The Impact of Economic Globalization on Labor Informality

Abstract

This paper explores, empirically and at the global level, the relation between economic globalization and informal employment. Based on data over a long period of time on labor informality, economic globalization, level of development and institutional freedom in various countries, three linear models are advanced. One is a static model which suggests that a greater level of globalization reduces the level of informality. In contrast, two alternative dynamic models show that, taking into consideration the historic development of each country, a differential impact of globalization on employment informality becomes evident. In developing countries, higher globalization levels will result in higher levels of labor informality, while in developed countries the effects of globalization will be the opposite and produce lower levels of informality. An additional finding is that an institutional context of economic liberalization at the national level increases labor informalization.