Informal Labour and Credit Markets: A Survey.

the product, credit and/or labour markets informality can increase efficiency and so can
have a positive impact on the formal economy. This needs to be considered to arrive at a
final conclusion on the overall impact of informality. For this reason, instead of focusing
only on one aspect, a literature has emerged that assesses both the costs and benefits of
informality.³

Recent accurate data on the size of the informal sector are available for a number
of emerging market and developing economies as reported in section 2.2 of this survey.
In some of these countries, for example in Bolivia, India, Nigeria, Panama, Pakistan,
Paraguay, Peru, informality has been estimated to characterize over three quarters of the
labour force and little less than a half of total sales-implying a shadow economy as large
as 60 to 70 percent of GDP. (See Perry et al. (2007) for more details).

Recognition of the impact of informal behavior on economic activity has given impetus
to a growing literature on informality over the past few years. This literature includes
work that attempts to quantify the extent of informality in various countries and work
seeking to explain the causes and the nature of the informal sector, either by establishing
regularities in the data or by devising economic models for policy analysis that stylize
informal behavior.

Given that a large informal economy is generally thought to be detrimental for the
official economy, not surprisingly, research effort has been directed to analyze possible
ways to reduce its size. Understanding what drives informal behavior and how the in-
formal sector evolves and reacts to various combinations of public policies - including
fiscal, financial, social protection, labour market and enforcement policies - is crucial for
the design of measures conducive to significant reductions in present informality levels.
Moreover, a knowledge of informal labour and credit markets is important to understand
the monetary policy transmission mechanism and the conduct of an effective monetary
policy.

This survey reviews this literature and can serve as a point of departure for future
research in those areas that remain uncharted or that require a deeper understanding.
Our survey goes beyond existing surveys on informality that limit their review to either
labour markets (e.g. Fields (2005) and Perry et al. (2007)), regional evidence (e.g. Perry
³See Batini et al. (2009) reviewed in section 6.3.

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