What Explains Prevalence of Informal Employment inEuropean Countries: The Role of Labor Institutions,Governance, Immigrants, and Growth

European Social Survey data on 30 countries, covering years 2004-2009, are used to lookinto joint institutional [and other macro] determinants of the rates of dependent employmentwithout a contract, informal self-employment, and unemployment (secondary jobs are notaccounted for). Consistently with theoretical predictions, quality of business environment hasa significant negative impact on prevalence of both types of informal employment. The shareof non-contracted employees is negatively affected by perceived quality of public servicesand is positively related to economic growth. GDP per capita has a positive impact oninformality in Europe at large and within Eastern and Southern Europe. Other things equal,the share of non-contracted employees in the labor force across all European countriesincreases with the minimum-to-average wage ratio, with union density, with the share of firstand second generation immigrants, and with income inequality, but falls with stricteremployment protection legislation (EPL) and higher tax wedge on labor. Thus it appears thatin Europe at large, labor cost effects of EPL and taxes are weaker than their impact viaperceptions of job security and law enforcement, along with tax morale and the income effect.Yet the EPL effect on informality is positive (i.e., cost-related) when either Eastern andSouthern Europe or Western and Northern Europe are considered separately. Furthermore,within Western and Northern Europe, the minimum wage effect is negative, whilst withinEastern and Southern Europe, the union effect is negative. Various panel data methods areused to confirm the robustness of the results....