“Informality” is a term used to describe the collection of firms, workers, and activities that operate outside the legal and regulatory systems. It is widespread in the majority of developing countries—in a typical developing economy, the informal sector produces about 35 percent of GDP and employs 75 percent of the labor force. Informality is one of the most difficult challenges facing developing countries, and not surprisingly, it’s often at the top of policymakers’ priorities. Yet, there is confusion on basic definitions and measurement of informality, as well as about its causes and consequences.

In this presentation, Norman Loayza will clarify the definition, determinants, and consequences of informality. First, this will done by reviewing some empirical evidence on various countries and regions. Then, informality will be placed in the context of economic development by presenting an analytical framework that links informality, regulations, and economic growth. The framework will highlight the trade-offs between formality and informality, the relationship between the different types of informality, and the connection between them and the forces of capital and productivity growth.

Loayza will also present projections for the size of labor informality in the next two decades for a large group of countries representing all regions of the world. The projections will include separately informal firm employees and self-employed workers. The projections will be based on the calibration and simulation of the model outlined previously and will serve to highlight its usefulness and limitations. Finally, a flexible and adaptable Excel-based toolkit for the analysis and projections of labor informality will be presented and made available to economists inside and outside the World Bank for their own use. 

Last Updated: May 19, 2016