The Effect of the Informal Employment Rate on Productivity: Application to Developing Countries

Abstract

This paper measures the effect of the informal employment rate on labor productivity in developing country economies. In addition, knowing that productivity is influenced by other factors such as unemployment, inflation, skilled labor and the rate of trade openness, an econometric model is used that considers all these variables and is capable of quantifying their effect both individually and jointly, considering productivity as an endogenous variable in this specification. In this way, and by analyzing the individual effect of each factor considered on the endogenous variable after estimation, it is possible to contrast the contribution of the informal employment rate with that of the other regressors considered and, in general, to clarify which factor has the greatest influence on productivity in developing economies. The model used for the calculations was estimated by a panel data on 26 non-developed countries over the period 2015-2018. Taking into account the results obtained, it has been determined that the informal employment rate negatively affects productivity, being also the most statistically significant variable according to the estimates, which were modeled from World Bank data and from the labor and wage statistics of the International Labor Organization (ILO) for the countries considered. Finally, the final objective of this work is that its results and conclusions contribute to the dialogue for the elaboration of labor policies that strengthen and give greater coverage to the formal sector of the economy, being aware that this will better reward its workers and allow them to have knowledge and enjoyment of guarantees expressed in legal contracts which, in terms of aggregate welfare, will surely lead to an increase in productivity that will facilitate their progress and greater national development.