The Influence of Government Policies on Informal Labor: Implications for Long-Run Growth

Using cross-sectional data from industrialized and developing economies, we examine long-run growth regressions linking government policies, informal employment and real GDP per worker. We find that changes in government policies of taxation and enforcement significantly affect growth in the informal sector. Further, we show that increases (decreases) in informal employment significantly and negatively (positively) affect a country's growth rate of real GDP per worker. The empirical link between government policies, informal employment and real GDP per worker holds irrespective of a country's development. On average, changes in government policies, through their effect on the size of the informal sector, account for 6 percent of the growth rate of real GDP per worker between 1960 and 1990.