IZA DP No. 12487: The Effectiveness of Interventions to Reduce Informality in Low- and Middle Income Countries
revised version published in World Development 138, Feb 2021, 105256, https://doi.org/10.1016/j.worlddev.2020.105256
Labor markets in low- and middle income countries are characterized by high levels of informality. A multitude of interventions have therefore been implemented in many countries with the objective to increase the formalization of firms and workers, including information campaigns, simplification of registration procedures, reductions of payroll taxes and social security contributions, and interventions that enforce labor or business formalization. In this paper, we compile a database of 157 impact estimates from 32 academic studies that evaluate empirically one or more of these formalization interventions. The empirical analysis correlates the impact estimates of the primary studies — given as either (i) a measure of sign and statistical significance or (ii) the effect size — with explanatory factors such as the intervention type, the outcome variable, the scope of the intervention (program or policy), and other covariates. Several key findings emerge: first, the intervention type is not a strong determinant for the effectiveness of formalization interventions, though tax incentives and labor inspection are most likely to display significant positive effects. Second, the outcome "worker registration" shows significantly better results than other outcomes. Third, interventions at scale — i.e. formalization "policies" — are more effective on average than singular "programs".