Tackling Europe's Informal Economy: A Critical Evaluation of the Neo-Liberal De-Regulatory Perspective

Abstract

Since the turn of the millennium, there has been widespread recognition that the informal economy is a sizeable and growing feature in the global economy. To explain this, neo-liberals have contended that the informal economy is a direct result of over-regulation, high taxes and state interference in the free market. Their remedy, therefore, is de-regulation, tax reductions and minimal state intervention. This article evaluates critically this neo-liberal perspective towards the informal economy. Reviewing cross-national comparative data from the 27 member states of the European Union, the finding is that few people explain their own and others’ participation in the informal economy using such rationales, that higher tax rates are not correlated with larger informal economies, and that lower levels of state intervention are correlated with larger (not smaller) informal economies. The article concludes by refuting the neo-liberal approach as a remedy and calling for more, rather than less, regulation of the economy.

Keywords: Shadow economy, hidden economy, informal sector, informal employment, Europe

JEL Classification: H26, J46, J48, K34, K42, O17, P2, P3