2.6 Informality under Regulation-Based Indicators of Entry Barriers

REGULATION-BASED INDICATORS OF ENTRY BARRIERS AND INFORMALITY

Prior to concluding the analysis, we provide a quantification of the extent to which regulation-based indicators of the costs of entry, presumably an important component of the model-based measure of entry barrier that we have worked with so far, can account for the observed distribution of informal employment shares. To this end, we appeal to the costs of registering a new firm and accessing electricity as measured by the World Bank’s Doing Business Indicators.6

Panel a of figure 2.6 illustrates the regulation-based estimates of entry barriers against the model-based ones. It follows from the figure that while the regulatory hurdles and the

FIGURE 2.6 Informality under Regulation-Based Indicators of Entry Barriers

Sources: The informal employment share is based on ILO; the entry barrier in the vertical axis of panel A is based on the World Bank’s Doing Business Database. Note: The entry barrier comprises the sum of the costs of registering a new business and the cost of accessing electricity. TauE = entry tax or barrier in the undistorted economy in the model.