formal and informal institutions, it can be argued that this institutional asymmetry will not reduce unless businesses, employers, workers, and citizens see changes in the formal institutions. Therefore, in the next chapter, the reforms required in the formal institutions are addressed.

11. Reforming formal institutions to encourage formalisation Besides changing the norms, values, and beliefs of businesses, employers, workers, and citizens to align them with the laws and regulations of the formal institutions, policy can also seek to change the formal institutions. Indeed, in societies in which there is a lack of trust in government, addressing formal institutional failures is a necessity if the formal and informal institutions are to become better aligned. Three types of change can be pursued so far as formal institutional reform is concerned. First, there is often a fragmented and uncoordinated approach across the numerous bodies responsible for the transition to formality and a limited integration of social partners. The result is a lack of joined-up governance. Therefore, a more joined-up whole-government approach can be pursued across the formal institutions. A second change relates to modernising the internal processes of the formal institutions to improve the perception among businesses, employers, workers, and citizens that there is procedural and redistributive justice and procedural fairness. And third and finally, as Chapters 2 and 4 highlighted, there is a need for inclusive structural transformation at the macro-level by pursuing wider economic and social developments. Here, each is considered in turn.

JOINING UP FORMAL INSTITUTIONS: A WHOLE-GOVERNMENT APPROACH In many governments across the globe, different formal institutions are responsible for different aspects of the transition to formality. The most common division is that tax administrations are responsible for tackling tax non-compliance, social security institutions for tackling non-compliance in social security contributions, and labour inspectorates for violations of labour law (e.g., unregistered employment, non-payment of the minimum wage). These government authorities responsible for the transition to formality often operate in an uncoordinated and fragmented manner, and there is limited involvement and integration of social partners. The result is the absence of a joined-up coordinated approach across national governments. 261

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The aim of this section is to set out the coordination and institution building required to produce an integrated whole-government approach that will facilitate the transition to formality. To accomplish this, four forms of coordination and institution building are considered in turn. First, the coordination required on the level of strategy is discussed along with the institution building needed to develop a joined-up strategic approach towards tackling the informal economy. Second, the coordination required at the level of operations is reviewed along with the institution building needed to create a joined-up operational approach. Third, the coordination and institution building needed at the level of data collection, sharing, and analysis to develop a joined-up approach is explored and, fourth and finally, the coordination and institution building required between state authorities and social partners is examined along with how this can be achieved. Joining Up Strategy The current situation in many countries is that different government departments are responsible for different aspects of tackling the transition to formality (e.g., tax authorities for tax compliance, labour inspectorates for labour law, and social insurance bodies for social security compliance) and each government authority has a separate strategy that it individually formulates. A more integrated whole-government approach would be to join up these individual strategies. This is important because the transition to formality requires not only policy initiatives by enforcement bodies (discussed in Chapters 8, 9, and 10) but also inclusive structural transformation to tackle the determinants of the informal economy (discussed in Chapters 2 and 4), which is beyond the competence of individual enforcement authorities and ministries. As such, a whole-government approach is required to address these structural economic and social determinants of the informal economy and join up the strategies across the tax, labour, and social security authorities. The institution building required is the establishment of an overall national body responsible for coordinating strategy towards the informal economy. This national body needs to be at a level that is sufficiently high to address the structural economic and social determinants of the informal economy in its strategic actions and to join up the disparate strategies of tax, social security, and labour authorities. This latter joining up of enforcement authority strategies might involve establishing national targets that are common across government and set solely by the national coordinating body, or shared targets that are set in cooperation between this body and the enforcement authorities. Alternatively, each enforcement authority might maintain its separate targets but be coordinated by the national body. Whatever decision is taken on national targets,

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each individual enforcement body requires strategic objectives and targets that reflect the overall national strategy. Different countries are at different stages in this institution building and development of a joined-up integrated strategy for facilitating the transition to formality. In some countries, government departments work almost entirely in “silos” and there are low levels of cooperation between these government bodies and with social partners. In other countries, a more developed strategic approach exists, with a national strategic coordinating body and a national strategy for tackling the informal economy with at least some shared targets across enforcement authorities. In yet other countries, there are fully joined-up forms of government where one state body has responsibility for tackling the informal economy and common targets exist across the subsidiary government departments. In a 2022 survey of representatives of 30 European governments by the European Platform Tackling Undeclared Work, the finding was that only 17 per cent of the countries responding reported that there is one single national body responsible for national strategy (Williams and Horodnic, 2022). Meanwhile, a 2021 survey of the governments of Western Balkan economies for the Western Balkan Network Tackling Undeclared Work, coordinated by the Regional Cooperation Council, reveals that only two of the six Western Balkan economies have a single national body (Williams, 2021h), while a 2021 International Labour Organization (ILO) survey of four Central Asian countries (Azerbaijan, Kyrgyz Republic, Tajikistan, and Uzbekistan) reveals that half of these countries have a single national body (Williams, 2021e). In Azerbaijan, for example, the Commission on the Regulation and Coordination of Labour Relations, chaired by the Deputy Prime Minister and with its secretariat based in the Ministry of Labour and Social Protection of the Population of the Republic of Azerbaijan, was established to coordinate and join up strategy. In 2017, the first coordinated cross-government action plan for the prevention of informal employment was produced, covering 36 policy areas (Williams, 2020g). In Latvia, a Shadow Economy Combating Board, chaired by the Prime Minister, oversees the development of a coordinated and integrated strategic approach. In Finland, a tripartite steering group, led by the Minister of Employment, has developed a strategy and action plan for 2020–23 composed of 20 projects and 50 policy measures which is being implemented by different ministries, agencies, and stakeholders working in cooperation with each other (Finland Ministry of Interior, 2020a,b). In Serbia, since 2015, a central coordination body has been responsible for the overall common national strategy, meeting several times each year, with the first national programme, spanning 2015 to 2020, containing 36 measures and 153 activities to achieve the goal of a €200 million reduction in the informal economy through the transfer of at least 11 000 workers and 9000 businesses

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operating in the informal economy into the formal economy over the first two years following its adoption (Williams, 2021h). The Côte d’Ivoire, since 2019, has had a national body and strategy to facilitate the transition to formality. This strategy emerged out of a participatory diagnostic process that, first, identified key information about the characteristics and drivers of the informal economy and, second, identified four main components to be combined in an integrated strategy, namely the legal and regulatory component, the production component, the working conditions component, and the representation and social dialogue component (Lapeyre and Williams, 2020). Another example of a country where a participatory diagnostic process was used to formulate a national coordinated strategy is Greece. In August 2015, to receive “bailout” money, a European Stability Mechanism support programme for Greece was approved by the Greek authorities and the European Commission. One of the four conditions for receiving the bailout money was that the Greek authorities had to adopt an integrated action plan to tackle the informal economy. At the request of the European Commission, the ILO worked with the Greek government and social partners to design a project, funded by the European Union (EU), to establish a strategy to formalise the informal economy in Greece. Commencing in February 2016, this project assessed the informal economy in Greece and formulated, in cooperation with all stakeholders, a set of policy measures (ILO, 2016b), validated at a high-level tripartite meeting. This validation was important as it resulted from building a consensus on the nature and characteristics of the informal economy in Greece as well as the priority measures required to tackle it. To steer and monitor the implementation of the roadmap, a national tripartite institutional body, the Supreme Labour Council (ASE), was established. Between 2017 and 2019, the ASE met 14 times before fully implementing the roadmap at the end of this period. In fact, the ASE has since developed a follow-up action plan (Lapeyre and Williams, 2020). Finally, the development of a joined-up strategy is required not only at the national level but also at the supra-national level. Three examples exist of this supra-national joining up of strategy. First, there is Recommendation No. 204 of the International Labour Organisation (ILO, 2015). This established, through tripartite social dialogue across the 187 member states, a set of recommendations for achieving the transition to formality. This policy guidance based on an integrated whole-government approach and inclusive structural transformation is followed by United Nations (UN) members when designing their national strategies to facilitate the transition to formality. A second example of developing joined-up strategy at the supra-national level is the establishment in 2016 of the European Platform Tackling Undeclared Work. This platform brings together national enforcement authorities (such as labour inspectorates and tax and social security authorities), the

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European Commission, and European-level social partners (employer and employee organisations). Representatives of the European Foundation for the Improvement of Living and Working Conditions (Eurofound), the European Agency for Safety and Health at Work (EU-OSHA), and the ILO participate as observers (European Commission, 2016; Kantanen, 2021). A key objective of the platform is to encourage mutual learning to enable the development and sharing of good practice across nations. The resultant holistic approach that has arisen is pursued by the Platform members in their national contexts (see Williams, 2017c). A third example is the EU-funded establishment of a Western Balkans Network Tackling Undeclared Work covering six economies, namely Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia, and Serbia. Again, this brings together the tax, labour, and social security authorities and social partners across these six economies. The work programme of this Network mirrors that of the European Platform, given that the Western Balkan member economies are seeking accession to the EU from 2025 onwards. Again, the resultant holistic approach is pursued by the Network members in their economies (Williams, 2020d, 2021h). In sum, a joined-up strategic approach towards tackling the informal economy has been increasingly adopted in many individual countries but also at the supra-national level. Therefore, the evidence is that, over time, there has been a shift towards a joined-up strategic approach towards formalisation. Joining Up and Coordinating Operations It is not only strategy that needs to be joined up. Coordination is also required at the level of operations. It has been conventionally the case that different enforcement bodies conduct separate operations (e.g., workplace inspections) in an uncoordinated manner. Rather than receive multiple visits from different arms of government (e.g., labour inspectors, health and safety inspectors, tax inspectors), joining up operations can be perceived as a business-friendly approach. Although many countries join up operations, bringing together various authorities, these joined-up operations represent a small minority of all operations. For greater levels of cooperation on operations, each enforcement authority could set a target of making a share of all its inspections joint or concerted inspections. It could also be agreed how the successes of the joint or concerted inspections will be distributed (i.e., what proportion of the detections and fines are claimed by each of the authorities involved), which has previously been a contentious issue in some countries. In a 2022 survey of representatives of 30 European governments by the European Platform Tackling Undeclared Work, the finding was that 67 per

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cent of governments responding have fully adopted joint or concerted operations and 38 per cent of state authorities responding have fully adopted a target for the share of all operations which are joint or concerted (Williams and Horodnic, 2022). Meanwhile, a 2021 survey of the governments of six Western Balkan economies for the Western Balkan Network Tackling Undeclared Work reveals that 33 per cent have fully adopted joint inspections as a strategic objective and 44 per cent of authorities responding have fully adopted a target for the share of all operations which are joint or concerted (Williams, 2021h). A 2021 ILO survey of four Central Asian countries (Azerbaijan, Kyrgyz Republic, Tajikistan, and Uzbekistan) reveals that joint operations with other national organisations has been fully adopted in one country and targets set for the proportion that are joint or concerted operations in none (Williams, 2021e). For example, in Serbia, a coordinating body was established in 2017 to develop an action plan for coordinated inspections. In the Republika Srpska of Bosnia and Herzegovina, the government similarly established a coordination body for inspections (Williams, 2021h). Nevertheless, joined-up operations do not only relate to inspections, and nor does it have to be confined solely to collaboration between government departments. Joined-up operations can include preventative operations (e.g., joint education and awareness-raising campaigns) and operations with social partners. An example of the latter is found in Germany, where sectoral action alliances to tackle the informal economy exist across 12 sectors (European Platform Tackling Undeclared Work, 2018e). Joining Up and Coordinating Data Collection, Sharing, and Analysis Besides joining up strategy and operations at a cross-government level, it is also becoming increasingly important to cooperate on data collection, sharing, and analysis (as discussed in Chapter 8). All enforcement authorities, if they are to be effective, must ensure that they have access to data on businesses and employment to enable risky businesses to be identified. This requires the sharing of databases across state authorities. These databases need to be interoperable so that data can be easily shared electronically, which necessitates a cross-government information technology infrastructure that actively supports the implementation of standardised processes. Once data has been collected and shared, the final step relates to data analysis. Some countries are closer than others to having a fully coordinated cross-government approach to data sharing and analysis, with a central unit collating the various datasets and providing a common data analysis function to all relevant authorities (e.g., Finland’s Grey Economy Information Unit discussed in Chapter 8). Other nations possess fully interoperable datasets across authorities and full data sharing. Yet other nations have less cooperation between enforcement authori-

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ties on both data sharing and analysis. Some even have limited datasets that are incapable of detecting potential instances of informal work. In a 2022 survey of representatives of 30 European governments by the European Platform Tackling Undeclared Work, the finding on data sharing was that 8 per cent of authorities responding have limited access to data from other authorities and most of the remaining (88 per cent) have electronic access to some data from other authorities. Only 4 per cent of authorities have full electronic access to all relevant data from other authorities’ databases. Sharing data could be significantly improved. Turning to cooperation on data analysis, there is no country which reports that they have a central body holding the data and which conducts the analytical functions for all authorities, and neither are there any countries who report that they have direct access to all relevant databases of all other authorities for analytical purposes. Rather, 29 per cent of authorities report only being able to analyse their own databases, 50 per cent can and do import data from other public authorities into their own databases, and 21 per cent are able to directly analyse some relevant data from other public bodies. Data analysis could therefore also be significantly improved (Williams and Horodnic, 2022). Meanwhile, a 2021 survey of the governments of six Western Balkan economies for the Western Balkan Network Tackling Undeclared Work reveals that, on data sharing, 20 per cent of authorities surveyed have no access to data from other enforcement authorities, while 50 per cent only receive printouts of data from other enforcement authorities. The remaining 30 per cent have electronic access to some data of other enforcement authorities. No authorities claim to possess full electronic access to all data that is relevant in other authorities’ databases. Hence, sharing data could be significantly improved. On data analysis, no Western Balkan economy has one central unit that holds the data and does the analysis for all enforcement authorities. Neither can any authority directly analyse databases from all other authorities. Instead, 80 per cent of authorities surveyed can only directly analyse its own databases and just 20 per cent receive data from other authorities that can be imported into their own databases. Data analysis, therefore, could again be significantly improved (Williams, 2021h). A 2021 ILO survey of four Central Asian countries (Azerbaijan, Kyrgyz Republic, Tajikistan, and Uzbekistan) reveals that only in Azerbaijan is there full electronic access to all relevant data in other authorities’ databases. On data analysis, no country has one central unit that holds the data and does the analysis for all enforcement authorities (Williams, 2021e).

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Improving Social Partner Involvement Although enforcement authorities have the objective of tackling the informal economy, this is also an objective of social partners. Employer representative organisations wish to tackle the unfair competition that results from other businesses operating in the informal economy, and worker representative organisations, namely trade unions, wish to protect formal workers and tackle unscrupulous employers who use informal employment. Given that enforcement authorities, employers’ organisations, and trade unions all have a common interest in the transition to formality, it is important that they cooperate and work together in a coordinated manner. Therefore, it is not just joining up multifarious government departments that is required; coordination between state authorities and social partners is also needed. Hence, any government and its enforcement authorities need to build partnerships with social partners, defined as representatives of management and labour (employers’ organisations and trade unions). This can be a clearly defined strategic objective of enforcement authorities, with targets set regarding involvement and outcomes. To enhance the involvement of social partners, the first step that needs to be taken by enforcement authorities entails: 1. Identifying the relevant social partners (e.g., trade unions, employer federations). 2. Deciding for each social partner their relevance and role in delivering the different services of the authority (e.g., collection and sharing of data, detection activities, prevention activities, joint inspections). 3. Deciding the level (national, regional, local) at which each of these relationships is sought. Having decided on the social partners with whom cooperation will be pursued, and on their relevance, the potential types of cooperation, and at which level, the second step is to build the partnerships with the social partners. This requires: 1. Staff to be allocated the responsibility for partnership building at the necessary levels of the enforcement authority. 2. The activities in which these employees will engage to be clarified and clearly defined. 3. The potential challenges that will be faced when pursuing partnership building to be identified at the various levels of the organisation and then solutions sought.

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The third step is to manage these partnerships by: 1. Engaging the social partners in all relevant specified activities ranging from strategic management to detailed service provision activities. 2. Developing transparent agreements with clearly defined responsibilities. 3. Monitoring and evaluating in a systematic manner the outcomes of these partnerships. 4. Sharing the evaluation of the outcomes with the social partners. The same three-step process applies to social partner organisations. In a 2022 survey of representatives of 30 European governments by the European Platform Tackling Undeclared Work, the finding is that building partnerships with social partners is fully defined as a strategic objective in 63 per cent of authorities. Moreover, all consult relevant social partners, albeit to varying extents in different authorities. There is irregular ad hoc social partner involvement in 25 per cent of authorities and regular involvement in joint operations (e.g., information and awareness campaigns) in 37 per cent of authorities. Just 21 per cent of authorities have tripartite agreements (with business and workers representative bodies) on sector-specific inspection targets, information exchange, or awareness raising. Only 17 per cent have tripartite agreements on all three aspects. Turning to developing partnerships, no specific staff have been allocated responsibility for this in 21 per cent of authorities. In 33 per cent of authorities, there is discussion on doing this, or a decision to do this has been taken but not fully implemented, and in just 46 per cent of authorities has this been fully adopted. On managing these partnerships and whether there are transparent agreements with the social partners, outcomes are evaluated, and the results shared with the social partners, in 33 per cent of authorities there has been no progress, in 38 per cent discussion is taking place, a decision has been taken to do so but has not yet been fully implemented, or a pilot initiative is being pursued, and in just 29 per cent of authorities is this fully implemented (Williams and Horodnic, 2022). Meanwhile, a 2021 survey of the governments of six Western Balkan economies for the Western Balkan Network Tackling Undeclared Work reveals that in 60 per cent of authorities there is either discussion taking place on establishing partnership building as a strategic objective or a decision has been taken to implement this as a strategic objective but this has yet to be fully applied. In only 30 per cent of authorities has it been fully adopted as a strategic objective. In 60 per cent of enforcement authorities there is discussion on deciding which social partners to cooperate with and the type of activities where cooperation will be sought, while in 30 per cent of authorities this has been fully adopted. Examining the involvement with social partners, all authorities consult social partners to some degree, with 20 per cent engaging in irregular ad hoc involve-

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ment and 60 per cent in regular involvement (e.g., information and awareness campaigns). Only 20 per cent have tripartite agreements on sector-specific inspection targets, information exchange, or awareness raising. No authorities have tripartite agreements on all three aspects. There is no progress on making staff responsible for partnership building. But there is progress in addressing the problems and seeking solutions in 30 per cent of authorities. In 50 per cent of authorities, discussion is taking place on appointing staff to take responsibility for partnership building, or a pilot initiative being pursued, and in only 20 per cent of authorities has this been fully adopted. An important next step for authorities is to allocate specific staff with responsibility for partnership building. On whether transparent agreements exist, outcomes are evaluated, and the results shared with the social partners, there is no progress in 30 per cent of authorities, while 40 per cent are discussing this or have taken a decision to do so, with this having been fully implemented in only 30 per cent of authorities (Williams, 2021h). A parallel late 2020 survey of the 17 main social partner organisations in the six Western Balkan countries reveals that few adopt building cooperation with state authorities as a strategic objective, and in most cases there is only irregular ad hoc involvement with the state authorities. A few assert that there is no consultation. None state that they have tripartite agreements and none state that they are consulted on sector-specific inspection targets, information exchange, or awareness raising. A few assert that there is regular involvement in joint actions (e.g., education and awareness raising), while most allocate staff to the task of partnership building. Most social partners do not have transparent agreements with state authorities that are evaluated in terms of outcomes and then the results shared (Williams, 2021i). A 2021 ILO survey of four Central Asian countries (Azerbaijan, Kyrgyz Republic, Tajikistan, and Uzbekistan) reveals that only in Azerbaijan have all these steps been taken. In the other three countries progress has been slower and often one social partner (e.g., an employer federation) perceives more involvement than another (e.g., a trade union confederation) (Williams, 2021e).

MODERNISING THE INTERNAL PROCESSES OF FORMAL INSTITUTIONS It is not only greater coordination between enforcement authorities, and more involvement of social partners, which is required to improve the operation of formal institutions. The second change required is in the internal processes of the formal institutions to improve the perception among businesses, employers, workers, and citizens that there is procedural and redistributive justice and procedural fairness. If businesses, employers, workers, and citizens witness

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government officials demanding bribes and imposing unfair sanctions for example, trust in government is severely undermined and voluntary compliance is lower. Developing a modern, professional, and responsive bureaucracy is necessary to build trust in government (Rothstein, 2000; Rothstein and Stolle, 2008). To improve the trust in government by citizens, workers, employers, and businesses and prevent participation in the informal economy, it is necessary to modernise formal institutions by making them more customer-friendly and approachable and more fair and just. Businesses, employers, workers, and citizens often do not adhere to the formal rules, and there is a breakdown in the social contract between government and its citizens, workers, employers, and businesses when they feel that this is the case (see Chapter 2). A modernisation of governance is a way forward. At least three institutional reforms can be pursued: 1. Procedural justice can be improved, meaning that businesses, employers, workers, and citizens are treated in an impartial, respectful, and responsible way by public authorities, thus marking a paradigm shift from a “cops and robbers” mentality to a service-oriented perspective. 2. Procedural fairness can be enhanced, meaning that businesses, employers, workers, and citizens view the social contributions they make as fair compared with what others pay. 3. Redistributive justice can be improved, meaning that businesses, employers, workers, and citizens view the public goods and services received as appropriate for the social contributions made. Here, each is considered in turn. Before commencing, it is necessary to state that to improve trust in government among citizens, workers, employers, and businesses, and thus tackle the informal economy, it is important to distinguish between input state authorities on the one hand, which cover the legislative and executive branches of government and produce policies, and output state authorities on the other hand, which deliver the public goods and services decided on the input side (Rothstein, 2005). Using data from 92 countries over the period 1981–2014, Koumpias et al. (2020) find not only that trust in government organisations positively influences tax morale (and therefore the likelihood of compliance) but that trust in output authorities (e.g., tax administrations, labour inspectorates) has a significantly larger impact on tax morale than trust in input authorities. This further reinforces previous research, discussed in Chapters 2 and 7, revealing that when output authorities treat citizens, workers, employers, and businesses more as partners and are customer-friendly, they build a relation-

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ship of trust which results in greater voluntary compliance (e.g., Kirchler et al., 2008; Kogler et al., 2016). Improving Procedural Justice Procedural justice refers to whether businesses, employers, workers, and citizens view state authorities as dealing with them in a respectful, impartial, and responsible manner (Braithwaite and Reinhart, 2000; Murphy, 2005; Taylor, 2005; Thibaut and Walker, 1975; Tyler, 1997; Wenzel, 2002). If they view formal institutions as treating them with a lack of respect and not impartially, non-compliance is more likely (Hartner et al., 2008; Murphy, 2003; Murphy et al., 2009; Torgler and Schneider, 2007a; van Dijke and Verboon, 2010; Wenzel, 2002). Various factors affect whether procedural justice is perceived to exist. These include the consistent application of processes over time, the absence of decision-makers’ self-interest in the process, the accuracy of data on which decisions are based, and whether recipients can voice their opinions (Thibaut and Walker, 1975; Leventhal, 1980; van den Bos et al., 1996). When there is perceived to be procedural justice, rule-following occurs (e.g., Tyler, 2009), and there is greater voluntary compliance (Hartner et al., 2008; Murphy and Tyler, 2008; Farrar, 2015). Leventhal (1980) thus proposed the following six rules for how governments should interact with citizens, employers, workers, and businesses to improve the perceived level of procedural justice: 1. The consistency rule – procedures must be applied consistently across time and citizens; nobody should be favoured, or disadvantaged compared with others. 2. Bias suppression rule – egoistic intentions and prejudice on the part of the decision-makers must be avoided. 3. Accuracy rule – all relevant information sources should be used so that decisions are evidence-based. 4. Correctability rule – there should be the possibility to modify decisions in reaction to emergent evidence. 5. Representativeness rule – the interests and opinions of all stakeholders should be considered. 6. Ethicality rule – procedures must reflect the prevailing moral and ethical values. Leventhal’s rules deal primarily with the process of decision-making. However, Bies and Moag (1986) emphasise the importance of including interpersonal interactions. People want respectful and fair treatment, by which is

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meant interactional fairness with state authorities. As Wenzel (2006) reports, compliance is significantly higher among those perceiving there to be interactional fairness. When businesses, employers, workers, and citizens are treated politely, with respect and dignity, and feel they have voice and that their rights and social status are being respected, compliance increases (Alm et al., 1993; Feld and Frey, 2002; Farrar, 2015; Gangl et al., 2013; Hartner et al., 2008; Murphy, 2005; Tyler, 1997, 2006; Wenzel, 2002). If businesses, employers, workers, and citizens believe they are receiving unfair or unreasonable treatment, such as when inspectors do not display respect for them, or believe that taxes collected are being used to support powerful private interests who have captured the state, this results in a lack of trust and lower compliance rates (Murphy, 2008). As Kim and Wan (2022) find when examining data on 7300 taxpayers in South Korea, taxpayers are more likely to pay taxes if they perceive the tax system as being fair in terms of vertical exchange and distribution, while procedural fairness is not statistically significant when it comes to likelihood of paying taxes. When a “cops and robbers” approach exists in tax and labour inspectorates that views businesses, employers, workers, and citizens as “robbers” and the inspectorates themselves as “cops” policing their criminal behaviour, the view prevails that there is little respect for the customers (Murphy, 2003, 2005, 2008). A more customer-service-oriented approach is thus required which treats businesses, employers, workers, and citizens with respect and dignity. Case studies of countries adopting this approach can be found in Australia (Job and Honaker, 2002), Singapore (Alm et al., 2010), and the USA (Rainey and Bozeman, 2000). This treatment of businesses, employers, workers, and citizens as clients rather than criminals is part of the “new public management” approach (Lane, 2000; Osbourne, 1993) where customer-friendly services are part of a market-oriented business strategy and “good governance” (Bovaird and Loffler, 2003; Gemma-Martinez, 2011; Job and Honaker, 2002; Lane, 2000; Osbourne, 1993). The overarching goal is to improve the trust and confidence of businesses, employers, workers, and citizens in public administrations, politicians, and governance (Bouckeart and van de Walle, 2003; Heintzman and Marson, 2005). In a 2022 survey of representatives of 30 European governments by the European Platform Tackling Undeclared Work, 54 per cent of enforcement authorities responding have taken measures to improve the degree to which their customers are treated in a respectful, impartial, and responsible manner. However, there are regional variations. Some 83 per cent of enforcement authorities in Northern Europe have done so, as has 75 per cent of enforcement authorities in Western Europe, 44 per cent in East-Central Europe, and just 20 per cent in Southern Europe (Williams and Horodnic, 2022).

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In Latvia, for example, state authorities involved in tackling the informal economy adopt a “consult first” principle. This has led to a customer-oriented approach based on informing customers of non-compliance first and then giving them the option of eliminating the violation within a set time before imposing penalties. Reflecting this “consult first” principle, the Latvian state labour inspectorate strategy for 2018/19 started the shift away from traditional key performance indicators (KPIs), such as the number of inspections conducted and the number of instances of informal work identified, and towards new preventative KPIs, such as the number of risky companies receiving consultation and given the opportunity to prevent violations before the labour inspectorate visit, the number of consultations given to newly created companies, and client satisfaction with the labour inspectorate services (Lusis, 2019). Similar approaches are adopted by enforcement authorities in other countries with the aim of improving procedural justice. In the UK, the tax authority (Her Majesty’s Revenue and Customs, HMRC) adopts a “promote, prevent, respond” strategy to treat businesses, employers, workers, and citizens in a respectful, impartial, and responsible manner when tackling the informal economy. The intention is to promote compliance by designing the strategy into systems and processes, prevent non-compliance at or near the time of filing, and respond to non-compliance (National Audit Office, 2017). Improving Procedural Fairness Procedural fairness refers to whether businesses, employers, workers, and citizens perceive that they are being treated fairly compared with others and that the share of taxes and contributions they pay is fair relative to others (Brockner, 2002; Kinsey and Gramsick, 1993; Wenzel, 2004a,b). Those feeling that they receive procedurally fair treatment are more likely to trust the authorities and be compliant (Kim and Wan, 2022; Murphy, 2005). Conversely, if they believe that they are not being treated fairly, non-compliance increases (Alm and Torgler, 2006; Bird et al., 2006). For example, if state authorities display disapproval towards businesses, employers, workers, and citizens by stigmatising them and do not display respect, such as by labelling them with outcast identities (e.g., thief, tax cheat), the outcome will be persistent re-offending since the business, employer, worker, and citizen feels alienated (Ahmed and Braithwaite, 2005; Braithwaite and Braithwaite, 2001). Based on a survey of 652 offenders selected by the Australian Taxation Office, Murphy (2008) reveals that the taxpayer’s perception of the enforcement experience (stigmatic or reintegrative) can influence feelings of resentment, which then subsequently influences compliance. As Molero and Pujol (2012) find, where there is grievance either in absolute terms (e.g., they feel taxes are too high or public money

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wasted) or in relative terms (e.g., there is a lack of horizontal trust and a belief that others are cheating), non-compliance is the outcome. The fairness of the tax system is one of the key determinants of whether businesses, employers, workers, and citizens trust the authorities and are voluntarily compliant (Braithwaite, 2003b; Farrar, 2015; Hartner et al., 2008; Kirchgässner, 2010, 2011; McGee, 2005; McGee et al., 2008; Molero and Pujol, 2012). Braithwaite (2003b) reports a survey showing that in terms of overall fairness, perceptions of insufficient procedural fairness from the tax office is an important factor in determining voluntary compliance, along with economic self-interest and satisfaction with the nation’s democracy. Indeed, laboratory experiments reveal that there is greater compliance when individuals perceive that they have a voice in how their taxes are spent (Alm et al., 1993; Wahl et al., 2010) and how enforcement should be done (Alm, 1999). As Frey and Stutzer (2005) reveal in Switzerland, there is a positive relationship between direct democracy and taxpayer satisfaction, reinforcing earlier findings that in cantons where direct democratic rights are more developed, tax non-compliance is lower (Pommerehne and Weck-Hannemann, 1996; Torgler, 2005b). Procedural fairness is important, but only for some types of taxpayers. Gobena and van Dijke (2016), in a survey of Ethiopian business owners, test if procedural fairness fosters voluntary tax compliance, particularly when the legitimate power of the tax authority is low and when the coercive power of the authority is high (i.e., in an antagonistic tax climate). The results reveal that more procedural fairness leads to more cognition-based trust, which in turn leads to more voluntary compliance, but only for those taxpayers who have an antagonistic relation (low perceived legitimate power, high perceived coercive power) with the tax authority. The same authors explore this result further in another study (Gobena and van Dijke 2017), where they investigate how identification with the nation interacts with procedural fairness and trust in the tax authority in predicting voluntary tax compliance in Ethiopia and the USA. The relationship between procedural fairness and voluntary tax compliance that Gobena and van Dijke (2016) found among citizens with low trust in the tax authority only holds for citizens who weakly identify with the nation. Overall, this means that the finding about procedural fairness leading to voluntary compliance is not universal but limited to citizens with an antagonistic relationship with the tax authority and a weak national identity. In a similar disaggregation of population groups, Alexander and Balavac-Orlic (2022), in a study of 627 US and UK public and private sector employees, find that the perceived fairness of the tax system enhances tax morale when financial and tax literacy is high, whereas the perception of fairness has no effect on tax morale for respondents with lower levels of financial and tax literacy.

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Improving Redistributive Justice Redistributive justice refers to whether businesses, employers, workers, and citizens believe that they receive the goods and services deserved for the level of taxes paid (Cowell, 1992; Kinsey and Gramsick, 1993; Kinsey et al., 1991; Richardson and Sawyer, 2001; Saad, 2011; Thurman et al., 1984; Wenzel, 2002, 2003). Taxes and social insurance contributions are the price businesses, employers, workers, and citizens pay for public goods and services. The question is whether the price corresponds to the perceived value of these goods and services (i.e., whether it is “just”), or put another way, whether it is a “just price” (Kirchgässner, 2010). The less the tax and social insurance system is viewed as just, the more likely businesses, employers, workers, and citizens will be to operate in the informal economy and to break the social contract with the state (McGee, 2005). To improve compliance, the compliance system must be perceived as just. Governments thus need to educate the population about where their taxes are spent and why social security and labour laws prevail (as discussed in Chapter 10). When businesses, employers, workers, and citizens do not recognise or do not fully understand the public goods and services they receive for their taxes and social insurance contributions, compliance is lower than when they are more fully aware of the public goods and services received and agree with how their taxes and social contributions are spent (Lillemets, 2009). The outcome is that many governments now pursue education and awareness-raising initiatives, such as sending letters to taxpayers on how their taxes are spent. Van Dijke et al. (2019) analyse the relationship between procedural and distributive justice and voluntary (but not enforced) compliance, particularly among citizens who perceive the tax authority’s power as high (versus low). The results of two field studies among Ethiopian and US taxpayers reveal that voluntary compliance is higher when procedural and distributive justice is perceived to exist, especially among those who perceive the tax authority’s power as high.

STRUCTURAL TRANSFORMATION Until now, the policy initiatives discussed to tackle the informal economy have been largely measures at the level of enforcement authorities. These, after all, are the state authorities that have been conventionally responsible for tackling the informal economy. Chapter 8 evaluated deterrence policy tools, Chapter 9 formalisation incentive tools, and Chapter 10 awareness-raising tools. Indeed, the literature on how to tackle the informal economy is dominated by analysis of what should be done at this level of government.

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However, a major reason for arguing at the start of this chapter that a high-level coordinating body is required to produce a national strategy and to join up the strategies of the multifarious enforcement authorities involved (i.e., tax administrations, labour inspectorates, and social security bodies) is that the determinants of the informal economy cannot be tackled by enforcement authorities alone. As Chapters 2 and 4 highlighted, many of the determinants of the informal economy are macro-level economic and social conditions and beyond the remit of enforcement authorities. The structural transformation required to change these macro-level economic and social determinants of the informal economy requires action by a high-level government body. In this section, therefore, a summary is provided of the structural drivers of the informal economy identified in Chapters 2 and 4, along with the inclusive structural transformation required to tackle the informal economy. Chapter 2 revealed that a variant of institutional theory (Baumol and Blinder, 2008; Denzau and North, 1994; North, 1990) has emerged as the dominant way of explaining the informal economy. If institutions are defined as the rules of the game that prescribe what is socially acceptable and govern behaviour, then all societies have two types of institutions. On the one hand, there are formal institutions in the form of laws and regulations, which formulate the official rules of the game and prescribe “state morale”. On the other hand, there are informal institutions, which are the unwritten socially shared rules about what is acceptable so far as citizens, workers, and entrepreneurs are concerned and prescribe “civic morale” (Denzau and North, 1994; Helmke and Levitsky, 2004). This institutionalist theory has made major advances in explaining the prevalence of the informal economy. As Chapter 2 revealed, the informal economy is more prevalent when the failings of formal institutions lead to the formal rules of the game differing to what citizens view as socially acceptable (Dau and Cuervo-Cazurra, 2014; Godfrey, 2015; Webb et al., 2009; Williams and Shahid, 2016; Williams et al., 2017a). The greater the difference between state morale and civic morale, the more prevalent is the informal economy. As Chapter 2 outlined, these formal institutional failings are of four types: 1. Formal institutional resource misallocations and inefficiencies by formal institutions. These result from the lack of modernisation of government organisations (i.e., the lack of procedural and distributive justice and procedural fairness) and/or formal institutions acting in a corrupt manner to protect or maximise economic rents for elites, or happen when state capture by such elites occurs, resulting in the majority not receiving a fair share in return for their contributions, or suffering from overly burdensome taxes, registration, licensing regulations, and costs. 2. Formal institutional voids and weaknesses. Which institutional voids and weaknesses result in a greater prevalence of the informal economy, and

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which do not, has been subject to much discussion. The majority view is that informal economic activity results from too little state intervention in the provision of formal work and welfare. 3. Formal institutional powerlessness. This is expressed in not only a lack of capacity to enforce policies but also a lack of ability to incentivise adherence to the formal rules. From this perspective, power means the ability to get somebody else to do something that they were not going to do before, in the way in which you want them to do it. Formal institutions lack power because they are unable to encourage businesses, workers, and citizens to adhere to the formal rules (i.e., the laws and regulations) using either enforced compliance (i.e., “sticks” and “carrots”) or voluntary compliance. 4. Formal institutional instability and uncertainty. This occurs due to, for example, continuous changes in the formal rules of the game about what is acceptable, which leads to rejection of the rules in favour of the more stable unwritten socially shared rules. As Chapters 2 and 4 then revealed, the informal economy is more prevalent when there are: 1. Greater formal institutional resource misallocations and inefficiencies manifested in: a. A lack of modernisation of government. b. Greater levels of corruption. 2. Greater formal institutional voids and weakness manifested in: a. Lower levels of development. b. Ineffective regulations. c. Lower (not higher) tax rates. d. Lower government expenditure and lower expenditure on social contributions. e. Higher levels of poverty and inequality. 3. Greater formal institutional powerlessness manifested in: a. Lower levels of government effectiveness, regulatory quality, public trust in politicians, and perceived rule of law. 4. Greater formal institutional instability and uncertainty manifested in: a. Low transparency of government policymaking. These results therefore identify the inclusive structural transformation required to address the prevalence of the informal economy. To facilitate the transition to formality, countries need to: A. Improve formal institutions by:

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1. Reducing formal institutional resource misallocations and inefficiencies through: a. Modernising government such as improving government effectiveness and the quality of public services. b. Reducing the perceived and/or actual levels of public sector corruption. 2. Tackling formal institutional voids and weakness by: a. Increasing the level of development. b. Improving state intervention in formal work and welfare (in terms of simplifying compliance and increasing government expenditure, especially on social contributions and active labour market policies). c. Reducing the depth and incidence of poverty and inequality. 3. Reducing formal institutional powerlessness by: a. Strengthening the rule of law and increasing the effectiveness of government, quality of the regulatory environment, and trust in state authorities. 4. Reducing formal institutional instability and uncertainty by: a. Improving the transparency of government policymaking and reducing perceptions of political instability and risk. B. Improve informal institutions by: 1. Increasing the level of vertical trust in government, such as by improving tax morale (i.e., reducing the acceptability of work in the informal economy). 2. Increasing the level of horizontal trust (i.e., the view that others are compliant). To reiterate, this requires a whole-government approach in which a high-level coordinating body takes responsibility for the overall strategy for tackling the informal economy. It is only a high-level coordinating body at the top of government, and including social partners, which can take the decisions necessary to tackle these structural conditions that determine the prevalence of the informal economy. To pursue this approach, the high-level body needs to engage in a continuous monitoring of the trends in these determinants to provide early warning signals of the growth or decline in the prevalence of the informal economy and identify the structural economic and social conditions which require action. An example of this can be found in the EU, where the European Platform Tackling Undeclared Work has monitored these structural economic and social conditions between 2009 and 2018. This monitoring identifies on a country-by-country level the positive macro-level changes that signal a likely future decline in informal work and the negative macro-level changes where

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action is required to prevent a likely future growth in informal work (Williams and Horodnic, 2020c).

CONCLUSIONS This chapter has revealed that, beyond changing the norms, values, and beliefs of businesses, employers, workers, and citizens to align them with the laws and regulations of the formal institutions, there is also a need to reform the formal institutions if the informal economy is to be tackled. Three types of change have been outlined in this chapter in relation to reforming formal institutions. First, there is often a fragmented and uncoordinated approach across the numerous bodies responsible for the transition to formality and a limited integration of social partners. Therefore, a more joined-up whole-government approach is required across the formal institutions. This chapter has revealed four forms of coordination and institution building required. First, there is coordination required at the level of strategy, second, at the level of operations, third, at the level of data collection, sharing, and analysis, and fourth, between state authorities and social partners. This chapter has set out the progress of governments on each one of these dimensions, revealing that a shift towards a whole-government approach and greater coordination at the level of strategy, operations, data collection, sharing, and analysis, and social partner involvement is underway in many countries but that there remains considerable scope for improvement in most countries. A second change required is in the internal processes of the formal institutions to improve the trust in government among businesses, employers, workers, and citizens, by making them more customer-friendly and approachable and more fair and just. Businesses, employers, workers, and citizens often do not adhere to the formal rules, and there is a breakdown in the social contract between the state and its citizens, workers, employers, and businesses when they feel that this is the case. A modernisation of governance is a way forward. At least three institutional reforms are required. First, procedural justice can be enhanced. This refers to public bodies dealing with businesses, employers, workers, and citizens in an impartial, respectful, and responsible manner, and replacing a “cops and robbers” attitude with a service-oriented mentality. Second, procedural fairness can be enhanced. This refers to businesses, employers, workers, and citizens viewing themselves as contributing a fair share relative to others. And third and finally, redistributive justice can be improved. This refers to businesses, employers, workers, and citizens perceiving that the public goods and services they receive are appropriate for the social contributions made. Again, these reforms of the processes of the formal institutions are underway in many countries but there is again considerable room for improvement.

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A third and final change of the formal institutions required relates to structural transformation at the macro-level in terms of wider economic and social developments. On the one hand, this requires four types of improvement in the formal institutions. First, there is a need to reduce formal institutional resource misallocations and inefficiencies through modernising government (e.g., improving government effectiveness and the quality of public services) and to reduce the perceived and/or actual levels of public sector corruption. Second, there is a need to tackle formal institutional voids and weakness by increasing the level of development, improving state intervention in formal work and welfare (in terms of simplifying compliance and increasing government expenditure, especially on social contributions and active labour market policies), and reducing the depth and incidence of poverty and inequality. Third, there is a need to reduce formal institutional powerlessness by improving government effectiveness, regulatory quality, trust in government, and the perceived rule of law. And fourth and finally, there is need to reduce formal institutional instability and uncertainty by improving the transparency of government policymaking and reducing perceptions of political instability and risk. On the other hand, there is also a need to improve informal institutions through increasing the level of vertical trust in government, such as by improving tax morale (i.e., reducing the acceptability of work in the informal economy), and increasing the level of horizontal trust between peers (i.e., the view that others are compliant). In sum, this chapter reveals that facilitating the transition to formality requires not just effective policy tools at the level of enforcement authorities but also wider reforms of formal institutions. As such, responsibility for formalisation can no longer be assigned by governments to enforcement bodies such as labour inspectorates and tax administrations. Although these institutions play a key role in facilitating formalisation, a much broader whole-government approach is required that not only addresses the structural economic and social determinants of informality, but also joins up strategy and operations across labour, tax, and social security authorities, fully involves social partners, and uses the full range of policy measures available.

12. Conclusions and a future roadmap for the transition to formality The aim of this concluding chapter is to synthesise the findings from the previous chapters and to produce a future roadmap for the transition to formality. The starting point is the series of questions posed at the beginning of this book. What different theories have been used to explain the informal economy and how have the theoretical explanations used altered over time? What methods can be used to measure the prevalence of the informal economy and what is its prevalence across the world? What diverse types of informal work exist? Who is more likely to participate in each of these types of informal work and what are their motives for doing so? What policy choices are available regarding what should be done about the informal economy? What is the current approach most widely adopted and what policy tools are being used? In this concluding chapter, how these questions have been answered is summarised. Alongside this, fruitful future directions for research on the informal economy are proposed. The chapter proceeds as follows. First, a summary is provided of the different theories of the informal economy. This is followed by, second, a synopsis of the measurement methods used to estimate the informal economy’s magnitude and, third, a review of the prevalence of the informal economy across the world. Fourth, the heterogeneity of the informal economy is summarised in terms of the different kinds of informal work that take place and, fifth, who engages in each of these kinds of informal work and why they do so is outlined. Having discussed the lived practices in the informal economy, attention then turns to what should be done about this sphere. Sixth, the various objectives that can be pursued and policy tools to achieve them are summarised, and this is followed by a more detailed summary regarding, seventh, deterrence tools, eighth, formalisation incentive tools, ninth, education and awareness-raising tools, and tenth, the reforms required to formal institutions. The final section provides a brief synthesis and some concluding remarks. Before commencing, a brief word is required on how the informal economy has been defined in this book as well as on the impacts the informal economy has on different stakeholders. Throughout this book, reflecting the growing influence of institutional theory, the informal economy has been defined as socially legitimate paid activity that is legal in all respects other than it is not 282

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declared to, is hidden from, or is unregistered with the authorities for tax, social security, and/or labour law purposes when it should be declared. Given the strong consensus among both scholars and practitioners about what is included as being part of the informal economy, and what is not, future research need not expend yet further energy on defining the informal economy. However, it could prove useful to conduct more systematic research on the impacts of the informal economy on different stakeholders, namely formal enterprises, informal businesses, formal workers, informal workers, customers, governments, and the wider economy and society. Although there is a strong consensus that the negative impacts of the informal economy outweigh any positive ones, and this is doubtless the case, evidence supporting this is currently lacking. Therefore, future research could usefully adopt a more evidence-based approach towards understanding the positive and negative impacts of the informal economy by systematically analysing its impacts on each of the different stakeholder groups and how these vary in different contexts.

THEORETICAL AND METHODOLOGICAL PERSPECTIVES Evolution of Theories Explaining the Informal Economy In Chapter 2, the different theories used to explain the informal economy have been reviewed along with how the dominant theoretical explanations have changed over time. This has revealed that scholarship has shifted from the domination of modernisation theory, depicting the informal economy as persisting only due to economic under-development and a lack of modernisation of governance, through a period when neo-liberal and political economy theories competed for dominance (which respectively view the informal economy as resulting from over- and under-intervention by the state in work and welfare provision), to the present day when institutional theory has become the dominant explanation, not least because it synthesises and incorporates the core tenets of the previous theorisations. Based on the recognition that prior theories, which all focus upon macro-level structural determinants, cannot explain why some workers and businesses in a country turn to the informal economy and others do not, institutional theory has emerged. In this perspective, all societies possess both formal institutions, which set out the legal rules of the game, and informal institutions, which are the unwritten socially shared rules expressed in the norms, values, and beliefs of businesses, employers, workers, and citizens (Helmke and Levitsky, 2004). Work in the informal economy happens outside the formal rules but inside the rules of the informal institutions (Godfrey, 2011; Kistruck et al., 2015; Siqueira et al., 2016; Webb et al., 2009; Welter et al., 2015).

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In a first wave of institutional theory, the informal economy has been explained as resulting from formal institutional failings, as described above in the modernisation, neo-liberal, and political economy theories. A second wave has viewed it as arising due to the asymmetry between formal and informal institutions, while a third wave synthesised the two previous waves. This third wave of institutional theory has posited that when formal institutional failures result in an asymmetry between formal and informal institutions, the consequence is a greater prevalence of the informal economy. To explain and tackle the informal economy, this third wave of institutionalist thought asserts that, on the one hand, the formal institutional failings that lead to participation in the informal economy need to be identified and addressed, and on the other hand, the failings of informal institutions that result in greater participation in the informal economy need to be understood and resolved. To identify the formal institutional failings, institutional theory has included the determinants identified in the previous modernisation, neo-liberal, and political economy theories and grouped them into (1) formal institutional resource misallocations and inefficiencies, including indicators measuring the lack of modernisation of government and corruption; (2) formal institutional voids and weaknesses, including indicators measuring state intervention in work and welfare; (3) formal institutional powerlessness, including indicators measuring the capacity to enforce law and regulations and the ability to provide incentives to encourage compliance; and (4) formal institutional instability and uncertainty, including indicators measuring the frequency of changing the laws and regulations. To comprehend the failings of informal institutions, institutional thought has recognised that participation in the informal economy is deemed socially acceptable by businesses, employers, workers, and citizens even though such an endeavour is illegitimate in terms of the formal institutions. To measure the gap between formal and informal institutions in terms of what is considered legitimate, tax morale has been used, defined as the intrinsic motivation to pay taxes. The finding is that a low level of tax morale is associated with greater engagement in the informal economy. Investigating the determinants of this institutional asymmetry, trust has been identified as a key driver. This is of two main types. On the one hand, there is vertical trust, by which is meant the trust of businesses, employers, workers, and citizens in state authorities (e.g., government, the legal system, labour inspectorates, tax authorities). On the other hand, there is horizontal trust, which refers to the trust that businesses, employers, workers, and citizens have in relation to others being compliant, often measured in terms of their perceptions of the prevalence of the informal economy in a society. Table 12.1 summarises the overarching approach adopted in this book in relation to explaining and tackling the informal economy. It synthesises the

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current consensus in third wave institutional theory on how the informal economy is explained, and maps how the various direct and indirect policy tools discussed in this book each address different determinants. It thus links the different determinants of the informal economy with the different policy tools discussed. So far as is known, this is the first time that the theoretical basis underpinning the holistic integrated strategic policy approach being adopted by supra-national institutions and governments across the world has been made explicit. In doing so, the theoretical rationales underpinning each set of policy tools being used are clearly displayed. So too are the specific determinants and drivers of participation in the informal economy targeted by each set of policy tools. Until now, and akin to earlier theorisations, this institutionalist explanation for participation has been applied to the informal economy treated as a singular homogeneous entity. In future, it would be useful to apply this explanation to each of the different kinds of informal work. This might well lead to a more nuanced explanation for each kind of informal work with, for example, some of the determinants being more important in relation to some kinds of informal work than others. This is a major avenue for future research. Some headway has been made on applying this institutionalist explanation to unregistered enterprises and informal self-employment. Future research could apply this institutionalist explanation to bogus self-employment, quasi-formal employment, unregistered employment, and paid favours. Methods for Measuring the Size of the Informal Economy In Chapter 3, the different ways of estimating the size of the informal economy have been reviewed. This differentiated two broad measurement methods. On the one hand, there have been indirect measurement methods that employ macro-level data collected for other purposes. The assumption is that even if those engaged in the informal economy seek to hide their economic activity, it is possible to detect statistical traces of such endeavour in such macro-level data. These indirect measurement methods were shown to be of four types, differentiated by the proxy indicators used to measure the magnitude of the informal economy. First, there are non-monetary indicator methods, which can be sub-divided into those that use very small enterprises as a surrogate indicator of the informal economy, those that use electricity demand, and those using formal labour force statistics, including the labour input method. Second, there are monetary proxy indicator methods, which can be sub-divided by whether they use large denomination notes, the cash–deposit ratio, or money transactions as a proxy indicator. Third, there are income/expenditure discrepancy methods which can entail either aggregate-level or household-level analysis,

Key driver

taxes they pay.

goods and services they deserve given the

Stakeholders do not believe that they pay a fair share compared with others.

Lack of procedural

fairness

them as cheats to be caught.

authorities, whose default position is to view

an impartial and respectful manner by the

justice

of government

Stakeholders do not feel they receive the

vided for the taxes and social contributions paid

• Awareness-raising initiatives about the public goods and services pro-

ers in a respectful, impartial, and responsible manner

• Customer-friendly initiatives by enforcement agencies to treat custom-

taxes and social contributions are used

• Educate businesses, employers, workers, and citizens on how their

• Improve Social Progress Index (SPI)

• Improve Human Development Index (HDI)

economy.

Stakeholders do not feel they are treated in

Lack of redistributive

Lack of modernisation

• Improve household final consumption per capita

• Improve gross domestic product (GDP) per capita

Examples of policy measures

with greater participation in the informal

Economic under-development is associated

justice

under-development

development

Lack of procedural

Economic

Level of economic

Modernisation perspective

Formal institutional resource misallocations and inefficiencies

Explanation

Institutionalist explanation of participation in the informal economy and policy responses

FORMAL INSTITUTIONS

Determinant

Table 12.1

286 A modern guide to the informal economy

environment

environment

 

 

 

 

Complex regulatory

Regulatory

Neo-liberal perspective

Formal institutional voids and weaknesses

Personal connections

State capture

gifts and bribes and therefore citizens

for private gain

to operate in the formal economy.

which result in greater costs, time, and effort

economy due to the institutional constraints

Stakeholders voluntarily exit the formal

(e.g., health, education).

gain preferential access to state services

connections to bypass the formal rules and

Stakeholders believe others use personal

and services for the wider public.

meaning fewer resources for public goods

reflect their interests and benefit from them,

Powerful interests shape laws and policies to

money from them.

perceive public officials to be extorting

Government officials demand or receive

Corruption and bribery

Explanation

Key driver

Misuse of public office

Determinant

• Access to public sector contracts

• Free marketing

Improve benefits of formalisation:

• Simplify tax filing

• Simplify employment registration

• Simplify business registration

Simplify regulatory environment:

• Tackle informal payments in the health services sector

• Address ways in which state capture occurs in political systems

• Tackle bribery and corruption by public officials

Examples of policy measures

Conclusions and a future roadmap for the transition to formality 287

Key driver

• Increase health expenditure • Pursue labour market policies to reduce both in-work and out-of-work

being excluded from formal provision, resulting in participation in the informal economy as a survival strategy.

work and welfare

provision

(“sticks”).

participation in the

 

 

 

or expected penalties and risk of detection

institutions to deter

rules

initiatives)

actual ease and benefits of being compliant. Incentives and rewards are required to increase the benefits of operating in the formal economy and encourage compliant

institutions to make

engagement in the

formal economy easier

and beneficial behaviour (“carrots”).

indirect tax incentives such as rebates and VAT reductions, social label

economy due to the low perceived and/or

and ability of state

• Demand-side incentives (e.g., service vouchers, targeted direct and

tax incentives, targeted VAT reductions)

Stakeholders engage in the informal

• Supply-side incentives (e.g., formalisation advice and support, direct

departments)

and matching, risk assessment, coordination across government

Lack of capacity

informal economy

penalties that encourage formalisation; non-compliance lists)

economy due to a low level of actual and/

and ability of state

• Increase the risk of detection (e.g., workplace inspections, data mining

employers or companies to deter participation in informal economy;

Stakeholders engage in the informal

Lack of capacity

enforce the formal

• Implement more effective sanctions (e.g., penalties and fines for

• Reduce inequalities and poverty

• Enhance employment participation rate

Lack of capacity to

Formal institutional powerlessness

• Improve public employment services

work and welfare provision lead to workers

intervention in formal

poverty

• Improve social protection • Increase active labour market policies

Inadequate levels of state intervention in

Lack of state

Examples of policy measures

work and welfare

Explanation

Under-intervention in

Political economy perspective

Determinant

288 A modern guide to the informal economy

Key driver

low tax morale)

informal institutions, or

Low horizontal trust

the same behaviour (i.e., the social norm).

work and, as such, are more likely to adopt

personally know people engaged in informal

a large share engage in informal work and/or

peers are compliant. They perceive that

economy because they do not believe their

Stakeholders engage in the informal

levels of compliance

• Do not advertise the high levels of non-compliance but rather the high

other citizens)

• Campaigns to improve horizontal trust in others (e.g., competing firms,

• Education in schools on tax, social insurance, and labour law

• Advisory inspections

• Information units in enforcement authorities

voluntary compliance

• Campaigns to increase trust in public institutions in order to enhance

engaging in the informal economy

between formal and

or customers about either the benefits of formalisation or the costs of

institutions.

(i.e., high asymmetry

Stakeholders participate in the informal economy due to low trust in public

Low vertical trust

forth.

of informal work

High acceptability

INFORMAL INSTITUTIONS

unemployment benefits, pensions, and so

apply, preventing them from benefiting from

• Education and awareness-raising campaigns targeting either suppliers

• Improve applicability of regulations for medium and long term

little benefit of paying social contributions because in future the same rules will not

to remain in the future. They thus perceive

laws and regulations

formal rules

• Reduce frequent changes in regulations

Stakeholders do not expect the current rules

Continuous changes in

• Provide better predictability of the regulations

Examples of policy measures

uncertainty of the

Explanation

Instability and

Formal institutional instability and uncertainty

Determinant

Conclusions and a future roadmap for the transition to formality 289

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and fourth and finally, there are multiple indicator methods, of which the most common is the MIMIC method. On the other hand, there have been direct methods such as surveys. These have been adopted by those who recognise that even if participation in the informal economy might contravene the laws and regulations of formal institutions, it is often deemed legitimate activity in terms of the informal institutions, namely the norms, values, and beliefs of businesses, employers, workers, and consumers. Hence, it is hidden in plain sight and openly discussed, which makes direct methods of measuring the informal economy feasible. The argument of Chapter 3 was that in earlier decades indirect measurement methods were valuable because they revealed that the informal economy persisted and was not disappearing. This recognition led to more resources being devoted to direct surveys, enabling not only the prevalence of the informal economy to be analysed but also, importantly, what informal work participants do, who engages in informal work, and why they do so. This has been crucial in enabling a better evidence-based understanding of the informal economy to emerge. In future, better cross-national micro-level datasets are required using harmonised data and methods that provide individual-level data so that multi-level regression analyses can be conducted of the first-level socio-demographic and socio-economic characteristics of participants in each kind of informal work and of the second-level determinants of each kind of informal work. This will enable improved understanding of not only the prevalence of the different types of informal work but also the characteristics of each kind, including their determinants. A cross-national survey of this kind could be coordinated by a supra-national institution such as the International Labour Organization (ILO) or World Bank.

MAGNITUDE AND CHARACTER OF THE INFORMAL ECONOMY Prevalence of the Informal Economy in Global Perspective To understand the prevalence of the informal economy globally, Chapter 4 reported an ILO dataset covering 112 countries comprising 90 per cent of the global workforce. This dataset reveals that 61.2 per cent of the total global workforce are in informal employment as their main job, which equates to two billion of the world’s employed population aged 15 and over. However, this proportion varies across global regions, ranging from 85.8 per cent of the workforce in Africa in informal employment as their main job, to 25.1 per cent in Europe and Central Asia.

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Of the total global workforce, 51.9 per cent have their informal employment in the informal sector, 6.7 per cent in the formal sector, and 2.5 per cent in households. Moreover, own-account workers comprise 45.0 per cent of those engaged in informal employment, and employees 36.2 per cent, contributing family workers 16.1 per cent, and employers 2.7 per cent. When the employment status of the global informal and formal workforces are compared, this chapter revealed that the informal workforce is far less likely to consist of employees than the formal workforce (36.2 per cent compared with 76.3 per cent), and far more likely to consist of own-account workers (45.0 per cent compared with 19.8 per cent) and contributing family workers (16.1 per cent compared to nil). To explain the higher prevalence and intensity of informal employment in some countries than others, this chapter turned to evaluating the formal institutional failings covered in the different theories which assert that participation in the informal economy is driven by economic under-development and corruption (modernisation theory), state over-interference (neo-liberal theory), or inadequate state intervention to protect workers from poverty (political economy theory), as well as to the integrative institutional theoretical explanation. The finding is that informal employment is more prevalent when there are: 1. Greater formal institutional resource misallocations and inefficiencies manifested in: a. A lack of modernisation of government. b. Greater levels of corruption. 2. Greater formal institutional voids and weakness manifested in: a. Lower levels of development. b. A lack of regulatory simplification. c. Lower (not higher) tax rates. d. Lower government expenditure and lower expenditure on social contributions. e. Higher levels of poverty and greater inequality. 3. Greater formal institutional powerlessness manifested in: a. Lower levels of government effectiveness, regulatory quality, public trust in politicians, and perceived rule of law. 4. Greater formal institutional instability and uncertainty manifested in: a. Low transparency of government policymaking. Having provided this overview of the prevalence and intensity of the informal economy across the globe, and explained the cross-national variations, attention then turned to a deeper understanding of this sphere in which most of the world’s workers have their main job.

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Types of Work in the Informal Economy Given that most of the global workforce have their main employment in the informal economy, work in the informal economy cannot be treated as an unvarying and uniform singularity. Instead, the heterogeneous components of the informal economy must be unpacked. Chapter 5 provided a review of the different types of work in the informal economy. Based on economic units, first, unregistered enterprises were examined and, second, participation in the informal economy by registered formal enterprises. This revealed a burgeoning body of knowledge on unregistered enterprises and their prevalence, while on participation in the informal economy by registered formal enterprises, it revealed the recent adoption of a “degrees of informalisation” approach and mapped the evidence available on the prevalence of enterprises displaying different degrees of informalisation. Turning to employment relationships, the chapter then displayed that a degree of informalisation of employment relationships can be similarly discerned, ranging from more formal to more informal relationships. At the more formal end of informal relationships can be found bogus self-employment and quasi-formal employment, with the spectrum then moving through unregistered employment and informal self-employment before reaching paid favours at the more informal end. However, these are all two-way relationships between an employer and worker. Reflecting that there are increasingly also three-way relationships between an employer, worker, and an intermediary, two types of triangular relationship were discussed in which informal work exists. First, the various types of informal work in the collaborative economy were discussed and, second, the heterogeneity of informal relationships in temporary agency work. Finally, given that the recent COVID-19 pandemic has had an impact on the informal economy, consideration was given to how this pandemic has resulted in the reduction of economic activity in not only the formal economy but also the informal economy. There was a temporary shrinkage of the “traditional” kinds of informal work, namely unregistered and registered businesses operating in the informal economy, bogus self-employment, quasi-formal employment, unregistered employment, informal self-employment, and paid favours. In addition, the lockdown led to new kinds of informal work related to the short-term financial support schemes established for formal businesses and workers, which largely involved various types of “bogus declaration of the suspension of work”. There also emerged new violations of workers’ rights, such as in remote working practices, and new business models, such as dark kitchens, that must be recognised and addressed.

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Given the existence of these different types of informal work in the contemporary world, attention then turned to who engages in each of these types and what their motives are for doing so. Who Participates in the Different Types of Informal Work and Why? Given that different groups of the population are likely to engage in different types of informal work and that the rationales for participation in the informal economy are likely to vary across each type of informal work, Chapter 6 evaluated who engages in the informal economy and why they do so. Unlike previous reviews of who engages in the informal economy and why, the original contribution of this chapter is that it examined who engages in informal work, and why they do so, in each kind of its different forms, as well as investigating the demand side of the informal economy. The finding was that compared with literature on who engages with the informal economy treated as a single unified whole, and why they do so, there is much less literature that looks at these same issues but for each form of informal work. When examining the literature available on who engages in the different types of informal work, similar traits exist in the literature as when the informal economy as a unified whole is discussed. There is a strong tendency to adopt the marginalisation thesis that it is marginalised populations who are excluded from the formal labour market who engage in each of these different forms of informal work. However, it is not always the case, for example, that women, younger age groups, the unemployed, low-income groups, and ethnic minorities are more likely to participate in each form of informal work. As such, and taking each form of informal work in turn, this chapter revealed that a more nuanced and variegated understanding is required. Some marginalised groups, in certain places and at various times, are significantly more likely to engage in some forms of informal work. However, this is far from a universal tendency. It is sometimes population groups who benefit from the formal economy who also benefit from participation in some forms of informal work in various places and at various times. Hence, there remains considerable scope for more research on who engages in each form of informal work in different global regions and countries. Turning to the motives for engaging in each type of work, similar findings emerge to those identified when discussing the informal economy as a singular unified entity. Singular universal logics are not appropriate for explaining the full range of reasons for participating in each of the different forms of informal work. Instead, there is a need to combine the existing explanations if participation in each form of informal work is to be more fully understood. This means that it is necessary to combine exit- and exclusion-driven explanations. However, the prevalence of exclusion- and exit-driven explanations varies

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according to the type of informal work evaluated. For example, those engaged in unregistered employment are significantly more likely to state purely exclusion-driven rationales, those engaged in informal self-employment are significantly more likely to state neo-liberal rational economic actor exit-driven motives and neo-institutionalist social actor exit-driven motives, and those engaged in paid favours are significantly more likely to state neo-institutionalist social actor exit-driven motives and mixed motives (Williams and Oz-Yalaman, 2021a). However, no singular logic fully explains motivations for any individual form of informal work. All explanations are required. Moreover, the finding that mixed motives are also required to explain why individuals engage in different forms of informal work reveals the need for a continuum of explanations for individuals engaged in each form of informal work to be envisaged as ranging from solely exclusion-driven explanations at one end to solely exit-driven explanations at the other end with emphasis given to the different mixed motives that exist between these two extremes. Indeed, combining the findings on who engages in each form of informal work with those on their multifarious motives, this chapter revealed that for every form of informal work there appears to be a two-tier informal labour market. This is composed of a lower tier of necessity-driven informal workers who are from marginalised population groups and an upper tier of informal workers who engage in the informal economy more out of choice and are less likely to be from marginalised population groups. The proportion of workers in each group varies by the form of informal work under consideration and according to the context. And again, this is more a continuum than a “two-tier” informal labour market. Even if this chapter has made advances in explaining who engages in each form of informal work and why they do so, various limitations and avenues for future research were identified. First, more research is needed to evaluate whether these explanations remain valid in different countries and regions of the world. Indeed, for some forms of informal work, such as quasi-formal employment and bogus self-employment, there has been little research on the motives for participation. Second, future research could begin to disaggregate the group of participants displaying mixed motives to better understand their position on the continuum of motives. Third, and relatedly, more qualitative research is required of participants’ rationales. For example, a reason for the low level of purely exclusion-driven participants might be that, when excluded, they also view engagement as a rational economic decision and disagree with the formal rules, thus ending up in the “mixed motives” category. This requires fuller exploration. There is also a need for far more research on the demand-side characteristics and motives of consumers purchasing from the informal economy. Until now, such demand-side analysis of the informal

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economy has adopted a narrow geographical focus, with little or no research conducted, for instance, in North America on this topic. Having discussed the prevalence of the informal economy and how it can be explained, what kinds of informal work exist, and who engages in each type and why they do so, attention then turned to how the informal economy can be tackled.

POLICY APPROACHES Policy Options for Tackling the Informal Economy: Objectives and Policy Measures Chapter 7 introduced the policy options and approaches for addressing the informal economy. Although modernisation theory in the 1950s and 1960s predicted an inevitable transition to formality, the informal economy has shown a marked vitality and resilience. The natural disappearance of the informal economy can no longer be assumed. Given this, there are a range of interventions available to governments. First, a decision could be made to take no action. Second, governments could decide to informalise (de-regulate) the formal economy. Third, a decision could be taken to harness the informal economy, fourth, to eradicate the informal economy, or fifth and finally, to formalise the informal economy. Reviewing the disadvantages and advantages of each option, the finding was that if nothing is done, the disadvantages far outweigh the advantages. If eradication of the informal economy is pursued, the disadvantages again outweigh the advantages, as is also the case when informalising the formal economy or harnessing the informal economy. In consequence, Chapter 7 displayed that the most viable goal is formalising the informal economy. Indeed, over the past few decades, this is the conclusion reached by supra-national institutions and governments when considering what should be done about the informal economy (European Commission, 2016; ILO, 2015; OECD, 2016, 2017; World Bank, 2020). Turning to how a transition to formality can be achieved, the holistic integrated strategic policy approach was outlined, which has been adopted over the past decade by most supra-national institutions involved in tackling the informal economy. This includes the European Platform Tackling Undeclared Work (European Commission, 2016), the ILO in its Recommendation No. 204 (ILO, 2015) and the report of the Global Commission on the Future of Work (ILO, 2019), and the Organisation for Economic Co-operation and Development (OECD, 2016, 2017). All these supra-national institutions, along with many national governments, recognise that a fragmented and uncoordinated approach has been adopted across the multifarious state bodies

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responsible for the transition to formality and that there has been a limited involvement of social partners, as well as an incomplete range of policy initiatives employed. Their response has been to adopt what is variously called a “holistic” or “integrated strategic” approach where the transition to formality is facilitated using a whole-government approach to (1) achieve the inclusive structural transformation required, (2) join up the fields of labour, tax, and social security law, and fully involve social partners, and (3) use the full range of direct and indirect policy tools available to enhance the power of and trust in authorities respectively (Lapeyre and Williams, 2020). This chapter then introduced the full range of direct and indirect policy tools available. First, the direct policy tools were outlined. These dissuade participation in the informal economy and/or incentivise and encourage participation in the formal economy. The intention is to directly increase the costs and reduce the benefits of participation in the informal economy and reduce the costs and increase the benefits of engaging in the formal economy. Second, indirect policy tools were outlined. These include not only awareness-raising campaigns to change the norms, values, and beliefs of citizens, worker, employers, and businesses about the acceptability of engaging in the informal economy, but also policy tools that reform formal institutions. Such policy tools include initiatives to join up governance and process innovations that enhance the perceived level of procedural and redistributive justice and fairness of government, to reduce institutional asymmetry, but also indirect policy tools that address wider macro-level economic and social conditions associated with greater participation in the informal economy. It was then highlighted that these two sets of policy tools are not mutually exclusive. Both are needed to address participation in the informal economy. To outline how these can be combined, two different approaches were reviewed. First, a responsive regulation approach was outlined that temporally sequences these two sets of tools, starting with the indirect tools and, if these do not elicit compliant behaviour, following them with direct incentives to formalise the informal economy and to change behaviour, eventually using deterrents but only when all these other tools have failed. Second, a slippery slope framework approach was reviewed which contends that the most effective approach is to concurrently increase both the power of authorities (using direct policy tools) and trust in authorities (using indirect policy tools). If either the power of or trust in authorities decreases, then governments will be on a slippery slope towards greater participation in the informal economy. The conclusion was that there is a consensus that the policy objective is to formalise the informal economy and to achieve this a holistic integrated strategic approach is being widely used. However, there has been little if any attempt to synthesise what is known about the effectiveness of different individual policy measures within the direct and indirect toolsets for tackling

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the informal economy. Until this is known, it will be difficult for stakeholders to decide which policy tools to use to tackle different types of informal work in various contexts. Therefore, the scene was set for the next four chapters, which evaluate the effectiveness of different deterrence policy tools (Chapter 8), supply- and demand-side incentives (Chapter 9), education and awareness-raising initiatives (Chapter 10), and the multifarious initiatives to reform formal institutions to join up governance, make them more trustworthy, and deal with the structural conditions required to achieve inclusive structural transformation (Chapter 11). Deterring Participation in the Informal Economy Chapter 8 evaluated the range of tools used to deter engagement in the informal economy through increasing the actual and/or expected costs of participation in such work. Two sets of policy tools were outlined: tools to improve the actual and/or perceived sanctions for those caught, and tools used to increase the expected or real probability of detection. Reviewing empirical studies on whether using deterrents is effective at tackling the informal economy, mixed evidence was revealed. Reinforcing the widespread adoption of this deterrence approach by enforcement authorities across the world, some studies find that deterrents reduce engagement, with increasing the risk of detection found to be more effective than increasing the penalties. However, other studies find no association, and yet other studies find that deterrents increase participation, due to the resultant breakdown of the social contract between the state and citizens, workers, employers, and businesses. However, although it is far from clearcut whether deterrents are universally effective at reducing the likelihood of participation in the informal economy, this chapter argued that some deterrence tools will be more effective than others in different contexts. The chapter first reviews sanctions. This revealed that although increasing the expected sanctions does not have a significant impact on participation, it does have a significant impact on the likelihood of some groups participating, especially those whose social norms conform to the law, suggesting that penalties should not be used as a threat wielded towards all, but only to individuals whose ethics are weak. The effectiveness of six types of sanctions were then evaluated, namely sanctions to deter participation in the informal economy, sanctions to facilitate the transition to formality, sanctions applied to citizens or businesses who buy goods and services from the informal economy, non-compliance lists, sanctions that exclude non-compliant businesses from bidding for public procurement contracts and receiving subsidies and licences, and naming and shaming lists.

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The chapter then reviews the policy tools used to improve the actual or perceived probability of detection. Akin to sanctions, there is little conclusive evidence that increasing the probability of detection is universally effective in reducing participation. Instead, it depends not only on the context (e.g., whether there is a high- or low-compliance culture), but also on the type of policy tool being evaluated. The effectiveness of nine types of policy tools to improve the likelihood of detection were then evaluated, namely inspections of workplaces; registration of workers prior to their first day at work; workplace identity cards; business registration and certification schemes of tax and social contribution payments; data collection, sharing, and analysis tools; notification letters; complaint reporting tools; certified cash registers; and supply chain responsibility tools. The finding was that there is a need for more evidence-based evaluations of all these deterrent policy tools. Of note is the lack of empirical evidence on the effectiveness of workplace inspections and audits in facilitating formalisation. Given that the vast majority of resource in enforcement authorities is dedicated to physical workplace inspections, especially in labour inspectorates, or to audits in the case of tax offices, there is a need to evaluate whether these are the most effective use of their resources, whether more resource could be dedicated to complementary initiatives (e.g., data collection, sharing, and analysis), or whether alternatives to physical workplace inspections and audits require greater resource (e.g., tools to improve the benefits of operating in the formal economy). Incentives to Operate in the Formal Economy Chapter 9 outlined the range of incentive policy tools used to make it easier and more beneficial to participate in the formal rather than informal economy. Two types of formalisation incentives exist. On the one hand, there are supply-side formalisation incentives to make it easier and/or more beneficial for businesses, employers, and workers to operate in the formal economy. Here, the following supply-side incentive measures have been evaluated: the simplifying the formal regulations; advisory inspections; society-wide amnesties; voluntary disclosure schemes; direct tax and social security incentives; targeted indirect tax incentives; formalisation support to start-ups; formalisation support and advice to existing informal enterprises; help with record-keeping; and compliance lists. On the other hand, there are demand-side formalisation incentives targeting customers with rewards for purchasing formal goods and services rather than those from the informal economy. Here, the following demand-side incentive measures have been evaluated: direct tax incentives; service voucher schemes; indirect tax incentives; incentivising electronic payments and deterring cash

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payments; incentives for encouraging customers to request receipts; and social label initiatives. The lack of available evidence on the effectiveness of formalisation incentive tools has been the major reason for their low level of adoption and the continuing dominance of deterrence tools. Therefore, this chapter has gone some way towards bridging this gap in knowledge by reviewing the evidence available. It revealed that when a finer-grained analysis is conducted of the different types of supply- and demand-side incentives, there is a considerable amount of evidence that many of these policy tools are effective at encouraging the formalisation of the informal economy. However, it also reveals the need for more evaluation of the effectiveness of these supply- and demand-side policy tools in specific contexts than has so far been conducted. Education and Awareness Raising to Encourage Formalisation Participation in the informal economy takes place when the norms, values, and beliefs differ to the laws and regulations, resulting in what formal institutions deem illegal activities to be legitimate in terms of the norms, values, and beliefs of the society or population groups. Therefore, a reduction in this institutional incongruence is necessary to facilitate formalisation. Education and awareness raising seeks to reduce the incongruity between the laws and regulations of formal institutions and the norms, beliefs, and values of informal institutions by changing the informal institutions. Awareness-raising campaigns can be defined as organised communication activities which aim to create awareness about an issue (e.g., formalisation) to prompt behavioural change. Chapter 10 reviewed the key issues when designing effective education and awareness-raising campaigns. This considered how education and awareness-raising campaigns need to, first, identify a target group, second, identify its objectives and key messages as well as how these messages can overcome the neutralisation techniques that actors use to justify their actions, third, identify the channels to be used to convey the messages, and fourth and finally, evaluate the effectiveness of the campaign. Following this, four types of campaigns were outlined differentiated by their key message and target group, namely campaigns that are (1) targeted at suppliers and highlight the costs and risks of participation in the informal economy; (2) targeted at suppliers and convey the benefits of formality; (3) targeted at purchasers of informal goods and services and set out the costs and risks of participation in the informal economy; and (4) targeted at purchasers of informal goods and services and display the benefits for them of purchasing in the formal economy. Reviewing each type of campaign, this revealed that most education and awareness-raising initiatives in the realm of tackling the informal economy have tended to have ill-defined target audiences, to lack well-defined objec-

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tives and messages, to use a wide range of channels, and to be poorly evaluated. First, on the target audience, it has often been the case that there has been limited evidence-based selection of the target audience and therefore a wide audience has been identified, with political considerations often outweighing risk-assessed evaluations of who should be the target group. Second, the objectives and key messages have often not been subjected to empirical evaluation. For example, the decisions as to whether key messages on the benefits of formalisation should focus upon improved class sizes, better healthcare facilities, or better transport infrastructure are not based on detailed quantitative empirical research or even focus groups. Neither has detailed research been conducted to identify the neutralisation techniques used by the target groups to justify their actions, and the messages then constructed that directly counter the rationalisations for their actions. Third, the choice of channels has again not been based on empirical evaluations of the major channels used by the target group, with the choice instead often being based on assumptions about which they might use, pragmatic decisions on which can be easily used, and considerations concerning the availability of resources. And fourth and finally, evaluation of the impact of education and awareness-raising initiatives has seldom assessed the change in attitudes or behaviour resulting from the campaign using pre- and post-campaign surveys of attitudes and behaviour among the target group. A final further problem with education and awareness-raising campaigns is that much of the focus until now has been upon resolving the lack of trust in the state and/or the lack of understanding of what the state is seeking to achieve, namely a lack of “vertical” trust. There has been much less emphasis on changing the belief that many others are operating in the informal economy, so employers and workers see no reason to operate in the formal economy themselves, namely the lack of “horizontal” trust. This will need to be resolved in the future by pursuing campaigns to improve horizontal trust in others, such as by advertising the high level of compliance among different target groups who may believe that others like them are non-compliant. Even if education and awareness-raising initiatives improve their effectiveness and thus the potential for bringing into symmetry the formal and informal institutions, it can be argued that the transition to formality will not take place unless there is reform of the formal institutions. Reforming Formal Institutions to Encourage Formalisation Chapter 11 argued that beyond changing the norms, values, and beliefs of businesses, employers, workers, and citizens to align them with the laws and regulations of the formal institutions, there is also a need to reform the formal institutions if the informal economy is to be tackled.

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Three types of change were outlined in relation to reforming formal institutions. First, there is often a fragmented and uncoordinated approach across the numerous bodies responsible for the transition to formality and a limited integration of social partners. The result is a lack of joined-up governance. Therefore, a more joined-up whole-government approach is required across the formal institutions. This chapter revealed four forms of coordination and institution building required. First, there is coordination required at the level of strategy, second, at the level of operations, third, at the level of data collection, sharing, and analysis, and fourth, between state authorities and social partners. This chapter set out the progress of governments on each one of these dimensions, revealing a shift in many countries towards a whole-government approach and greater coordination at the level of strategy, operations, data collection, sharing, and analysis, and social partner involvement, but that there remains considerable scope for improvement in most countries. A second change required is in the internal processes of the formal institutions to improve the trust in government among businesses, employers, workers, and citizens, by making them more customer-friendly and approachable and more fair and just. Businesses, employers, workers, and citizens often do not adhere to the formal rules, and there is thus a breakdown in the social contract between the state and its citizens, workers, employers, and businesses when they feel that this is the case. A modernisation of governance in terms of internal processes is thus a way forward. At least three institutional reforms are required. First, procedural justice can be enhanced, second, procedural fairness, and third, redistributive justice. Again, these reforms of the processes of the formal institutions are underway in many countries but there is again considerable room for improvement. A third and final change of the formal institutions required relates to structural transformation at the macro-level in terms of wider economic and social developments. On the one hand, this requires four types of improvement in the formal institutions. First, there is a need to reduce formal institutional resource misallocations and inefficiencies through modernising government (e.g., improving government effectiveness and the quality of public services) and to reduce the perceived and/or actual levels of public sector corruption. Second, there is a need to tackle formal institutional voids and weakness by increasing the level of development (in terms of GDP per capita; household consumption per capita; improving human development by way of a long and healthy life, being knowledgeable, and having a decent standard of living; and improving social progress in relation to basic human needs, well-being, and opportunities), improving state intervention in formal work and welfare (in terms of simplifying compliance and increasing government expenditure, especially on social contributions and active labour market policies), and reducing the depth and incidence of poverty and inequality. Third, there is a need to reduce formal

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institutional powerlessness by improving government effectiveness, regulatory quality, trust in government, and the perceived rule of law. And fourth and finally, there is need to reduce formal institutional instability and uncertainty by improving the transparency of government policymaking and reducing perceptions of political instability and risk. On the other hand, there is also a need to improve informal institutions (norms, values, and beliefs) through increasing the level of vertical trust in government, such as by improving tax morale (i.e., reducing the acceptability of work in the informal economy) and increasing the level of horizontal trust between citizens (i.e., the view that other citizens are compliant).

CONCLUDING REMARKS This book has argued that for future progress to be made on understanding and tackling the informal economy, there is a need to move beyond treating this sphere – in which 61.2 per cent of the global workforce have their main employment – as a homogeneous uniform realm. To move forward in this regard, this book has begun unpacking the different types of work in the informal economy along with their prevalence, who engages in each type of informal work, and why they do so. For future advances to be made, what is now required is to collect more evidence on the magnitude and character of each type of informal work and subsequently evaluate whether the institutionalist theorisation is appropriate in each case. The roadmap for future research will require the collection and evaluation of evidence both on the prevalence and characteristics of participation and on the relevance of institutionalist explanations for each of the following types of informal work: (1) unregistered enterprises; (2) registered enterprises conducting a portion of their work on an undeclared basis; (3) bogus self-employment; (4) quasi-formal employment; (5) informal self-employment; (6) unregistered employment; (7) paid favours; (8) informal work resulting from the collaborative economy; and (9) informal work arising from temporary work agencies. This is not a call for a cessation of synthesis studies on the informal economy more generally. A valuable lesson arising out of this book is that many of the concepts applied to one form of informal work appear valid when studying other forms of informal work (e.g., institutional theory as an explanation, the use of direct survey methods, the marginalisation thesis, the concept of a two-tier informal labour market; the view that there are both exit and exclusion rationales). In other words, there is no need to “reinvent the wheel” when evaluating and explaining the prevalence and characteristics of each form of informal work. Instead, the call here is that – akin to the formal economy – a more disaggregated level of analysis is required, given that most of the global workforce have their main employment in the informal economy.

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A legacy of twentieth-century studies, when the informal economy was seen as a minor and receding “other”, is the persistent view that it can be treated as a unified whole and that there is no need to break it down and understand the differences in its component parts. Turning to the policy approaches, if this book encourages wider recognition that facilitating the transition to formality is the way forward, and that this requires not just new policy tools at the level of enforcement authorities but also wider reforms of formal institutions, then it will have achieved one of its objectives. If this book also stimulates individual countries to explore how this might be pursued in their specific context, then it will have fulfilled its wider intention. Nevertheless, there is a need to consider whether the transition to formality must always be the goal for all kinds of informal work in all contexts in the future. There is more importantly a need to evaluate which policy tools are more applicable to which kinds of informal work in which contexts. A substantial research agenda exists on policy measures not only in terms of evaluating the effectiveness of different policy tools in different contexts but also in terms of understanding which policy tools are relevant to tackling which kinds of informal work in different contexts. What is certain is that the responsibility for tackling informality and facilitating the transition to formality can no longer be assigned by governments to enforcement bodies such as labour inspectorates and tax administrations. Although these institutions play a key role in facilitating formalisation, a much broader whole-government approach is required that not only addresses the structural economic and social determinants of different kinds of informal work, but also joins up strategy and operations across labour, tax, and social security authorities, fully involves social partners, and utilises the full range of policy tools relevant to tackling each form of informal work.

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Williams, C. C. (2020e). Evaluating public administration approaches towards tax non-compliance. Administrative Sciences, 10(3), 43. https://​ doi​ .org/​ 10​ .3390/​ admsci10030043. Williams, C. C. (2020f). COVID-19 and undeclared work: Impacts, challenges and policy responses. Regional Cooperation Council. https://​ www​ .esap​ .online/​ download/docs/COVID%20WB6%20report​.pdf/​970c85ba​5d5e7818c5​905a3e6565 2800.pdf. Williams, C. C. (2020g). Supporting the transition from the informal to formal economy in Azerbaijan. ILO. Williams, C. C. (2021a). COVID-19’s impact on enforcement authorities’ work and priorities. European Labour Authority. https://​www​.ela​.europa​.eu/​sites/​default/​ files/​2022​-04/​Thematic​-paper​_COVID19​-impact​-on​-enforcement​-authorities​-work​ .2021​_EN​.pdf. Williams, C. C. (2021b). The lessons learned from the COVID-19 pandemic for the organisation of inspections and inspectorates: Report of the peer learning dialogue. European Labour Authority. https://​www​.ela​.europa​.eu/​sites/​default/​files/​2021​-12/​ PLD_Lessons-learned-from-COVID19-pandemic-for-organisation-inspections.2021 _EN.pdf. Williams, C. C. (2021c). COVID 19: Combating fraud in short-term financial support schemes. European Labour Authority. https://​www​.ela​.europa​.eu/​sites/​default/​files/​ 2021​-09/​Report​%20​-​%20Platform​%20webinar​%20​-​%20COVID​-19​.pdf​.pdf. Williams, C. C. (2021d). Policy approaches towards informal sector entrepreneurship: An overview. Journal of Developmental Entrepreneurship, 26(2), 1500138. https://​ doi​.org/​10​.1142/​S1084946721500138. Williams, C. C. (2021e). Towards integrated strategy for the transition to formality: Road maps for Azerbaijan, Kyrgyz Republic, Tajikistan and Uzbekistan. ILO. https:// southsouthpoint​.net/​2021/​02/​17/​towards​-integrated​-strategy​-for​-the​-transition​-to​formality-road-maps-for-azerbaijan-kyrgyz-republic-tajikistan-and-uzbekistan-ilo2021/. Williams, C. C. (2021f). Tackling undeclared work: Improving the range and effecttiveness of sanction tools. Regional Cooperation Council. https://​www​.esap​.online/​ download/docs/Improving%20the%20range%20and%20effectiveness%20of%20 santion%20tools​.pdf/​93​d718b84f9b​6933278788​dfbe1ad8c7​.pdf. Williams, C. C. (2021g). E-formalisation in Europe. ILO. https://​www​.ilo​.org/​wcmsp5/​ groups/​public/​-​-​-ed​_emp/​documents/​publication/​wcms​_823279​.pdf. Williams, C. C. (2021h). Towards a holistic approach for tackling undeclared work in the Western Balkans: A self-assessment survey. Regional Cooperation Council. Williams, C. C. (2021i). Evaluating the involvement of social partners in tackling undeclared work in the Western Balkans. Regional Cooperation Council. https://​www .esap.online/download/docs/WB6%20study%20social%20partner%20involvement. pdf/8d86624c60c30932a3293c6ef568b17b.pdf. Williams, C. C. (2022a). Tackling unregistered employment in European regions: Towards a variegated approach. UTMS Journal of Economics, 12(2), 104–122. https://​www​.utmsjoe​.mk/​files/​Vol​.12​.No​.2/​1​.TACKLING​_UNREGISTERED​_ EMPLOYMENT_IN_EUROPEAN_REGIONS_TOWARDS_A_VARIEGATED_ POLICY_APPROACH.pdf. Williams, C. C. (2022b). Comparative study of the use of social identity cards in the construction sector in various European countries. Romanian Employers’ Federation of Building Companies. https://​dx​.doi​.org/​10​.2139/​ssrn​.4002311.

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Williams, C. C., and Bezeredi, S. (2017a). Evaluating the use of personal connections to bypass formal procedures: A study of vrski in FYR Macedonia. UTMS Journal of Economics, 8(2), 169–182. https://​www​.utmsjoe​.mk/​files/​Vol​.​%208​%20No​.​%202/​ UTMSJOE​-2017​-0802​-11​-Villiams​-Bezerdi​.pdf. Williams, C. C., and Bezeredi, S. (2017b). Tackling the illegal practice of under-reporting employees’ wages: Some lessons from the Republic of Macedonia. UTMS Journal of Economics, 8(3),175–195. https://​www​.utmsjoe​.mk/​files/​Vol​.​%208​%20No​.​%203/​ UTMSJOE​-2017​-0803​-04​-Williams​-Bezeredi​.pdf. Williams, C. C., and Bezeredi, S. (2017c). Explaining consumers’ motives for purchasing from the informal economy: Some lessons from a study of Bulgaria, Croatia and FYR Macedonia. Economic Alternatives, 4, 515–531. https://​www​.unwe​.bg/​ uploads/​Alternatives/​2​_EAlternativi​_english​_4​_2017​.pdf. Williams, C. C., and Bezeredi, S. (2018a). Explaining informal entrepreneurship in South-East Europe: A tax morale approach. Eastern Journal of European Studies, 9(2), 47–68. https://​ejes​.uaic​.ro/​articles/​EJES2018​_0902​_WIL​.pdf. Williams, C. C., and Bezeredi, S. (2018b). An institutional theory of informal entrepreneurship: Some lessons from FYR Macedonia. Journal of Developmental Entrepreneurship, 23(3), 1850019. http://​dx​.doi​.org/​10​.1142/​S108494671850019X. Williams, C. C., and Bezeredi, S. (2018c). Evaluating the impact of informal sector competition on firm performance: Some lessons from South-East Europe. Journal of Developmental Entrepreneurship, 23(4), 1–14. https://​doi​.org/​10​.1142/​ S1084946718500255. Williams, C. C., and Bezeredi, S. (2018d). Explaining and tackling the informal economy: A dual informal labour market approach. Employee Relations, 40(5), 889–902. https://​doi​.org/​10​.1108/​ER​-04​-2017​-0085. Williams, C. C., and Bezeredi, S. (2018e). Explaining and tackling under-declared employment in FYR Macedonia: The employers perspective. The South East European Journal of Economics and Business, 13(2), 19–31. https://​doi​.org/​10​ .2478/​jeb​-2018​-0010. Williams, C. C., and Bezeredi, S. (2018f). Evaluating policy approaches towards undeclared work: Some lessons from FYR Macedonia. South-Eastern Europe Journal of Economics, 16(2), 171–187. http://​www​.asecu​.gr/​Seeje/​issue31/​issue31​-williams​ -bezeredi​.pdf. Williams, C. C., and Bezeredi, S. (2020). Evaluating the impacts on firm productivity of informal sector competitors: Results of a business survey in South-Eastern Europe. International Journal of Entrepreneurship and Small Business, 41(4), 524–538. https://​dx​.doi​.org/​10​.1504/​IJESB​.2020​.111577. Williams, C. C., and Franić, J. (2015). Tackling the propensity towards undeclared work: Some policy lessons from Croatia. The South East European Journal of Economics and Business, 10(1), 18–31. https://​doi​.org/​10​.1515/​jeb​-2015​-0003. Williams, C. C., and Franić, J. (2016a). Beyond a deterrence approach towards the undeclared economy: Some lessons from Bulgaria. Journal of Balkan and Near Eastern Studies, 18(1), 90–106. https://​doi​.org/​10​.1080/​19448953​.2015​.1094269. Williams, C. C., and Franić, J. (2016b). Explaining participation in the informal economy in post-socialist societies: A study of the asymmetry between formal and informal institutions in Croatia. Journal of Contemporary Central and Eastern Europe, 24(1), 51–65. https://​doi​.org/​10​.1080/​0965156X​.2015​.1118817. Williams, C. C., and Franić, J. (2017). Tackling the illegitimate under-reporting of salaries in Southeast Europe: Some lessons from a 2015 survey of Bulgaria, Croatia

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and FYR Macedonia. Eastern Journal of European Studies, 8(1), 5–28. http://​ejes​ .uaic​.ro/​articles/​EJES2017​_0801​_WIL​.pdf. Williams, C. C., and Gashi, A. (2021). Beyond the marginalization thesis: An evaluation of the prevalence, character and motives of informal sector entrepreneurs in Kosovo. Journal of Developmental Entrepreneurship, 26(2), 1–17. https:///​dx​.doi​ .org/​10​.1142/​S1084946721500035. Williams, C. C., and Gashi, A. (2022). Evaluating the wage differential between the formal and informal economy: A gender perspective. Journal of Economic Studies, 49(4), 735–750. https://​doi​.org/​10​.1108/​JES​-01​-2021​-0019. Williams, C. C., and Gurtoo, A. (2011a). Women entrepreneurs in the Indian informal sector: Marginalisation dynamics or institutional rational choice? International Journal of Gender and Entrepreneurship, 3(1), 6–22. https://​doi​.org/​10​.1108/​ 17566261111114953. Williams, C. C., and Gurtoo, A. (2011b). Evaluating women entrepreneurs in the informal sector: Some evidence from India. Journal of Developmental Entrepreneurship, 16(3), 351–369. https://​doi​.org/​10​.1142/​S1084946711001914. Williams, C. C., and Gurtoo, A. (2011c). Evaluating competing explanations for street entrepreneurship: Some evidence from India. Journal of Global Entrepreneurship Research, 1(2), 3–19. Williams, C. C., and Gurtoo, A. (2012). Evaluating competing theories of street entrepreneurship: Some lessons from Bangalore, India. International Entrepreneurship and Management Journal, 8(4), 391–409. https://​doi​.org/​10​.1007/​s11365​-012​-0227​ -2. Williams, C. C., and Gurtoo, A. (Eds) (2017). Routledge handbook of entrepreneurship in developing economies. Routledge. https://​doi​.org/​10​.4324/​9781315725826. Williams, C. C., and Horodnic, A. (2017). Rethinking informal payments by patients: An institutional approach. Health Policy, 121(10), 1053–1062. https://​doi​.org/​10​ .1016/​j​.healthpol​.2017​.08​.007. Williams, C. C., and Horodnic, A. (2018a). Explaining the prevalence of informal payments for health services in Central and Eastern Europe: An institutional asymmetry perspective. Post-Communist Economies, 30(4), 440–458. https://​doi​.org/​10​.1080/​ 14631377​.2018​.1442051. Williams, C. C., and Horodnic, A. (2018b). Evaluating the prevalence of informal payments for health services in Southeast Europe: An institutional approach. Southeast European and Black Sea Studies, 18(3), 345–365. https://​doi​.org/​10​.1080/​14683857​ .2018​.1487138. Williams, C. C., and Horodnic, A. (2018c). Informal payments by patients for health services: Prevalence and determinants. The Service Industries Journal, 38(11/12), 841–855. https://​doi​.org/​10​.1080/​02642069​.2018​.1450870. Williams, C. C., and Horodnic, A. (2019). Why is informal employment more common in some countries? An exploratory analysis of 112 countries. Employee Relations, 41(6), 1434–1450. https://​doi​.org/​10​.1108/​ER​-10​-2018​-0285. Williams, C. C., and Horodnic, I. (2015a). Evaluating the prevalence of the undeclared economy in Central and Eastern Europe: An institutional asymmetry perspective. European Journal of Industrial Relations, 21(4), 389–406. https://​doi​.org/​10​.1177/​ 0143831X14568835. Williams, C. C., and Horodnic, I. (2015b). Explaining and tackling the shadow economy in Estonia, Latvia and Lithuania: A tax morale approach. Journal of Baltic Economics, 15(2), 81–98. https://​doi​.org/​10​.1080/​1406099X​.2015​.1114714.

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Index Bàculo, L. 61, 225 Bakos, J. 191 Bami, X. 219 Banks, N. 2 Barrett, R. 135 barriers to entry into work 12–13 Batrancea, L. 177 Baumann, A. 212 Baumol, W.J. 26 Bazart, C. 236 Beccaria, C. 170 Becker, G.S. 170 Becker, K.F. 34 Beer, S. 192 Bentham, J. 170 Bhattacharya, S. 34 Beeby, D. 200 Belgium 203, 204, 212, 216–17, 227, 245, 256 Crossroads Bank for Social Security 198 MiningWatch 199 service vouchers 230–31 Benhassine, N. 211 Berdiev, A.N. 46 Bernal-Torres, C.A. 150 Bernhard, S. 223 Bezeredi, S. 138, 142, 149, 153, 155 Bhowmik, S. 31 bias suppression rule 272 Bies, R.J. 272 binary oppositions 25 Biryukova, S.S. 136 “black” economy 3, 4 Boeke, J.H. 25 bogus self-employment 106–7, 108–11, 119, 123–4, 126, 185, 216, 255, 292 participant characteristics 133–4 participant motives 145–6

“abnormal” adjectives 2 access to finance 12 accuracy rule 272 Acs, Z. 98 activity-based definitions 6, 8–9, 9–10 adjectives used for the informal economy 2–5 Adriaenssens, S. 231 Advani, A. 192 advice and support on formalisation 208, 224–6 advisory inspections 208, 216–17 Africa 70, 71, 94 aggregate-level income/expenditure discrepancies 58 Albania 72–3, 74 Allingham, M. 171, 181 Alm, J. 46, 49, 62, 171, 182, 213, 217, 218, 226 Americas, the 70–72 Amin, M. 11 amnesties 208, 217–18 Anderson, J.E. 48 Andrews, D. 55 Apostolis, C. 246, 248 appeal to higher loyalties 245, 246, 247, 248 Arab States 70–72 Arabsheibani, G.R. 137–8 Argentina 201 Artavanis, N. 58–9 Asia and the Pacific 70–72 Assunção, J. 214 audits 61–2, 192–3, 298 Australian Tax Office (ATO) 199 Autio, E. 67, 68, 98–9, 130–31 awareness raising, see education and awareness raising Ayira, K. 149 Azerbaijan 263 383

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Bonnet, F. 115 Bosnia and Herzegovina 266 “bottom of the pyramid” (BOP) markets 15 Braithwaite, J. 174 Braithwaite, V. 174, 275 Brazil 214–15 bribery 13, 41, 287 see also corruption Brill, L. 116 Brockmeyer, A. 201 Bruhn, M. 210 Bruni-Bossio, V. 116 Brunk, T. 228 Burchell, B. 111 Bulgaria 245 business registration 11, 189, 194–6 simplifying 209–11 business support 12 formalisation support and advice to existing informal enterprises 208, 224–6 to start-ups 208, 222–4 short-term financial support schemes 56, 123–6, 292 business surveys 61 Cagan, P. 58 Caliendo, M. 223 Canada “Get it in Writing” campaign 257–8 Capital Economics 233 Cappelen, C. 148 Carfora, A. 221 cash-deposit ratio 57 cash payments, deterring 228, 233–5 Castells, M. 8, 10, 162 Castro, L. 201 celebrities 244–5 Central Asian countries 70–72, 94, 263, 266, 267, 270 certification schemes 189, 194–6 certified cash registers 189, 203 channels for education and awareness raising 248–9, 259, 300 Chen, M.A. 30 Chodorow-Reich, G. 233 Christian Trade Union of Belgium 256 civic morale 277 civil society organisations 188

cleaning businesses 195–6, 223 coercive isomorphism 44 collaborative (platform) economy 118–20, 126, 139–40, 152, 215, 238, 292 collective bargaining 14, 16 Colombia 220 National Administrative Department of Statistics (DANE) 105 colonial economy 25 Commonwealth of Independent States Interstate Statistical Committee (CIS STAT) 8 competitive advantage 10 complaint reporting tools 189, 202–3 compliance 11, 16, 17 enforced 175–8 tax compliance, see tax compliance voluntary 172, 174, 175–8, 200, 240–41 compliance lists 208, 226–7 concerted inspections 191 consistency rule 272 construction sector 222 consumers/purchasers 129, 153–7 characteristics 153–4 demand-side incentives 169, 171, 207, 228–38, 238–9, 298–9 education and awareness campaigns 257–8 impacts of the informal economy on 15–16 reasons for purchasing from the informal economy 129, 154–7 sanctions for buying goods and services from the informal economy 184, 186 contracts 12 verbal 15, 111–12 contributing family workers 71–3, 74–80, 94, 291 “cops and robbers” approach 273 Coricelli, G. 188 Cornuel, D. 116 correctability rule 272 corruption 13, 27, 29, 40–42, 86, 87, 89, 90, 287 Costa Rica 201 Côte d’Ivoire 264

Index

COVID-19 pandemic 56, 197, 211, 219–20 and new types of informal employment 123–6, 126–7, 97, 292 credit 12, 14 Cremers, J. 186 criminal economy 9 Croatia 203, 223, 231–2 cross-national surveys 290 cross-national variations in informality 85–94, 94–5 cryptocurrencies 235 Cuervo-Cazurra, A. 98 cultural-cognitive pillar 44–5 customer-service-oriented approach 273–4 Cyan, M.R. 249 Czechia 187 dark kitchens 125 Darnaud, D. 231 data analysis joining up and coordinating 266–7 tools 189, 198–200 data analytics 251 data collection joining up and coordinating 266–7 tools 189, 196–7 data matching 198–9 data mining 198–9 data sharing joining up and coordinating 266–7 tools 189, 197–8 Dau, L.A. 98 De Andrade, G.H. 190–91, 210 De Camillis, R. 232 De Castro, J.O. 104 De Kok, J. 210 De Mel, S. 43, 104, 210 De Neve, J.-E. 213 De Soto, H. 13, 34 De Sutter, T. 231 De Wispelaere, F. 198 DeBacker, J. 192 deceived employees 147 defence of necessity 246, 247–8 defining the informal economy 2–10, 282–3 Dekker, H. 230

385

Deléchat, C. 129 Delgenes, J.-C. 125 Dell’Anno, R. 24 Dellot, B. 30 demand-side formalisation incentives 169, 171, 207, 228–38, 238–9, 298–9 direct tax incentives 228–9 electronic payments 228, 233–5 encouraging requests for receipts 228, 235–7 indirect tax incentives 228, 233 service voucher schemes 228, 230–33 social label initiatives 228, 237–8 demonetisation 228, 233–5 denial of injury 245, 246, 247, 248 denial of the necessity of the law 246, 247 denial of responsibility 245, 246–7, 248 denial of victim 245, 246, 247 Denmark 228–9 Denzau, A.T. 39 dependent contractors 108–9 de-regulation (informalisation) of the formal economy 160, 162–3, 167, 295 Derrida, J. 25 detection improvement policy tools 169, 170–71, 181, 189–204, 205–6, 298 business registration and certification schemes of tax and social contribution payments 189, 194–6 certified cash registers 189, 203 complaint reporting tools 189, 202–3 data collection, sharing and analysis tools 189, 196–200 notification letters 189, 200–201 registration of workers prior to first day at work 189, 193, 196–7 supply chain responsibility tools 190, 204 workplace identity cards 189, 193–4 workplace inspections 189, 190–93, 194, 298 deterrence measures 21, 169, 170–71, 176–7, 181–206, 297–8

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sanction tools 169, 170–71, 181, 182–8, 204, 205, 297 tools to increase the likelihood of detection 169, 170–71, 181, 189–204, 205–6, 298 Devas, N. 210 developed economies 7 developing countries 1, 42, 43 Di Gioacchino, D. 50 digital platforms, see platform (collaborative) economy direct measurement methods 53, 60–63, 63–4, 290 direct policy tools 168, 169, 170–71, 179, 296 combined with indirect policy tools 173–8, 179, 296 direct tax incentives and social security incentives 208, 220–21 targeting purchasers 228–9 Divald, S. 209 dominantly formal countries 70, 73, 83–4 dominantly informal countries 70, 73, 81 Dularif, M. 182 Duriez, B. 116 Duval-Hernández, R. 148 dynamic benchmarking 199 earmarking taxes and social contribution revenues 256 economic development 16 level of 25–6, 26–7, 28, 86, 87, 89, 90, 286 economies, impact of the informal economy on 16 education and awareness raising 22, 170, 172, 240–60, 299–300 campaign design 241–53, 259, 299 channels 248–9, 259, 300 evaluating effectiveness 249–53, 259 objectives and messages 243–8, 259, 299–300 target groups 241–3, 259, 299–300 educating consumers 257–8 about the benefits of formalisation 258

about the costs of engaging in the informal economy 257–8 educating suppliers 253–7 about the benefits of formalisation 254–7 about the costs of engaging in the informal economy 253–4 electricians 253–4 electricity consumption 54–5 electronic payments 228, 233–5 employability 14 employee sharing (joint employment) 213 employees impacts of the informal economy on formal employees 14–15 on informal employees 13–14 prevalence of the informal economy 71–3, 74–80, 94, 291 employers 71–3, 74–80, 94, 291 employers’ organisations 268–70 employment registration prior to first day at work 189, 193, 196–7 simplifying 212–13 employment relationships 19–20, 96, 105–22, 126, 292 bogus self-employment 106–7, 108–11, 119, 123–4, 126, 133–4, 145–6, 185, 216, 255, 292 informal self-employment 106, 107, 115–16, 119, 124, 126, 137–8, 149–51, 292 paid favours 106, 107–8, 116–18, 126, 138–9, 151–2, 161–2, 292 quasi-formal employment 14–15, 38, 106, 107, 111–14, 124, 126, 135–6, 146–8, 292 triangular, see triangular employment relationships unregistered employment 106, 107, 114–15, 124, 126, 136–7, 148–9, 292 employment retention schemes 123–6 abuse by employers 124–5 employment rights 13

Index

employment status 71–3, 74–80, 94, 291 energy consumption 54–5 enforced compliance 175–8 enterprise voucher (EV) schemes 230, 231–2 entrepreneurship 16, 26 informal 98–102 enterprise-based definitions of the informal economy 6–8, 10 envelope wages 111–14, 146–7 see also quasi-formal employment equine industry 253 eradication 160, 164–5, 167, 178, 295 Ernst Young 234 errant taxpayers 174 Estonia 196–7, 200, 209, 215 ethicality rule 272 Ethiopia 275 Eurobarometer surveys 45–6, 61 Europe and Central Asia 70–72, 94 whole-government approach 263, 265–6, 267, 269 European Commission 8 European Federation of Building and Woodworkers (EFBWW) 256 European Migrant Workers Union (EMWU) 256 European Platform Tackling Undeclared Work 5, 166, 181, 232, 264–5, 279, 295 #EU4FairWork campaign 243, 256–7 holistic integrated strategic approach 160–61, 167, 173, 177, 178 European Union (EU) 5 Common Agricultural Policy (CAP) subsidies 187 Directive on Administrative Cooperation 215 Europol 235 evaluation of education and awareness raising campaigns 249–53, 259 “everyday” economy 3, 5 exclusion-driven workers 12, 30–31, 141–2, 143–5, 146, 148–52, 157–8, 293–4 exclusion of sanctioned businesses from public procurement contracts, subsidies and licences 184, 187

387

existing informal enterprises, formalisation support and advice to 208, 224–6 exit-driven workers 141–2, 143–5, 146, 148–52, 157–8, 293–4 facilitating the transition to formality 184–5 fairness, procedural 40, 172–3, 270–71, 274–5, 280, 286 Fajnzylber, P. 101, 214–15 Feige, E.L. 58 Fernandez-Kelly, P. 30 Fichera, D. 50 field experiments 62–3 Fields, G.S. 130 fines 184, 185, 188 Finland 214, 229, 245, 263 Grey Economy Information Unit (GEIU) 198 fiscal informality 105 flexibility 13, 14 flexible specialisation 30 Floridi, A. 105, 208 focus groups 251 formal employees, impacts on 14–15 formal employment 7–8, 69, 71, 72, 106 formal enterprises 7–8 impacts of the informal economy on 10–11 formal institutions 8–9, 39 failures of 39, 40–44, 51–2, 91–4, 156, 277–8, 284, 286–9, 291 instability and uncertainty 40, 43–4, 93, 94, 95, 278, 279, 281, 284, 289, 291, 302 institutional asymmetry as an outcome of 39, 50–51, 51–2 powerlessness 40, 42–3, 93, 94, 95, 278, 279, 281, 284, 288, 291, 301–2 resource misallocations and inefficiencies 40–42, 92, 93, 95, 277, 278, 279, 281, 284, 286–7, 291, 301

388

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voids and weaknesses 40, 42, 92–3, 95, 277–8, 279, 281, 284, 287–8, 291, 301 reforming, see reforming formal institutions formal sector, informal employment in 71, 72, 74–80, 94, 291 formalisation 160, 165–80, 295–7, 303 benefits of 165–6 classifying 105 combining direct and indirect policy tools 173–8, 179, 296 direct policy tools 168, 169, 170–71, 179, 296 disadvantages 165 education and awareness campaigns about the benefits of 254–7, 258 holistic integrated strategic approach 167–78, 178–80, 295–6 incentives, see incentives indirect policy tools 168, 170, 171–3, 179, 296 formalisation support and advice to existing informal enterprises 208, 224–6 to start-ups 208, 222–4 Foundation for Economic and Industrial Research 234 Fourtané, S. 235 France 125 Chèque Emploi Service Universel (CESU) 231 Franić, J. 147 fraud 124–5 free marketing 225–6 Frey, B.S. 46, 48, 59, 275 Fu, K. 67, 68, 98–9, 130–31 gangmasters 122, 195 Garcia, F. 49 Garcia-Bolivar, O. 210 Gashi, A. 114, 131, 136, 143–4 Georgia 236–7 Germany 266 “mini-jobs” scheme 212 start-up premium 223 Ghinaruru, C. 111

Global Entrepreneurship Monitor (GEM) 66, 67 Gobena, L.B. 275 Godfrey, P.C. 30 Goel, R.K. 132 González, M.S.G. 211 Goodluck, C. 210 Górecki, M.A. 35, 48 Gould, M. 219 governance, quality of 26–7, 29, 40, 86, 87, 89, 96, 286 governments, impacts of the informal economy on 17 Grabiner, L. 14 Greece 209, 225, 234–5, 236 Hellenic Labour Authority sanctions system 185 joining up strategy 264 tourists in 248 “grey” economy 3, 5, 35 growth of the informal economy 160, 163–4, 167, 295 Gunther, I. 149 Gutiérrez-Romero, R. 31 Gutmann, P.M. 57 Haeussler, S. 246, 248 Hallsworth, M. 63, 201 Hammer, A. 30 harnessing the informal economy 160, 163–4, 167, 295 Hart, K. 1 Hart, M. 209 Hasseldine, J. 200–201, 255 Hauben, H. 193 Hazans, M. 114, 136 health and safety standards/regulations 14, 15 Helmke, G. 9, 39 “hidden” economy 3, 5 high denomination notes 56–7, 235 higher loyalties, appeal to 245, 246, 247, 248 Hirlinger, M.W. 218 Hofmann, E. 176 holiday voucher scheme 232–3 holistic integrated strategic policy approach 167–78, 178–80, 295–6 horizontal trust 46, 48–50, 52, 240, 260, 279, 284, 289, 300, 302

Index

Horodnic, I. 30, 46–7, 49, 113, 114, 117–18, 119, 125, 133–4, 135, 136–7, 138, 139–40, 153, 155, 176–7, 193, 194–5, 197, 198–9, 200, 202, 204, 209, 216, 217, 222, 223–4, 225, 226, 227, 228, 230, 233, 235, 253, 255, 257, 258, 263, 266, 267, 269, 273 hotels 237–8 household-level income/expenditure discrepancies 58–9 households, informal employment in 71, 72, 74–80, 94, 291 humour 245 Hungary 203, 212 Hussmanns, R. 7 identity cards, workplace 189, 193–4 Igudia, E. 155 impacts of the informal economy 10–17, 283 on consumers 15–16 on economies and societies 16 on formal businesses 10–11 on formal employees 14–15 on governments 17 on informal employees 13–14 on informal enterprises 11–13 incentives 21, 169, 171, 207–39, 298–9 demand-side 169, 171, 207, 228–38, 238–9, 298–9 supply-side 169, 171, 207, 208–27, 238, 298, 299 income/expenditure discrepancy methods 58–9, 63, 285–90 India 233 indirect measurement methods 53, 54–60, 63–4, 285–90 indirect policy tools 168, 170, 171–3, 179, 296 combined with direct policy tools 173–8, 179, 296 indirect tax incentives demand-side 228, 233 supply-side 208, 221–2 inequality 31, 33, 88, 89, 91 “inferior” adjectives 2 influencers 249 informal employees, impacts of the informal economy on 13–14

389

informal employment 69, 70–71, 72 in the formal sector 71, 72, 74–80, 94, 291 in the informal sector 69, 71, 72, 73, 74–85, 94, 291 informal enterprises 6 formalisation support and advice to existing enterprises 208, 224–6 impacts of the informal economy on 11–13 informal institutions 8–9, 39, 277, 302 and institutional asymmetry 39, 44–50, 51, 284, 289 informal sector, informal employment in 69, 71, 72, 73, 74–85, 94, 291 informal self-employment 106, 107, 115–16, 119, 124, 126, 292 participant characteristics 137–8 participant motives 149–51 informalisation (de-regulation) 160, 162–3, 167, 295 information campaigns 244 injury, denial of 245, 246, 247, 248 Inland Revenue Authority of Singapore (IRAS) 174–5 input state authorities 271 inspections, see workplace inspections instability of formal institutions 40, 43–4, 93, 94, 95, 278, 279, 281, 284, 289, 291, 302 institutional asymmetry 172, 176–7 informal institutions and 39, 44–50, 51, 284, 289 as an outcome of formal institutional failings 39, 50–51, 51–2 institutional theory 18, 24, 39–52, 100–101, 141, 277, 283–5, 286–9 first wave 40–44 prevalence of the informal economy 91–4, 95 second wave 39, 44–50 third wave 39, 50–51 insurance cover 15 integrated (holistic) strategic approach 167–78, 178–80, 295–6 intellectual property rights (IPRs) 12 intentional non-compliance 255–6 intensity of informality 69–85, 94

390

A modern guide to the informal economy

internal processes of formal institutions 270–76, 280, 301 procedural fairness 40, 172–3, 270–71, 274–5, 280, 286 procedural justice 40, 172–3, 270–71, 272–4, 280, 286 redistributive justice 40, 172–3, 270–71, 276, 280, 286 International Conference of Labour Statisticians (ICLS) 6–7 International Labour Organization (ILO) 1, 8, 55, 108–9, 114, 115, 191–2 2018 survey 66, 68–95 Global Commission on the Future of Work 167, 178, 295 Recommendation No. 204 161, 166–7, 173, 178, 264, 295 strategic compliance approach 173 International Monetary Fund (IMF) 8, 43, 55 interpersonal interactions 272–3 interviews 251 Ireland 253, 255 Isachsen, A.J. 58 isomorphism 44–5 Italy 200, 219–20, 227, 256, 258 CUORE initiative in Naples 225 labour vouchers 232 Padron di Merde in Bologna 188 Iyer, G.S. 49 Jamaica 219 Jaramillo, M. 210 Jensen, L. 116 Jessen, J. 177–8, 208 Jiminez, P. 49 job security 13 jobs-based definitions of informal economy 6–8, 10 joined-up whole-government approach, see whole-government approach joint employment (employee sharing) 213 joint inspections 191 Jorens, Y. 109 Jørgensen, C. 229 Juma, N. 210 “Just Tourism” website 238

Kanbur, R. 25, 96 Kaplan, D. 210 Kayaoglu, A. 114, 136, 142 Kearney, A.T. 234 Kedir, A. 11 Kelly, R. 210 Kemal, A.R. 131 key messages 243–4, 300 key performance indicators (KPIs) 249–50, 274 Khamis, M. 210 Kim, Y. 273 Kirchgässner, G. 276 Kirchler, E. 175 Kleven, H.J. 62, 192 Kluve, J. 177–8, 208 “Know Your Rights” campaign 252 Knox, A.J. 144 Kogler, C. 176 Kosovo 219 Kosta, B. 155, 156 Koumpias, A.M. 249, 271 Krasniqi, B.A. 136 Kuehn, Z. 27 La Porta, R. 26, 100, 101 laboratory experiments 62, 63 labour force statistics 55–6 labour informality 105 labour input method (LIM) 55–6 Lapeyre, F. 110–11, 133–4, 167, 179, 220, 264, 296 large denomination notes 56–7, 235 largely formal countries 70, 73, 83 largely informal countries 70, 73, 81–2 Larsen, L.B. 116, 236–7 Latvia 249, 254, 256, 263, 274 Launov, A. 149 Lefebvre, M. 49 legal action 15 legal informality 105 legal rights 13 Lessing, V.P. 244 Letki, N. 35, 48 level of economic development 25–6, 26–7, 28, 86, 87, 89, 90, 286 Levenko, N. 49–50 Leventhal, G.S. 272 Levitsky, S. 9, 39 Lewis, W.A. 25

Index

Li, Z. 255 licences conditionality 227 exclusion from 184, 187 Lichard, T. 58 Lithuania 255 local governments 223 Lodovici, M. 111 Longo, M.E. 114 Lourenço, J.S. 236 Lozano, B. 141 Luitel, H.S. 217 Luque, A. 6 Mabuza, M. 153 MacDonald, R. 61 macro-level economic and social conditions 173, 279–80 Mahmood, Z. 131 Malézieux, A. 182, 218 Maloney, W.F. 141 Marbot, C. 231 Marè, M. 117 marginalisation thesis 20, 128, 129, 130, 131, 133, 135, 137–8, 139, 157, 293 marketing 12 free 225–6 Markota, T. 231–2 Marmorea, P. 57 Martinez-Perez, A. 11, 98, 131, 155, 161, 224 Martinez-Vazquez, J. 249 Marumo, O. 153 Mascagni, G. 201 Mason, B.J. 57 Matza, D. 245 Mayson, S. 135 Mbaye, A. 132 McCaig, B. 211 McCulloch, N. 42, 48, 49 McGee, R.W. 276 McKee, M. 213–14 McKenzie, D. 42, 210 measurement methods 19, 53–64, 285–90 direct 53, 60–63, 63–4, 290 indirect 53, 54–60, 63–4, 285–90 media impact of education and awareness raising campaigns 251–2

391

Medina, L. 129 Mendoza, J.P. 192–3 messages of education and awareness raising campaigns 243–8, 259, 300 Mexico 210, 211 Michalopoulos, S. 230 Mickiewicz, T. 44 micro-enterprise start-ups 215 migrant workers 219–20 Mikesell, J.L. 218 Milliron, V.C. 171 mimetic isomorphism 44–5 MIMIC method 59, 63, 290 misuse of public office for private gain 41, 287 Mladen, L. 111 Moag, J.S. 272 modernisation theory 18, 24–7, 28–9, 35–8, 51, 99, 100, 283, 286–7 cross-national variations in informality 86, 87, 89, 90, 94–5 modernising internal processes 270–76, 280, 301 Mohdalia, R. 184 Molero, J.C. 274–5 monetary proxy indicator methods 56–8, 63, 285 monetary rationalists 147 monetary transactions 57–8 Mongolia 237 monitoring structural economic and social conditions 279–80 Monteiro, J. 214 Mortelé, N. 203 Moser, C. 27 mostly formal countries 70, 73, 83 mostly informal countries 70, 73, 82 motives for engaging in the informal economy 128, 140–52, 157–8, 242, 293–4 Mullainathan, S. 210 multiple indicator measurement methods 59–60, 63, 290 multiple indicators multiple causes (MIMIC) method 59, 63, 290 Munck, R. 26 Muriaas, R.L. 148 Murphy, K. 273, 274

392

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Murtin, F. 46 Mussurov, A. 137–8 Myrdal, G. 41 Nadin, S. 102 “naming and shaming” lists 184, 188 Nanowski, J. 211 native economy 25 Natrah, S. 255 necessity, defence of 246, 247–8 necessity-driven participants 12, 30–31, 141–2, 143–5, 146, 148–52, 157–8, 293–4 necessity of the law, denial of 246, 247 “negative” adjectives 2 negative messaging 243–4 negligent taxpayers 174 Nell, C. 201 neo-liberal theory 18, 24, 34–8, 51, 100–101, 283, 287 cross-national variations in informality 86–8, 89, 90, 94–5 motives for engaging in the informal economy 140–41 Nergaard, K. 252 Netherlands, the 220, 227 neutralisation techniques 245–8 newspaper adverts 249 Nicaragua 226 Nigeria 48, 218 no action policy 160, 161–2, 167, 178, 295 non-agricultural informal employment cross-national variations in informality 89–91 prevalence of the informal economy 70, 71, 72, 73, 74–85 non-compliance lists 184, 186–7 non-monetary indicator indirect measurement methods 54–6, 63, 285 normative isomorphism 44–5 normative pillar 44 North, D. 39 Norway 195–6, 252 notification letters 189, 200–201 nouns used for the informal economy 3, 5–6 Nwabuzor, A. 34

objectives of education and awareness raising campaigns 243, 259, 299–300 Ødegård, A.-M. 252 Ohnsorge, F. 12, 27, 31, 46, 208, 213, 221 Okou, C. 11 Okoye, F. 218 Oliver Wyman 231 Olomi, D. 210 omnibus surveys 251 operations, joining up and coordinating 265–6 opinion leaders 244–5 opportunity-driven participants 141–2, 143–5, 146, 148–52, 157–8, 293–4 Organisation for Economic Co-operation and Development (OECD) 8, 115, 167, 235, 295 other economy 3, 5 output state authorities 271–2 outsourcing 11, 30 own-account workers 71–3, 74–80, 94, 291 Oxfam 237 Oz-Yalaman, G. 138, 139, 142, 148–9, 150–51, 151–2, 158, 294 Pacolet, J. 198 Padron di Merde (“crappy bosses”) 188 Paetzold, J. 50 Pahl, R.E. 61 Paid, Earned, Shared and Owned (PESO) media model 248 paid favours 106, 107–8, 116–18, 126, 161–2, 292 participant characteristics 138–9 participant motives 151–2 Pakistan 104, 249 Park, C.W. 244 Parle, W.M. 218 part-time employment 215–16 participants in the informal economy 20, 128–58, 293–5 characteristics of 128, 129–40, 157, 293 consumers/purchasers 129, 153–7

Index

reasons for purchasing from the informal economy 129, 154–7 education and awareness campaigns 253–7 about the benefits of formalisation 254–7 about the costs of engaging in the informal economy 253–4 motives for engaging in the informal economy 128, 140–52, 157–8, 242, 293–4 sanctions to deter participation 184 partnership building 268–70 payment certification schemes 189, 194–6 pensions 13 performance 100–102 Perry, G.E. 101, 141 personal connections 41–2, 287 personal norms 49–50 personas 242–3 phantom-ware 203 phoenixism 227 Pickhardt, M. 236 Piore, M.J. 30 platform (collaborative) economy 118–20, 126, 139–40, 152, 215, 238, 292 policy options 20–21, 160–80, 285, 286–9, 295–7 formalisation of the informal economy, see formalisation potential goals of policy intervention 161–7 research needed 303 political economy theory 18, 24, 27–33, 35–8, 51, 99, 100, 283, 288 prevalence of the informal economy 87–8, 88–9, 90–91, 94–5 reasons for engaging in the informal economy 140–41 poorer performance thesis 100–102 Portes, A. 8, 10, 27, 30, 54, 162 positive messaging 243–4 positive role models 244 post-socialist transition countries 7, 43, 112 poverty 31, 33, 87–8, 89, 90–91

393

power 175–8 powerlessness, institutional 40, 42–3, 93, 94, 95, 278, 279, 281, 284, 288, 291, 301–2 “precarious” economy 3, 4 pre-filled tax returns 214 prevalence of the informal economy 19, 66–95, 290–91 evaluating 70–85 explaining cross-national variations 85–94, 94–5 and intensity across the globe 69–85, 94 prices 15–16 private unincorporated enterprises 6 procedural fairness 40, 172–3, 270–71, 274–5, 280, 286 procedural justice 40, 172–3, 270–71, 272–4, 280, 286 productivity 11, 16 proxy indicator methods 53, 54–60, 63–4, 285–9 public access to risk assessment tools 200 public procurement contracts, exclusion from 184, 187 Pujol, F. 274–5 pure voluntarists 147 Puts, E. 164, 202, 207, 239 quasi-formal countries 70, 73, 84–5 quasi-formal employment 14–15, 38, 106, 107, 111–14, 124, 126, 292 participant characteristics 135–6 participant motives 146–8 quasi-informal countries 70, 73, 81 Rablen, M.D. 219 randomised tax audits 61–2 rational economic actors 154–5, 170–71 real-time employment registers 193 receipt lotteries 236–7 receipts, incentivising requests for 228, 235–7 reclassification of employment relationships 185 record-keeping, help with 208, 226 redistribution 117

394

A modern guide to the informal economy

redistributive justice 40, 172–3, 270–71, 276, 280, 286 references 14 reforming formal institutions 22, 170, 172–3, 261–81, 300–302 modernising internal processes 270–76, 280, 301 structural transformation 276–80, 281, 301–2 whole-government approach 167, 168, 172, 261–70, 279–80, 301, 303 registered enterprises engaging in the informal economy 103–5, 123, 126, 292 characteristics 132–3 motives 144–5 registration business registration 11, 189, 194–6, 209–11 employment registration 189, 193, 196–7, 212–13 regulations 16, 17 simplification of formal regulations 208–16 regulatory environment 287 regulatory pillar 44 Rehman, F. 132 Reimers, H. 58 reinforcement thesis 129–30, 130–31 reluctant voluntarists 147 remote working 125 Renooy, P. 121 reporting 186 representativeness rule 272 requesting receipts, incentivising 228, 235–7 researching target groups 242 “residual” adjectives 2 resource misallocations and inefficiencies 40–42, 92, 93, 95, 277, 278, 279, 281, 284, 286–7, 291, 301 responsibility, denial of 245, 246–7, 248 responsive regulation approach 173, 174–5, 179, 296 reverse supply chain responsibility 186, 204 Richardson, G. 209 Ricketts, H. 219

risk analyses 198–200 Roberts, A. 30 role models 244 Romania 216, 232–3, 236, 237 Builders Social House (CSC) Scheme 221 Rosaldo, M. 96 Ross, J.M. 218 Rothenberg, A.D. 104 Rothstein, B. 271 Round, J. 26 Rwanda 201 Sabel, C.F. 30 Sakho, Y.S. 42 Samfunnsøkonomisk Analyze 252 sanction tools 169, 170–71, 181, 182–8, 204, 205, 297 for buying goods and services from the informal economy 184, 186 deterrence of participation in the informal economy 184 excluding sanctioned businesses from public procurement contracts, subsidies and licences 184, 187 facilitation to formality 184–5 “naming and shaming” lists 184, 188 non-compliance lists 184, 186–7 Sander, C. 210 Sandmo, A. 171, 181 satellite technology 55 Saudi Arabia 234 Saunoris, J.W. 46 Scartascini, C. 201 Schanz, G. von 172 Schildberg-Hörisch, H. 183 Schnabl, P. 210 Schneider, F. 43, 59, 62, 212, 234 Scott, W.R. 44 “second” economy 3, 4–5 sector 3, 5–6 self-employment bogus 106–7, 108–11, 119, 123–4, 126, 133–4, 145–6, 185, 216, 255, 292 informal 106, 107, 115–16, 119, 124, 126, 137–8, 149–51, 292

Index

semi formal countries 70, 73, 82–3 semi informal countries 70, 73, 82 Serbia 263–4, 266 service voucher schemes 228, 230–33 “shadow” economy 3, 4, 9 Shahid, M. 12, 104, 132–3, 138, 144 sharing (collaborative) economy 118–20, 126, 139–40, 152, 215, 238, 292 Shleifer, A. 26, 100, 101 short-term financial support schemes 56, 123–6, 292 silos 263 simplification of formal regulations 208–16 Sissel, T. 196 Slemrod, J. 62 slippery slope framework 173, 175–8, 179, 296 slogans 243 small enterprises 6 SMART objectives 243 Smith, J.D. 58 Sobel, R.S. 217 social actors 155–6 social cohesion 17 social contract 171–2 social contribution payments certification schemes 189, 194–6 simplifying 213–16 social entrepreneurship 102 social label initiatives 228, 237–8 social norms 49–50 social partners 256 improving involvement of 268–70 social security incentives 208, 220–21 social traffic data 251 social voucher (SV) schemes 230–31, 232 societal impacts of the informal economy 16 society-wide amnesties 208, 217–18 Spain 197, 213 Sri Lanka 43, 210 Srinivasan, T.N. 171, 181 Staehr, K. 49–50 standard deductions for expenses 215 Standard Industrial Classification (SIC) index 5–6

395

start-ups, formalisation support for 208, 222–4 state capture 41, 287 state intervention in work and welfare provision 31, 32, 87, 88–9, 90, 288 state morale 277 state revenue, loss of 17 Stefanov, R. 258 Stinchcombe, A.L. 100 Strassmair, C. 183 strategy, joining up 262–5 structural economic and social conditions 173, 279–80 structural transformation 276–80, 281, 301–2 Stutzer, A. 275 subcontracting 11, 30 subsidies, exclusion from 184, 187 subsistence economy 9, 25 supply chain responsibility tools 186, 190, 204 supply-side incentives 169, 171, 207, 208–27, 238, 298, 299 advisory inspections 208, 216–17 compliance lists 208, 226–7 direct tax and social security incentives 208, 220–21 formalisation support and advice to existing informal enterprises 208, 224–6 formalisation support to start-ups 208, 222–4 help with record-keeping 208, 226 simplification of formal regulations 208–16 society-wide amnesties 208, 217–18 targeted indirect tax incentives 208, 221–2 voluntary disclosure schemes 208, 218–20 support for formalisation to existing informal enterprises 208, 224–6 to start-ups 208, 222–4 surveys 60–61, 63, 250–51, 290 Sutter, C. 226 Swanson, L.A. 116 Sweden 222, 228, 235 Fair Play Bygg 202

396

A modern guide to the informal economy

Sykes, G.M. 245 taking no action 160, 161–2, 167, 178, 295 Tall, I. 132 target groups 241–3, 259, 299–300 targeted indirect tax incentives 208, 221–2 tax amnesties 217–18 tax audits 61–2, 192–3, 298 tax compliance education and awareness raising campaigns 255–6 measuring 61–3 policy options 174–5, 176, 177 procedural fairness and 274–5 rational actor model and non-compliance 170–71 tax auditing and 61–2, 192–3 trust and 48–50 tax incentives direct 208, 220–21, 228–9 indirect 208, 221–2, 228, 233 tax levels 35, 36–7 and prevalence of the informal economy 86–8, 89, 90 tax morale 45–50, 52, 284 tax payments certification schemes 189, 194–6 simplifying 213–16 television adverts 249 teleworking 213 Temkin, B. 137, 149 temporary agency work 120–22, 126, 152, 195, 292 temporary legal/tax status 211 temporary work agencies (TWAs) 120–22, 195 test-trading 11, 222 theories 18, 24–52, 283–5, 286–9 see also institutional theory; modernisation theory; neo-liberal theory; political economy theory third-party data 197 Thörnquist, A. 109 Torgler, B. 43, 46, 48, 62–3, 217–18 Toy, D.R. 171 trade unions 16, 268–70 training 17

transactions 57–8 transition economies 7, 43, 112 transition to formality, sanctions to facilitate 184–5 triangular employment relationships 118–22, 195, 292 collaborative economy 118–20, 126, 139–40, 152, 215, 238, 292 temporary agency work 120–22, 152, 195, 292 tripartite agreements 269, 270 trust 279, 302 education and awareness raising campaigns 240, 259–60, 300 horizontal, see horizontal trust and institutional asymmetry 46–50, 52, 284, 289 modernising internal processes of formal institutions 270–76, 301 slippery slope framework 175–7 vertical, see vertical trust two-tier informal labour market 141–2, 158, 294 types of work 19–20, 96–127, 292–3 bogus self-employment 106–7, 108–11, 119, 123–4, 126, 133–4, 145–6, 185, 216, 255, 292 collaborative economy 118–20, 126, 139–40, 152, 215, 238, 292 COVID-19 pandemic and new types of informal employment 97, 123–6, 126–7, 292 employment relationships in the informal economy 19–20, 96, 105–22, 126, 292 informal self-employment 106, 107, 115–16, 119, 124, 126, 137–8, 149–51, 292 paid favours 106, 107–8, 116–18, 126, 138–9, 151–2, 161–2, 292 quasi-formal employment 14–15, 38, 106, 107, 111–14, 124, 126, 135–6, 146–8, 292 registered enterprises engaging in the informal economy 103–5, 123, 126, 132–3, 144–5, 292 roadmap for research 302–3

Index

temporary agency work 120–22, 126, 152, 195, 292 unregistered employment 106, 107, 114–15, 124, 126, 136–7, 148–9, 292 unregistered enterprises 6, 97–103, 123, 126, 130–31, 143–4, 292 Umar, M.A. 48 unaware taxpayers 174 uncertainty, institutional 40, 43–4, 93, 94, 95, 278, 279, 281, 284, 289, 291, 302 “undeclared” economy 3, 5 undeclared work 8 “underground” economy 3, 4 unintentional informal work 119–20 unintentional non-compliance 255 unintentional purchases 156–7 United Kingdom (UK) 5, 125, 201, 212 compliance lists 227 gangmaster licensing 195 Her Majesty’s Revenue and Customs (HMRC) 5, 202, 274 Connect data system 199 education and awareness raising campaigns 252, 253–4 “promote, prevent, respond” policy approach 175 Street (UK) 224–5 Supermarkets Scorecard 237 voluntary disclosure schemes 218–19 United Nations Guiding Principles on Business and Human Rights 204 United States (US) IRS rap video contest 245 unpaid subsistence economy 9 unregistered employment 106, 107, 114–15, 124, 126, 292 participant characteristics 136–7 participant motives 148–9 unregistered enterprises 6, 97–103, 123, 126, 292 participant characteristics 130–31 participant motives 143–4 Urbano, D. 43

397

utilitarian campaigns 244 value added tax (VAT) 218–19 reductions 221–2, 233 reverse charges for 186, 222 value-expressive campaigns 244 Van Dijke, M. 275, 276 Van Elke, K. 210 Venkatesh, S.A. 31 Vennesland, T.E. 195 verbal contracts 15, 111–12 vertical trust 46, 47–8, 52, 240, 260, 279, 284, 289, 300, 302 very small enterprises (VSEs) 54 victim, denial of 245, 246, 247 voids and weaknesses, institutional 40, 42, 92–3, 95, 277–8, 279, 281, 284, 287–8, 291, 301 voluntary compliance 172, 174, 175–8, 200, 240–41 voluntary disclosure schemes 208, 218–20 wages 13, 14 envelope wages 111–14, 146–7 Wan, H. 273 weaknesses, institutional 40, 42, 92–3, 95, 277–8, 279, 281, 284, 287–8, 291, 301 web scraping 197 web traffic data 251 Webb, J.W. 45 Weck-Hannemann, H. 59 Wenzel, M. 273 Western Balkans 263, 266, 267, 269–70 Western Balkans Network Tackling Undeclared Work 265 whole-government approach 167, 168, 172, 261–70, 279–80, 301, 303 improving social partner involvement 268–70 joining up and coordinating data collection, sharing and analysis 266–7 joining up and coordinating operations 265–6 joining up strategy 262–5 Wienges, S. 212 Willems, H. 231

398

A modern guide to the informal economy

Williams, C.C. 8, 9, 11, 12, 26, 30, 43, 46, 49, 50, 56, 98, 101–2, 104–5, 110–11, 113, 114–15, 117–18, 119, 121, 124, 125, 131, 132, 133–4, 135, 136–7, 138–9, 139–40, 141–2, 143–4, 144–5, 148–9, 150–51, 151–2, 155, 156, 158, 161, 164, 167, 173, 176–7, 179, 184, 193, 194–5, 197, 198–9, 200, 202, 204, 207, 209, 216–17, 220, 222, 223–4, 225, 226, 227, 228, 229, 230, 232, 233, 235, 239, 263, 253, 255, 257, 258, 263, 264, 265, 266, 267, 269, 270, 273, 294, 296 Windebank, J. 8, 138–9 Winner, H. 50

Wolff, J. 223 working abroad 140 workplace identity cards 189, 193–4 workplace inspections 189, 190–93, 194, 298 advisory 208, 216–17 World Bank 13, 14, 105, 209, 211 World Bank Enterprise Survey (WBES) 66–7, 68, 101–2 yield-to-cost ratios 252 Yitzhaki, S. 171, 181 Yousseff, Y. 149 Yu, S. 12, 27, 31, 46, 208, 213, 221 zappers 203 Zinnes, C. 211