Globalization and the political benefits of the informal economy

The informal sector in the globalizing economy relieves policymakers from immediate pressures to generate unskilled jobs in the formal sector, provides formal (and costly) benefits and protection to informal workers, and adopts drastic labor reforms at the national level that would keep labor costs low. The demand for informal work, which is likely increasing with globalization, may provide governments some reprieve from diverting scarce government resources toward generating formal employment and safety nets for this group in the globalizing environment. The authors Nita Rudra and Helen Milner propose informal sector presence makes it easier to respond to the needs and demands of stronger interest groups in the globalizing environment, while still pacifying marginalized populations. The next step is to develop a research design and collect data to analyze the empirical validity of this hypothesis. The challenge ahead is to find empirically testable measures of the political incentives.