Topic 4: Informality

Question 1

Implications of a large informal sector (3)

Answer 1

Large fraction of economic activity is UNREGULATED

Behaviour of firms and workers, and consumers

Effects on productivity and output and growth

Question 2

What is informality for workers and firms

Answer 2

Informal firms and workers are those who do not comply with the relevant laws and regulations

Workers: no labour contract
Firms: not registered with tax authorities

Question 3

Reasons for informality (2)

Answer 3

Evade labour regulation costs e.g min wage, or safety regs etc.

Underreport revenue to evade taxes

Question 4

Relationship between informality and economic development, and evaluation

Answer 4

Negative correlation

However there is huge variation within income brackets,

e.g low income countries like Nepal have 98% informal employment, but another low income country Ethiopia has 36%

Question 5

Will countries grow out of informality

Answer 5

Unlikely - as GDP has been increasing for countries e.g India but informal employment has stayed the same.