Conclusion

Formal and total employment during formal-economy business cycles. Total and formal employment in advanced economies behaved significantly differently from both types of employment in EMDEs during formal economy recessions and recoveries (tables 2B.6A and 2B.6B). Both total and formal employment contracted significantly (by 2.5 and 2.7 percent, respectively) in advanced economies during formal economy recessions, whereas neither total nor formal employment fell significantly in EMDEs. Employment changes during formal-economy recoveries were insignificant in both advanced economies and EMDEs. The lack of significant responses in employment during formal economy recoveries suggests delayed responses in the labor market and the emergence of “jobless” recoveries in recent decades (Farber 2012; Hall 2005; Shimer 2010, 2012).

The compilation of a comprehensive database of model-based and survey-based estimates of informal economic activity provides a rich set of measures available for cross-country analysis and a more limited set of measures available for time-series or panel analysis. Among all the measures, DGE-based estimates and survey-based estimates of self-employment stand out in their cross-country and year coverage. In contrast, survey-based measures of perceptions tend to be highly stable over time and, therefore, are mainly useful for cross-country comparisons. Last, for cross-country analyses of narrowly defined questions, measures from labor, firm, and household surveys may be more suitable, especially when surveys are done consistently. Two applications of the constructed database are illustrated in this chapter. First, using the widest possible range of measures, the chapter illustrates the broad-based and steady decline in the shares of informal output and employment since 1990. Three somewhat distinct aspects of informality are identified: output, employment, and perceptions. Cross-country rankings of informal output or employment are typically consistent with each other although varying over time. Second, the chapter documents that informal economies experience business cycles just as formal economies do. Like formal-economy output cycles, informal-economy output cycles tend to be shallower in advanced economies than in EMDEs. Informal employment tends to behave acyclically in EMDEs and advanced economies, largely invariant to both output recessions and recoveries. In contrast to distinct cyclical movements in informal output, perceptions of the scale of informality shown by surveys are highly persistent. Several possible areas for further research are worth noting. First, the limitations and weaknesses of all existing measures of informality remain, despite the richness of the database described here. More work is needed to improve the quality of existing measures and to explore new approaches to better capture the extent of informality in EMDEs. Second, the chapter distills the main features of informal-economy business cycles. It does not look into the factors and policies that could affect informal-economy business cycles. Further analyses in this direction would be valuable.