Combating Informal Employment in Latin America: A Critical Evaluation of the Neo-Liberal Policy Approach

This paper evaluates critically the neo-liberal perspective which contends that informal employment results from high taxes, public sector corruption and too much state interference in the free market and that the consequent remedy is to reduce taxes, public sector corruption and the regulatory burden via minimal state intervention. Reporting International Labor Organization data on the cross-national variations in the level of informal employment across 16 Latin American economies, and analyzing the economic and social conditions across these countries, no support is found for the neo-liberal tenets that higher tax rates, greater levels of corruption and state interference are correlated with higher levels of informal employment. Instead, higher levels of regulation and state intervention are associated with lower (not higher) levels of informal employment resulting in a tentative call for more, rather than less, regulation of the economy and state intervention to protect workers. The theoretical and policy implications are discussed.