Out of the shadows: a classification of economies by the size and character of their informal sector

Given that 60 per cent of the global workforce is in the informal sector, this article develops a typology that classifies economies according to, firstly, where different countries sit on a continuum of informalization and, secondly, the character of their informal sectors. This is then applied to the economies of the 27 member states of European Union (EU-27). Finding a clear divide from east to west and south to north in the EU-27, with the more informalized and wage-based informal economies on the eastern/southern side and the less informalized and more own-account informal economies on the western/Nordic side, it is then revealed that formalization and more own-account informal sectors are significantly correlated with wealthier and more equal (as measured by the gini-coefficient) countries in which there is greater labour market intervention, higher levels of social protection and more effective redistribution via social transfers. The article concludes by discussing the implications for theory and practice

Explaining Cross-national Variations in the Size of the Shadow Economy in Central and Eastern Europe

Cross-national variations in the size of the shadow economy have been variously explained to be a result of: economic underdevelopment (modernization theory); high taxes, public sector corruption and state interference in the free market (neoliberal theory) or inadequate levels of state intervention to protect workers (political economy theory). The aim of this paper is to start to evaluate critically these competing theories by comparing crossnational variations in the size of the shadow economy with the various aspects of the broader economic and social environment denoted as determinants of the shadow economy in each of the theories. The finding is that across Central and Eastern Europe, smaller shadow economies prevail in wealthier, more modern and equal societies and countries with higher levels of social protection expenditure, greater state intervention in the labour market, more effective social transfers and lower levels of poverty. No evidence is, therefore, found to support the neoliberal suggestion that decreasing tax rates, deregulating the economy and cutting back work and welfare expenditure by the state will reduce the shadow economy. The paper concludes by discussing the theoretical and policy implications of the findings