Evaluating cross‐national variations in the extent and nature of informal employment in the European Union

• Author: Colin C. Williams
• DOI: http://doi.org/10.1111/irj.12030
• Published date: 01 November 2013
• Date: 01 November 2013

Evaluating cross-national variations in the

extent and nature of informal employment

in the European Union

Colin C. Williams

ABSTRACT

This article evaluates critically the contrasting explanations for the cross-national

variations in the prevalence and nature of informal employment, which variously view

such work as more prevalent in poorer, under-developed economies; driven by high

taxes, corruption and state interference that lead workers to exit formal employment;

or driven by inadequate state intervention leading to the exclusion of workers from

formal employment and state welfare provision. By analysing cross-national vari-

ations across the European Union in the size of informal employment using indirect

measurement methods and in its varying character using evidence from a 2007

Eurobarometer survey, it was found that wealthier, less corrupt and more equal

economies with higher levels of labour market intervention, social protection and

redistribution via social transfers have lower levels of informal employment, much

of which is conducted to exit formal employment. The paper concludes by exploring

the theoretical and policy implications.

1 INTRODUCTION

Given that globally, 60 per cent of jobs are in the informal economy (Jütting and

Laiglesia, 2009) and that informal employment is expanding relative to formal

employment in many global regions (ILO, 2011; OECD, 2002; Rodgers and

Williams, 2009; Schneider, 2008; Schneider et al., 2010), mainstream industrial rela-

tions scholars can no longer limit themselves to studying formal employment rela-

tions (e.g. Bach, 2012; Mailand, 2013; Proctor and Rowlinson, 2012). With the

majority of jobs globally in the informal economy, scholarship on employment rela-

tions needs to broaden its scope to explaining informal employment and its policy

implications. In this paper, the aim is to contribute to the advancement of knowl-

edge on this expanded view of employment relations by evaluating critically the

competing explanations for the cross-national variations in the size and nature of

informal employment across the globe. First, a modernisation perspective has

argued that informal employment is greater in less modern and developed econo-

mies and will disappear with advancement and modernisation (Boeke, 1942; Geertz,

❒Colin C. Williams is Professor of Public Policy in the Management School at the University of Sheffield,

UK. Correspondence should be addressed to Colin C. Williams, ICOSS, 219 Portobello, Sheffield S1 4DP,

UK; email: C.C.Williams@sheffield.ac.uk

Industrial Relations Journal 44:5–6, 479–494

ISSN 0019-8692

© 2013 Brian Towers (BRITOW) and John Wiley & Sons Ltd

1963; Lewis, 1959). Second, a neoliberal perspective has argued that informal

employment is more prevalent in economies with high taxes, greater public sector

corruption and high levels of state interference in the free market, which have led

workers to choose to exit the formal economy (Becker, 2004; De Soto, 1989; 2001;

London and Hart, 2004; Nwabuzor, 2005; Sauvy, 1984; Small Business Council,

2004). Third and finally, a structuralist perspective has argued that informal

employment is larger in economies where state intervention is inadequate to protect

workers, which results in them being pushed into informal employment owing to

their exclusion from formal work and state welfare provision (Davis, 2006; Gallin,

2001; Slavnic, 2010). In this paper, these theoretical perspectives are evaluated criti-

cally by analysing their validity as explanations for the cross-national variations in

the extent and nature of informal employment in the European Union.

To do this, the first section will provide a brief review of the competing moderni-

sation, neoliberal and structuralist explanations for the cross-national variations in

the extent and nature of informal employment. To evaluate critically these rival

explanations, the second section will then report the methodology used to evaluate

whether the variable extent and nature of informal employment in the EU27 are

correlated with the societal characteristics that these various perspectives use to

explain such cross-national variations. The results are then reported in the third

section. Finding that there is a strong correlation between the variations in informal

employment across the EU27 and some of the societal characteristics identified by

each of these theoretical explanations but not others, the fourth and final section will

call for a new synthesis of these previous explanations in the form of what is here

termed a ‘neomodernisation’ perspective and will tentatively discuss the policy impli-

cations of these findings.

Before the analysis commences, however, a definition of informal employment,

or what is variously called the ‘black’, ‘cash-in-hand’, ‘hidden’, ‘undeclared’, ‘under-

ground’ or ‘shadow’ economy/sector/work, is required. On review of the literature,

nearly all definitions are found to be descriptions of what is insufficient or absent from

this form of employment relationship relative to formal employment, and a strong

consensus exists regarding what is missing or absent. Informal employment is widely

defined as paid work that is not declared to the state for tax, social security and labour

law purposes when it should be declared but that is legal in all other respects

(European Commission, 1998; 2007; Sepulveda and Syrett, 2007; Williams, 2006;

Williams and Windebank, 1998). If there are additional differences, then the work is

not defined as informal employment. For example, if the good and/or service provided

is illegal (e.g. drug trafficking), then it is deemed ‘criminal’ activity, while it is part of

the unpaid economy if there is no payment. Blurred edges of course exist, such as

when gifts or in-kind labour are exchanged in lieu of money (White, 2009). Here,

nevertheless, informal employment includes only activity where money is exchanged

between the employer/purchaser and employee/supplier.

Informal employment takes various forms. On the one hand, there is wholly infor-

mal employment where the worker is not formally employed by the employer and the

remunerated activity is not declared to the state for tax, social security and labour law

purposes. This may take the form of either waged employment or self-employment.

On the other hand, however, an employment relationship can be concurrently both

formal and informal, such as when a formal employee receives from his or her formal

employer both a declared salary and an additional undeclared (‘envelope’) wage

(Karpuskiene, 2007; Neef, 2002; Sedlenieks, 2003; Williams, 2007; 2009; Woolfson,

480 Colin C. Williams

© 2013 Brian Towers (BRITOW) and John Wiley & Sons Ltd