International Entrepreneurship Journal is a scholarly open access journal. The journal comprises international standard articles focusing on recent trends of entrepreneurship. Since the turn of the millennium, there has been widespread recognition that a sizeable and growing share of the global workforce is in the informal sector. To explain this, neo-liberals contend that enterprises operate in the informal sector due to 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. This paper evaluates critically this neo-liberal policy approach. To do this, International Labor Organization data from 16 Latin American countries on the share of the workforce in informal sector enterprises is compared with cross-national variations in tax rates, corruption and levels of state interference using World Bank development indicators. Revealing that one in three non-agricultural workers in Latin America are employed in
informal sector enterprises and analyzing the economic and social conditions in different countries, no support is found for the neo-liberal tenets that higher tax rates, greater levels of corruption and state interference are correlated with larger informal sectors. Instead, higher levels of regulation and state intervention are associated with smaller (not larger) informal economies resulting in a tentative call for more, rather than less, regulation of the economy and state intervention to protect workers.
To evaluate the neo-liberal de-regulatory hypothesis which asserts that the level of employment in informal enterprises will be greater in countries with higher levels of state interference in the workings of the free market, six different measures of state intervention are evaluated.
Last date updated on July, 2014