Kwabena Otoo

Kurzexposé zum Promotionsvorhaben von Kwabena Nyarko Otoo

Labour Regulations and Informal Employment: Evidence from Ghana

The growth of informal employment and enterprises has been one of the most unexpected outcomes of economic liberalization motivated by Structural Adjustment and Poverty Reduction Strategies of the past three decades. A central assumption that underpinned structural adjustment and its successor policies and programs was that by removing regulatory and institutional constraints and allowing unfettered markets to allocate resources countries will experience unprecedented economic growth. And as economies grow and develop, the rate of employment creation will accelerate. More of the workforce will gain access to employment in the formal sector. The informal economy was seen as transitory. With growth and development the informal economy will eventually disappear. 

However, in the last three decades economic growth as measured by Gross Domestic Product (GDP) has coincided with rising informal employment and a decline of formal wage employment. Wage employment in Ghana grew marginally from 14 percent in 2000 to 16 percent in 2006 and then fell to 13.3 percent in 2010 (GSS, 2000; 2006; 2012). Informal employment now makes up about 86 percent of the total workforce with nearly two-thirds (64.8%) of the active population being self-employed. 

Advocates of Structural Adjustment and Neo-liberalism have attributed the failure of market-based reforms to accelerate employment creation and reduce informality to the fact that the reforms did not go far enough. That Ghana and many other countries in Africa are saddled with costly labour regulations that constrain employment creation in the formal economy and promote informality. The view is that regulations increase the cost of labour in the formal economy and compel employers to substitute capital for labour or employ labour informally. A large stream of studies (World Bank, 1990; OECD, 1994; Schneider, 2002; Chen, 2006;) purports to show that informality is the results of excessive regulation of the labour markets. The Doing Business report of the World Bank postulates, “Overly rigid labour regulations are associated with a larger Informal sector”. Most of the studies that informed this view have taken place in the advanced OECD economies. There has been very few empirical analysis of the impact (if any) of regulations on labour market in Ghana. 

Since correlation does not imply causality, one cannot conclude that the large and growing informal employment in Ghana is the result of labour regulations and the institutions they embody. This research provides empirical analysis of the relations between labour regulations and informal employment in Ghana. The research question is: do regulations cause both workers and enterprises to self-select into the informal economy?