Labour protection and informal work: A cross‐national analysis of European countries, 2004–2012

• Date: 01 December 2016
• Author: Luz Adriana FLÓREZ,Francisco PERALES
• DOI: http://doi.org/10.1111/j.1564-913X.2015.00049.x
• Published date: 01 December 2016

Copyright © The authors 2016

Journal compilation © International Labour Organization 2016

International Labour Review, Vol. 155 (2016), No. 4

Labour protection and informal work:

A cross-national analysis

of European countries, 2004–2012

Luz Adriana FLÓREZ* and Francisco PERALES**

Abstract. Informal work, dened as work performed without a formal contract,

lowers productivity, reduces tax revenue and hampers economic growth. Reducing

informal work is a policy objective in developed and developing countries alike.

Yet, particularly since the onset of the global nancial crisis in 200 8, most socio-

economic policy reforms across Europe have reduced the generosity of unemploy-

ment benet schemes and deregulated employment protection. The authors argue

that, while such reforms may have contributed to reducing unemployment, they

might also have increased the incidence of informal work. Using European Social

Survey data for 200 4–12 , they nd that labour protection is effective in reducing

informal wage employment.

E

mployment in the “informal economy”, dened by the ILO as “economic

activities by workers and economic units that are – in law or in practice –

not covered or insufciently covered by formal arrangements”,

1

is a recognized

problem in both developing and developed countries. Informal workers are

not covered by the law and lack access to unemployment insurance, pensions

and/or the health insurance system. Informal workers are also less product-

ive (Bernal, 2009; Henle, Arabsheibani and Carneiro, 2009), which hampers

economic growth, and they do not pay taxes, which reduces the government’s

revenue and its subsequent ability to protect workers. As a result, reducing

informal work has been a long-standing policy objective in developed and

developing countries alike.

* Labour Market Analysis Group, Banco de la República de Colombia, email: lore@

banrep.gov.co. ** ARC Centre of Excellence for Children and Families over the Life Course,

Institute for Social Science Research, University of Queensland, email: f.perales@uq.edu.au. The

opinions expressed in this article do not necessarily reect those of the Banco de la República or

of its Board of Directors. The authors would like to thank Arturo Martinez Jr, Blendi Kajsiu and

Tina Rampino for their helpful comments and suggestions.

Responsibility for opinions expressed in signed articles rests solely with their authors, and

publication does not constitute an endorsement by the ILO.

1 See Conclusions concerning decent work and the informal economy, para. 3 (ILO, 2002 a,

p. 53); see also ILO (20 02b).

International Labour Review624

During the past few decades, but especially since the 2008 global nan-

cial crisis, several European countries have implemented reforms to increase

labour market exibility and reduce unemployment. Turrini et al. (2014) review

the breadth of policy reforms undertaken in European countries since 2008,

concluding that a majority of them have involved reducing labour protection.

One way of doing so has consisted in reducing the generosity of unemployment

benet schemes (Acemoglu and Shimer, 1999a and 1999b; Cahuc, 2 014). This

sort of reform has been more common in eastern and western Europe. Another

way has consisted in reducing the regulation of employment protection. This

approach was most typically followed in countries with high unemployment

rates, notably southern European countries such as Portugal or Italy. These

courses of action are unsurprising because labour protection restricts ring and

hiring by increasing the associated costs incurred by employers (Janiak and

Wasmer, 2 014; Skedinger, 2010). Overall, there is evidence that these reforms

did reduce unemployment, including long-term unemployment (Martin, 2014).

However, the recent neoliberal policies pursued by European countries

might have had effects on areas other than unemployment. In this article, we

argue that by reducing labour protection, they might have affected the preva-

lence of informal work.2 There are two competing perspectives on how the

degree of state intervention in the economy in general (and labour protection

legislation in particular) affects national rates of informal work. From a neolib-

eral perspective, workers and micro-entrepreneurs willingly engage in informal

work as a rational strategy to circumvent state control on economic matters,

e.g. to avoid paying high taxes or providing insurance (Williams, 2013). State

investments in labour protection are costly to employers and are typically -

nanced through increased taxation. From this perspective, therefore, recent em-

ployment reforms to increase labour market exibility in Europe should have

resulted in a lower prevalence of informal employment. Advocates of the struc-

tural perspective, by contrast, argue that little state intervention (as opposed to

over-interference) results in workers being pushed into informal employment

(ibid.). In this view, individuals engage in informal work when the State fails

to protect workers, employers have too much power, and downsizing, subcon-

tracting and outsourcing are widespread. As Cahuc argues, “an employer who

does not comply with health and safety regulations in the workplace may re

workers who complain […] if he has monopsony power which allows him to

2 Other evidence on the macro-level effects of labour protection is mixed. Some studies nd

that labour protection has negative consequences. These include adverse effects on disadvantaged

groups of workers (e.g. the young), increased numbers of workers on temporary contracts, reduced

productivity, and the lengthening of unemployment spells (Bajada and Schneider, 2009; Skedinger,

2010). Other studies report benets of labour protection. For example, Janiak and Wasmer (2014)

nd a positive effect on capital–labour ratios through skill protection. Similarly, Boeri, Garibaldi

and Moen (2013) argue that tenure-based severance payments increase productivity by increasing

investments in training, reducing inefcient ring and promoting efcient labour allocation. There

is also a literature highlighting the role of labour protection in reducing the negative outcomes of

economic recession on the most vulnerable, including in terms of mental health, sleep, mortality and

suicide (Zivin, Paczkowski and Galea, 2011; Suhrcke and Stuckler, 2012; Perales and Plage, 2016).