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### Executive summary: scope and headline facts
- About two-thirds of workers in North Africa operate without any formal arrangement and social protection.
- About 30 percent of GDP is estimated to be produced by informal workers and firms.
- About 80 percent of workers living in rural areas in North Africa have an informal job, compared with 60 percent in urban areas.
- About 90 percent of jobs in the agricultural sector in North Africa are informal, higher than the average in other emerging markets (75 percent).
- Informality may reflect development stage (low human capital, young population, sectoral composition) and/or policy distortions (tax/regulatory burdens and weak governance) that generate “excess” informality beyond structural predictions.

### Structural drivers and measured correlates
- Sociodemographic drivers:
  - Lower average human capital and a younger population increase informality incidence, especially for low-skilled and youth (ages 15–24).
  - Sectoral composition: large agricultural sectors in Mauritania and Morocco contribute to higher employment informality; large public sectors in Algeria, Egypt, and Tunisia help reduce employment informality (but can be costly).
  - Gender: raw shares of informal employment are often higher for women, but gender effects weaken or reverse once other characteristics are controlled for (example: women have a 15 percent lower probability of having an informal job in Morocco after controls).
- Firm- and household-level correlates:
  - Informality concentrated in very small firms (fewer than nine workers) in Egypt and Mauritania.
  - Having a formal worker in the household reduces the probability of being informal by up to 60 percent.
  - Working in public administration reduces likelihood of informality by up to 35 percent in Morocco relative to the secondary sector.
- Measured indexes and correlations (Averages, 2000–19):
  - Positive correlations with output informality: burden of government regulation; tax burden.
  - Negative correlations with output informality: availability of financial services; wage flexibility; governance indicators (rule of law, government effectiveness, control of corruption).
  - Governance gaps explain about half of the excess informality experienced in North Africa compared with advanced economies (distance‑from‑frontier analysis).

### Regression, dominance, and decomposition results
- Sociodemographic factor index construction: simple average of (1) average years of schooling, (2) share of youth, (3) share of agricultural employment, (4) share of rural population.
- Dominance analysis (medium-informality group contribution to Schneider index R-squared):
  - Sociodemographic factors: 37%
  - Governance: 35%
  - Tax burden: 17%
  - Business regulation: 5%
  - Labor market: 6%
- Distance-from-frontier (North Africa vs advanced economies):
  - Policy variables explain about 60 percent of the difference in predicted output informality (Schneider index); governance indicators alone could account for about 45 percent of the explained gap; eliminating tax-burden gap would reduce explained gap by 13 percent.
- Principal component analysis (2005–17): on average, more than 30 percent of changes in composite informality index in North Africa explained by changes in policy variables. Country differences: Egypt, Mauritania, Morocco saw policy improvement contributing to declines; Algeria and Tunisia saw deteriorations in some governance/regulatory indicators contributing to increases.

### Microeconometric marginal effects (selected exact estimates)
- Having a formal worker in the household (marginal effects, All sample):
  - Egypt: –0.649*** (0.014)
  - Tunisia: –0.690*** (0.005)
  - Mauritania: –0.606*** (0.009)
  - Morocco: –0.526*** (0.011)
- Age (relative to 15–24), Tunisia (All):
  - 25–34: –0.114*** (0.012)
  - 35–54: –0.178*** (0.013)
  - 55–64: –0.178*** (0.014)
  - 65+: –0.186*** (0.020)
- Education (relative to no education), Tunisia (All):
  - Secondary: –0.088*** (0.022)
  - Tertiary: –0.160*** (0.023)
- Firm size effects (relative to firm size 1–4), Egypt (All):
  - 10–24: –0.037*** (0.010)
  - 25–49: –0.107*** (0.013)
  - 50–99: –0.127*** (0.015)
  - 100+: –0.139*** (0.012)
- Note: All coefficients above are from country-specific linear probability models; robust standard errors in parentheses; significance: * p < .10; ** p < .05; *** p < .01.

### Informality, Okun’s law, and the business cycle
- Stylized labor-market facts (two decades to 2019):
  - Unemployment: averaging nearly 11 percent in 2019.
  - Labor force participation: average about 45 percent in 2019.
  - Female labor force participation: about 22 percent in 2019.
  - Informal employment (proxy: share of self-employed): about 40 percent of total employment in 2019; EMDE average ~50 percent.
- Okun’s-coefficient evidence:
  - Panel regressions show Okun’s coefficients are statistically significant and less negative in high-informality countries (unemployment responds less to output fluctuations).
  - Example country results:
    - Morocco: a 1 percentage point increase in output above trend → 0.1 percentage point reduction in cyclical unemployment.
    - Algeria, Egypt, Tunisia: a 1 percentage point positive output deviation → 0.4–0.5 percentage point decline in cyclical unemployment (comparable with advanced‑economy averages).
- Informal employment cyclicality:
  - Informal employment behaves more countercyclically in medium- and high-informality economies, providing a buffer in downswings; in high-informality countries total employment can increase during recessions due to informal-sector job creation.

### COVID-19: a different recession
- In 2020 informal employment fell significantly in North Africa, unlike prior recessions where informality buffered labor markets.
- Causes: lockdown measures and the high share of informal jobs in contact-intensive services (accommodation and food services, entertainment, wholesale, retail).
- Recovery outlook:
  - As the pandemic subsides, a stronger-than-usual rebound of informal employment is possible because informal jobs have minimal hiring/setup costs.
  - Risk of hysteresis remains if workers displaced to informality during downturns cannot return to formal jobs; however, the lack of an informal-sector rise in 2020 could lower this hysteresis risk.
- Policy implication: strengthen and digitalize social protection systems to reach informal workers and encourage formalization, building on pandemic-era innovations (targeted cash transfers, digital registration).

### Model-based policy simulations (Morocco calibration) — steady-state counterfactuals
- Calibration to Moroccan moments (Data vs Model steady state):
  - Informal labor share: Data 0.54; Model 0.63
  - Formal-to-informal-wage ratio (W_F / W_I): Data 1.25; Model 1.26
  - Unemployment rate: Data 0.09; Model 0.17
  - Informal output share (P_I Y_I / GDP): Data 0.29; Model 0.49
  - Investment-to-GDP ratio (P_inv I / GDP): Data 0.33; Model 0.21
  - Import-to-GDP ratio (P_f M/GDP): Data 0.41; Model 0.31
- Four steady-state counterfactuals (each –50% relative to baseline):
  - Lower entry costs (–50%): Real GDP + 5.6%; Employment informality: Direct 59.4% ; Total 58.7% (baseline employment informality share: 63%).
  - Lower hiring costs (–50%): Real GDP + 1.5%; Employment informality: Direct 61.8% ; Total 61.6%.
  - Lower payroll taxes (–50%): Real GDP + 8.9%; Employment informality: Direct 50.9% ; Total 49.8%.
  - Flexible equilibrium (–50% all bottlenecks): Real GDP + 19.3%; Employment informality: Direct 45.8% ; Total 44.4%.
- Interpretation:
  - A simultaneous 50 percent reduction in entry costs, payroll taxes, and hiring costs reduces employment informality by about 30 percentage points (63% → 44.4%) and raises GDP by 19.3%.
  - Payroll-tax cuts are the single most powerful individual contributor to formalization in the Moroccan calibration.
  - Most of the reduction in informality stems from the direct channel (higher expected formal profits) rather than the indirect income-driven channel.

### Policy recommendations (region‑common and country‑specific highlights)
- Region-common priorities:
  - Improve the quality of governance.
  - Reduce the burden from government regulations.
  - Widen availability of financial services and expand financial inclusion.
  - Design efficient and non‑distortionary tax systems; consider simplified regimes with careful eligibility and enforcement.
  - Remove unnecessary labor-market rigidities.
  - Pursue coordinated, comprehensive reform packages rather than piecemeal measures.
  - Modernize and digitalize public‑service delivery, tax filing, company registration, and social protection to build digital footprints and facilitate formalization.
- Country highlights and targeted recommendations (selected):
  - Algeria:
    - Informality: estimated output informality 32 percent in 2019; high currency-in-circulation-to-broad-money ratio averaged 31 percent in 2015–17.
    - Measures enacted include administrative simplification, voluntary compliance programs (7% flat tax for deposited informal funds), temporary affiliation and social‑coverage options, increased fines, and limits on cash deductions.
    - Recommended: a comprehensive national formalization strategy; governance reforms; product and labor market reforms; credible discouragement of cash use combined with financial deepening; fiscal reforms to streamline exemptions and strengthen tax administration.
  - Egypt:
    - Reforms reduced bureaucratic steps for industrial licenses from 11 to 1; notification licensing for low-risk industries introduced.
    - Constraints: only 4.4 percent of firms have access to finance (World Bank, 2020).
    - Recommended: simplify licensing for services, reduce Lawyers Syndicate fees, continue digitalization and automation, improve justice efficiency, facilitate KYC for SMEs, develop NBFIs, and lower budget deficit to ease crowding out.
  - Mauritania:
    - Estimated informal sector about 30 percent of GDP (Schneider); 2017 national survey reported about 50 percent of GDP and 63 percent of employed population informal.
    - Recent measures: tax ID single-window (2019), credit bureau (2019), law on electronic payments (2021).
    - Recommended: simplify registration, lower tax burden, improve governance and enforcement, expand bank access (70 percent unbanked), create SME guarantee fund, and strengthen payment/clearing infrastructure.
  - Morocco:
    - Schneider estimate: 30 percent of GDP in 2017; New Model of Development aims to reduce informal jobs to 20 percent by 2035.
    - Auto-entrepreneur regime (2015): only about 5 percent of potential population joined by 2021.
    - Recommended: remove administrative barriers (“guillotine approach”); introduce professional cards linking workers to training and social protection; accelerate judicial digitalization and transparency; generalize social protection; and consider aligning minimum wage with productivity while protecting vulnerable groups.
  - Tunisia:
    - Informal activity about 36 percent in 2019; policy deterioration contributed to increases in informality between 2005 and 2017.
    - Challenges: cumbersome regulation, rigid labor code, low access to finance, administered prices (nearly 30 percent of CPI), strict FX regulation encouraging hoarding.
    - Recommended: implement Start‑Up Act complements, reform social protection (address tax wedge ~35 percent), reform wage bargaining and collective agreements, improve financial infrastructure (credit registry, collateral registry), reduce cash reliance, and strengthen incentives under simplified tax regimes.

### Digitalization, payments, and formalization
- Mechanisms:
  - Government service digitalization facilitates identification/verification, simplifies tax filing and registration, creates digital footprints, and supports financial inclusion.
  - Digital payments reduce cash use and can shrink the informal economy through better VAT compliance and easier credit access.
- Evidence and indices:
  - E‑government capacity index: Tunisia most developed in North Africa per UN 2020; Morocco shows large increases in digitalized government-to-business/citizen operations and 93 percent of tax receipts paid electronically (Economist Intelligence Unit measure).
  - GSMA mobile money regulatory index (2019) ranks: Morocco 37th; Egypt 68th; Tunisia 72nd; Mauritania 81st (sample of 81 countries).
  - Empirical findings: mobile financial services reduce informal sector size by 2–4 percentage points of GDP (Jacolin and others 2019).
- Constraints in North Africa:
  - High mobile connectivity (68 percent mobile penetration; 83 percent 4G coverage per OECD 2021) but low digital payments adoption, high currency-in-circulation ratios (Algeria, Mauritania), regulatory limits, lack of competition, and limited access to data.
  - Policy reforms underway: Morocco (2014) allowed nonbank electronic payment providers; Egypt and Tunisia opened fintech sandboxes.

*IMF Departmental Papers — Informality, Development, and the Business Cycle in North Africa.*

### Executive Summary ................................................................................................v

### Executive Summary

### Overview
- North African economies are characterized by a significant share of informal activity and employment.
- About two-thirds of workers in North Africa operate without any formal arrangement and social protection.
- About 30 percent of GDP is estimated to be produced by informal workers and firms.
- Informality can reflect a stage of development where many firms and workers lack capacity to operate under formal legal, tax, and labor market arrangements, and can function as a substitute or complement to social safety nets in crises.
- Policy distortions—public policy and institutional frameworks that impose large tax and regulatory burdens while failing to provide high-quality public goods and services—may generate “excess” informality beyond what development and structural characteristics would predict.

### Key findings: structural drivers and policy gaps
- Structural factors contributing to high informality:
  - Relatively lower level of human capital and younger population help explain high informality, as low-skilled and young people generally find it more difficult to operate in the formal sector.
  - The share of women in informal employment exceeds that of men in most countries in the region; however, there is less evidence that women are more exposed to informality once other individual characteristics are controlled for.
  - Sectoral composition matters: large public sectors contribute to reducing employment informality in Algeria, Egypt, and Tunisia (albeit at high cost). Informal output remains relatively high in these economies due to the large number of labor-intensive and informal small- and medium-sized businesses.
  - Mauritania’s and Morocco’s large agricultural sectors may contribute to their relatively higher employment informality, especially for women.
- Policy gaps contributing to excess informality:
  - Gaps in a set of policy indicators explain the relatively high informality in North Africa.
  - Gaps in the quality of governance explain about half of the excess informality experienced in North Africa compared with advanced economies.
  - The expansion of the informal sector in Algeria and Tunisia from the mid-2000s partially reflects deterioration in a few indicators of governance and regulatory frameworks.
  - The decline in informality in Egypt, Mauritania, and Morocco over this period reflects improved business regulations, governance, and tax systems, in addition to continued progress in economic development.

### Policy simulations and recommendations
- Policy simulations show that cutting the costs to operate in the formal sector can reduce employment informality by up to 30 percent and boost long-term growth.
- The greatest impact comes from implementing all measures simultaneously.
- Policy implications:
  - A coordinated and comprehensive approach to reducing informality should be preferred to a piecemeal approach.
  - North African economies need to:
    - improve the quality of their governance;
    - reduce the burden from government regulations;
    - widen the availability of financial services;
    - design efficient and non-distortionary tax systems;
    - remove unnecessary labor market rigidities.

### Informality and the business cycle, including COVID-19
- Historically, informality has buffered regional labor markets against the impact of recessions, contributing to relatively stable unemployment rates, including during recessions.
- The COVID-19 crisis has been different:
  - Informal employment has fallen significantly in North Africa during the pandemic, as lockdown measures particularly affected high-informality service sectors.
  - As the pandemic subsides and lockdown measures are removed, recovery of regional labor markets could exhibit a stronger-than-usual rebound of informal employment.
- Ensuring an inclusive recovery calls for renewed efforts to construct more modern (digitalized), more efficient, and fairer systems of social protection, building on progress achieved during the pandemic in extending safety nets to informal workers.

*IMF Departmental Papers — Informality, Development, and the Business Cycle in North Africa — Executive Summary*

### 1. Introduction

### 1. Introduction

### Informality in North Africa: scope and measurement
- About two-thirds of workers in North Africa are not subject to labor legislation, do not pay taxes, and do not receive social protection.
- Medina and Schneider (2019) estimate that informal production in North Africa accounts on average for about 30 percent of GDP.
- Informality defined and measured in multiple dimensions: informal sector (unincorporated, unregistered enterprises), informal employment (jobs not subject to labor legislation, income taxation, or entitlement to social protection), and the informal economy (aggregate of both perspectives).
- Commonly used indicators referenced in the paper include:
  - The Schneider index (estimated share of GDP undeclared to authorities).
  - ILO estimates of the share of informal employment in total employment.
  - Share of workers that do not contribute to a retirement pension scheme (World Bank pensions database).
  - Share of self-employed workers in total employment (ILO).

### Key research questions (as posed in the paper)
- To what extent is informality in North African countries explained by their level of development, as opposed to policy distortions?
- What are the main policy distortions that could lead to excess informality in North Africa?
- How does informality in North African countries affect labor markets during downturns, particularly in light of the COVID-19 crisis?

### Stylized facts and drivers of informality in the region
- Structural/developmental drivers:
  - Low-skilled and young people tend to find it more difficult to escape informality in the region.
  - Sectoral composition matters: higher employment informality in Mauritania and Morocco may reflect the relatively important role of the agricultural sector.
  - Algeria’s, Egypt’s, and Tunisia’s relatively lower employment informality may reflect the relatively larger public sectors in these economies.
  - Evidence on gender is mixed: once other characteristics are controlled for, women do not seem to have a higher probability of working in the informal sector in Morocco (possibly reflecting their higher level of human capital).
- Policy- and governance-related drivers:
  - A significant part of informality in North Africa is associated with policy distortions.
  - Cross-country regression analysis (with caution due to collinearity and endogeneity) finds that, after controlling for level-of-development variables, policy indexes are significantly associated with the size of the informal sector.
  - Gaps in the quality of governance tend to explain about half of the excess informality levels experienced in North Africa compared with advanced economies.
  - Improvements in business regulations, governance, and tax systems have contributed to declines in informality in Egypt, Mauritania, and Morocco over the past two decades.
  - The expansion of the informal sector in Algeria and Tunisia since 2008 reflects weaker contributions from economic development variables and deterioration in some governance and regulatory indicators.

### Macro modeling and policy simulations
- The paper develops a dynamic, small open-economy general equilibrium model with formal and informal labor and product markets, calibrated to replicate key characteristics of Morocco’s economy and policy framework.
- In the model, individuals decide whether to work in the formal or informal sector; choices depend on policy-controlled variables:
  - Firm entry costs
  - Payroll taxes
  - Hiring costs
- Main simulation results:
  - Cutting the costs to operate in the formal sector can significantly reduce informality and boost long-term growth.
  - The greatest impact on reducing informality and increasing growth comes from applying coordinated reforms simultaneously rather than piecemeal measures.
  - The relative contribution of each policy measure depends on how binding the corresponding distortion is.

### Informality and the business cycle, including COVID-19 implications
- Historically, informality has acted as a buffer for regional labor markets during recessions, contributing to relatively stable unemployment rates despite downturns.
- The COVID-19 crisis was different: in 2020 informal employment fell significantly in North Africa, driven by lockdown measures that particularly affected high-informality service sectors and an agricultural drought in Morocco.
- As the pandemic subsides and lockdown measures are removed, labor-market recovery could feature a stronger-than-usual rebound of informal employment.
- Policy implication: ensure recovery is of the same “quality” as past recoveries by developing more modern (digitalized), more efficient, and fairer systems of social protection, building on progress achieved during the pandemic in reaching informal workers.

### Policy priorities and recommendations (country-common themes)
- All North African economies need to:
  - Improve the quality of governance.
  - Reduce the burden from government regulations.
  - Widen the availability of financial services.
  - Design efficient and non-distortionary tax systems.
  - Remove unnecessary rigidities in labor market codes.
- A coordinated and comprehensive approach to reducing informality is preferred to isolated, piecemeal measures.

*IMF DEPARTMENTAL PAPERS • Informality, Development, and the Business Cycle in North Africa — Chapter 1 (Introduction)*

### 1. Schneider Index

### Schneider Index

### Overview and data sources
- Schneider index of output informality: source Medina and Schneider (2019).
- Informal employment (share of total employment): ILO (2018).
- Noncontributors to pension scheme (share of labor force): World Bank Human Development Network Social Protection (HDNSP) pensions database.
- Self-employment (share of total employment): ILOSTAT database.
- Note: Regional and income groupings exclude the North African countries. For each country and informality indicator, the year is the latest available in the sources reported.

### Levels and components of informality in North Africa
- About 80 percent of workers living in rural areas in North Africa have an informal job, compared with 60 percent in urban areas.
- About 90 percent of jobs in the agricultural sector in North Africa are informal, higher than the average in other emerging markets (75 percent).
- Contributing family workers account on average for about 20 percent of informal employment in Egypt, Morocco, and Tunisia, compared with 10 percent on average for emerging markets.
- Informality shares are much higher for workers without education or with only primary education than for workers who have completed secondary or secondary and tertiary education.
- Informality is concentrated in very small firms (with fewer than nine workers) in Egypt and Mauritania.

### Country and indicator patterns
- The Schneider index of output informality has fallen only in Egypt, Mauritania, and Morocco since 2008; it has increased in Algeria and Tunisia since 2008.
- The share of self-employed workers in total employment (the proxy with longer time series) seems to have declined in all North African economies over the last 20 years.
- The relatively higher share of informal employment in Morocco and Mauritania can be at least in part a reflection of the relatively higher concentration of their workforces in the agricultural sector.

### Socioeconomic and demographic characteristics of informal workers
- Informality and income:
  - Informality rises as income levels fall in Egypt, Morocco, and Tunisia.
  - In Egypt and Tunisia, the share of informality in the lowest quintile of the income distribution is about twice the level observed in the highest quintile.
  - In Mauritania, informality remains high even among the wealthiest, consistent with an upper-income tier of informal workers and a lower-income tier potentially stuck in informal employment.
- Gender:
  - There is generally higher informality among women than among men, except in Egypt.
  - In Morocco the gender gap is particularly high, possibly reflecting women’s concentration in agriculture.
  - Once controls are added, being female is associated with a higher probability of having an informal job in Egypt’s private sector and in Tunisia; no statistically significant gender effect in Mauritania; women have a 15 percent lower probability of having an informal job in Morocco.
- Age:
  - Informality is generally higher for young workers (very high among ages 15–24 in Mauritania, Egypt, and Tunisia), decreases until ages 50–60, then increases again as workers move to the informal sector after retiring from formal jobs.
  - In Morocco informality rates plateau between 25 and 29 years and increase monotonically afterward.
  - After controls, individuals 35–54 years of age are about 10 percent less likely to work in the informal sector than youth aged 15–24 in Egypt.
- Education:
  - Tertiary education is associated with a lower probability of being employed informally compared with otherwise similar workers without tertiary education.
  - The negative link between education and informality is stronger for the private sector than for the whole economy in Egypt, Morocco, and Tunisia.
- Household and firm factors:
  - Being head of a household and having a formal worker in the household reduce the probability of having an informal job (by up to 60 percent).
  - Working in public administration reduces the likelihood of being informal in all countries, by up to 35 percent in Morocco, relative to having a job in the secondary sector.
  - Working in the agricultural sector increases the probability of being informal in Morocco and Tunisia; working in the service sector reduces the probability of being informal only in Egypt.
  - Informality is more prevalent among workers in small firms.

### Wage and labor-market segmentation
- Egypt wage gap:
  - Formal workers in Egypt are paid almost 40 percent more than informal workers when observable characteristics are not controlled for.
  - Once observable characteristics (age, education, job experience) are considered, the gap is reduced to close to 20 percent.
  - Market segmentation gives rise to a “formality premium” that can explain about half of the difference in wages between formal and informal workers in Egypt.

### Survey coverage used for worker-level analysis
- Egypt: Labor Market Panel Survey (ELMPS), 2018. Informal defined as not contributing to social security.
- Mauritania: National Survey on Employment and the Informal Sector (ENE-SI), 2017. Informal defined as not contributing to social security.
- Morocco: National Survey on Household Consumption and Expenditure (ENCDM), 2014. Informal defined as self-employed.
- Tunisia: National Survey on Household Budget, Consumption and Standard of Living (NSHBCSL), 2015. Informal defined as not contributing to social security.

*IMF DEPARTMENTAL PAPERS •    Informality, Development, and the Business Cycle in North Africa*

### 1. Distribution of log Wages

### 1. Distribution of log Wages

### Informality, Level of Development, and Policy Distortions
- Chapter objective: assess the extent to which informality in North Africa is associated with the level of economic development versus policy distortions.
- Measures of informality considered:
  - Output informality proxied by the Schneider index.
  - Employment informality proxied by the share of workers that do not contribute to a retirement pension scheme.

### A. Correlates of Informality
- Development (sociodemographic) index:
  - Constructed for 177 countries as the simple (unweighted) average of the latest annual values for four variables:
    - (1) average years of schooling (Barro and Lee 2013)
    - (2) share of youth in the population (World Bank WDI)
    - (3) share of agricultural employment (ILO)
    - (4) share of rural population (WDI)
  - Rationale: least developed countries typically have lower education, younger populations, more agricultural employment, higher rural population shares.
- Institutional and policy correlates grouped into four categories and indicators used:
  - Business regulation:
    - Index of the burden of government regulation (World Economic Forum)
    - Index of regulatory quality (World Bank WGI)
    - Index of availability of financial services (World Economic Forum)
    - Interpretation: burdensome regulation raises formal-sector costs; limited financial access reduces benefits of formality.
  - Taxation:
    - Index of tax burden: average of top marginal income tax rate (Fraser Institute, The Economic Freedom of the World, based on PwC tax data) and total-VAT-revenues-to-GDP ratio (IMF).
    - Indicator on effect of taxation on incentives to work (World Economic Forum).
    - Interpretation: larger wedge between pretax total labor costs in the formal economy and after-tax labor earnings increases incentives to operate informally.
  - Labor market regulation:
    - Index of hiring and firing practices (Fraser Institute, based on World Economic Forum)
    - Flexibility of wage determination index (Fraser Institute, based on World Economic Forum)
    - Minimum wages as a ratio to average value added per worker (ILO and World Bank)
    - Interpretation: excessively rigid labor laws may discourage hiring formal employees.
  - Governance:
    - Integrity of legal system index (Fraser Institute, based on PRS Group, ICRG)
    - Rule of law index (World Bank WGI)
    - Government effectiveness index (World Bank WGI)
    - Control of corruption index (World Bank WGI)
    - Transparency of government policy-making (World Economic Forum)
    - Interpretation: better governance typically associated with lower informality.
- Correlation evidence (Averages, 2000–19):
  - Sociodemographic index: higher values associated with higher prevalence of informal sector.
  - Positive correlations between output informality and:
    - Burden of government regulation
    - Taxation (size of tax burden)
  - Negative correlations between output informality and:
    - Availability of financial services
    - Wage flexibility
    - Governance indicators
  - Most correlation coefficients statistically significant, particularly for governance and availability of financial services; labor market policy links appear relatively weaker.
- Regional standing:
  - On average over the last two decades, North African economies score relatively low on governance and business climate indicators compared with advanced economies and emerging markets.
  - Gaps are less pronounced for indicators capturing tax burden and labor market rigidities.

### Box 1. Taxation and Informality — Key Points and Policy Measures
- Tax systems’ relation to informality is complex and depends on type of informality and country idiosyncrasies.
- Informality is multifaceted (examples cited: registered firms hiring off the books; formal employees with informal side jobs).
- Tax-policy measures that can affect informality:
  - Simplified tax regimes for small businesses and the self-employed:
    - Many North African countries (Algeria, Mauritania, Morocco, Tunisia, and more recently, Egypt) introduced simplified flat-tax regimes.
    - Evidence mixed: low take-up (Morocco), high take-up with underdeclaration (Tunisia), inclusion of larger taxpayers (Algeria).
    - Design issues: tight eligibility (Morocco), onerous bookkeeping (Mauritania), underreporting incentives (Tunisia), weak controls and generous eligibility (Algeria).
    - Reforms moving toward including access to social protection in simplified regimes: Morocco and Tunisia; Algeria tightened eligibility.
  - More efficient VAT “chains of compliance”:
    - Participation in VAT chains can incentivize formalization through input tax credits; compliance can spread along the VAT chain.
    - Collection of VAT on imports is important (example: more than 60 percent of Algeria’s VAT receipts come from imports).
    - VAT exemptions are common and risk breaking compliance chains, especially in sectors with high informality (e.g., agriculture).
    - Promoting bank-based payments could help VAT compliance chains in cash-intensive sectors (retail).
    - Focus VAT enforcement on large firms to build compliance chains and consider withholding obligations for large firms or state-owned enterprises.
  - Lower the “net formalization cost” of labor:
    - A high labor tax wedge may discourage formal participation; unskilled workers may not see sufficient benefits from formal contributions.
    - The average tax wedge on labor in the region tends to be relatively large, reflecting relatively high social security contributions (see Box Table 1.1).
    - Temporary exemptions (for youth, first-time job seekers, agriculture, tourism) exist in Algeria, Morocco, Tunisia; these may have marginal effects unless aggressive and persistent.
    - Delinking tax allowances or social transfers from the number of earners in a household would encourage participation of both spouses, particularly females, in the formal labor market.
  - Strengthen tax enforcement:
    - Focus enforcement on evasion by the most affluent or larger firms to bolster revenue and compliance culture.
    - Targeting smaller informal players also sends a signal against unlawful competition.
    - Avoid frequent temporary waivers of penalties and tax amnesties; if used, they should be exceptional and followed by stronger enforcement.
    - Strengthening enforcement should be accompanied by institutional safeguards to counterbalance discretionary power and build taxpayer trust.
    - Evidence cited: a 13.5 percentage point reduction in employer social security contributions in Colombia in 2012 associated with a 1–2 percentage point reduction in informality.

- Additional empirical note: the existence of a large wage premium for formal jobs in the region is noted — estimated at 20 percent of net wages in Egypt (see Chapter 2) — implying reductions in the tax wedge may only affect informality meaningfully if implemented aggressively and persistently.

### Box Table 1.1. Statutory Tax Rates (2021) (Percent)
- Top PIT rate / Social security contribution rate (Employer / Employee):
  - Algeria: 35 2 69
  - Egypt: 25 18.8 11
  - Mauritania: 40 20 5
  - Morocco: 38 21 16.7
  - Tunisia: 35 16.6 9.2
- Averages:
  - Middle East and Central Asia: 18.3 14. 26.4
  - Advanced economies: 39.9 17.1 10.7
  - Emerging market and developing economies: 24.5 12.6 8.4
- Sources: KPMG Tax Rates Online; and national authorities.

### B. Regression Results (overview)
- Purpose: assess the relative role of the sociodemographic factor index and policy-distortion indicators in accounting for informality in a multivariate cross-section regression framework.
- Caveat: regression results are correlational and not necessarily causal due to potential endogeneity.
- Regression approach: sociodemographic index and policy indicators used as explanatory variables for output and employment informality.
- Empirical patterns (as suggested by prior correlations and figures):
  - Sociodemographic factors and policy distortions are correlates (and potential determinants) of informality.
  - The text notes statistical significance for many coefficients, especially governance and financial availability indicators; labor market policy variables show weaker links.

*Source: IMF staff estimates. IMF DEPARTMENTAL PAPERS • Informality, Development, and the Business Cycle in North Africa*

### 1. Output Informality and Sociodemographic Factors2. Output Informality and Integrity of Legal System

### Output Informality and Sociodemographic Factors2. Output Informality and Integrity of Legal System

### Relationships Between Output Informality and Socioeconomic / Policy Indicators
- Charts relate the Schneider index (informality) to multiple indicators (Averages, 2000–19): sociodemographic index; integrity of legal system; rule of law; government effectiveness; control of corruption; transparency of policymaking; burden of government regulation; regulatory quality; tax burden; effect of taxation on incentives to work; financial services availability; hiring and firing regulation; centralized collective bargaining; minimum wage.
- Index definitions and ranges (as presented):
  - Sociodemographic factor index (IMF staff estimates): ranges between 0 and 1, with a higher value associated with a lower level of economic development.
  - Integrity of legal system index (Fraser Institute, based on PRS Group, International Country Risk Guide): ranges between 1 and 10, with a higher value indicating greater strength and impartiality of the legal system.
  - Rule of law, government effectiveness, control of corruption, regulatory quality (World Bank): standardized to have a mean of 0 and a standard deviation of 1 and range from –2.5 to 2.5, with higher values corresponding to better governance and lower regulatory burden.
  - Transparency of government policymaking index (World Economic Forum, or WEF): ranges between 1 and 7, with a higher score associated with a more transparent government.
  - Burden of government regulation index (WEF): ranges from 1 to 7, with a higher score associated with a smaller government regulatory burden.
  - Tax burden index (IMF staff estimates): ranges between 0 and 1, with a higher score signaling a greater tax burden.
  - Effect of taxation on incentives to work index (WEF): ranges from 1 to 7, with a higher score associated with a less distortionary tax system.
  - Financial services availability index (WEF): ranges between 1 and 7, with a higher score associated with greater availability of financial products and services.
  - Hiring and firing regulations index (Fraser Institute, based on WEF): ranges from 1 to 10, with higher values associated with lower costs for employers associated with hiring and firing employees.
  - Flexibility of wage determination index (Fraser Institute, based on WEF): ranges between 1 and 10, with a higher value indicating greater flexibility (a smaller role for centralized bargaining).
  - Minimum wage (International Labour Organization; World Bank; and IMF staff calculations): ranges from 1 to 10, with a higher average value added per worker associated with higher labor costs for the employer.
- Data labels use ISO country codes; AEs = advanced economies; EMEs = emerging market economies; LICs = low-income countries.

### Correlation Structure of Independent Variables (Table 3 summary)
- Average absolute value of bilateral Pearson’s correlation coefficient across regressors: about 35 percent.
- Governance quality measures exhibit stronger correlations among themselves, with the sociodemographic factors index, and with access to financial services.
- Selected pairwise correlations (as listed):
  - Sociodemographic index with Government effectiveness: –0 . 750
  - Sociodemographic index with Control of corruption: –0.703
  - Sociodemographic index with Rule of law: – 0 . 712
  - Tax burden with Effect of taxation on incentives to work: 0.341
  - Transparency of government policymaking with Integrity of legal system: 0 . 617
  - Government effectiveness with Rule of law: 0.968
  - Control of corruption with Rule of law: 0.972
  - Regulatory quality with Government effectiveness: 0 .961
  - Hiring and firing regulations with Effect of taxation on incentives to work: 0.648
  - Minimum wage shows low correlations with most variables (examples: with Sociodemographic index 0 .13 5; with Tax burden – 0.018).
- Source: IMF staff calculations.

### Regression Methodology and Robustness
- Cross-sectional analysis covers about 130 countries using averages for the 2000–19 period.
- Stepwise inclusion of policy distortion variables is used to address multicollinearity concerns.
- Key robustness points:
  - All regression coefficients have the expected signs and are highly statistically significant (Annex Tables 2.2 and 2.3).
  - Regression with all policy distortion variables jointly considered yields the highest R-squared.
  - Baseline regression specification used: indexes on business regulation, tax burden, integrity of legal system, and flexibility of wage determination (column 14 in the regression tables).
  - Comparison of realized and fitted values indicates relatively solid goodness of fit, especially for the Schneider indicator of informality (Annex Figure 2.2).
  - Average variance inflation factor (VIF) values are well below 10, indicating limited multicollinearity concerns.
  - Additional robustness: 64 additional regressions pairing each business climate/governance indicator with indicators of labor market regulation; those with highest R-squared selected.

### Dominance Analysis (Medium-Informality Group)
- Purpose: assess each explanatory variable’s additional contribution to R-squared when inserted into the baseline regression (sample restricted to medium-informality countries including all North African economies).
- Contributions to predicted output informality (percent, using Schneider index):
  - Sociodemographic factors: 37%
  - Governance: 35%
  - Tax burden: 17%
  - Business regulation: 5%
  - Labor market: 6%
- Interpretation: socioeconomic index accounts for about one-third of predicted output informality in the medium-informality group; the rest explained by policy distortion variables. Governance indicators and tax burden together explain about one-half of informality in this group.
- Note: tax burden explains about 17 percent in the medium-informality group versus 10 percent in the full sample; labor market frictions explain 6 percent in the medium group versus 2 percent in the full sample.

### Distance-from-Frontier Analysis (North Africa vs Advanced Economies)
- Method: contribution of each variable = baseline regression coefficient × difference between North African country value and advanced-economy average.
- Findings (Percent of total difference, Schneider index):
  - Policy variables explain about 60 percent of the difference in predicted output informality between North Africa and advanced economies.
  - Individual contributions:
    - Governance indicators could reduce the explained informality gap by about 45 percent if North Africa achieved advanced-economy governance levels.
    - Eliminating the gap in the tax burden would reduce the explained informality gap by 13 percent.
- Using an employment measure (share of employed workers who do not pay social security contributions):
  - About 44 percent of the predicted employment informality surplus in North Africa relative to advanced economies is associated with lower level of development; the remainder associated with policy distortions.
  - Among policy distortions, weaker governance is the most important contributor, followed by greater tax burden and a less business-friendly environment.

### Country-Level and Aggregate Results for North Africa
- Differences in policy indicators relative to advanced economies explain between 30 and 75 percent of North African informality surplus, depending on the informality indicator used.
- Country highlights (as presented):
  - Algeria: policy gaps explain the greatest share of the informality gap.
  - Morocco: policy gaps explain the lowest share of the informality gap.
- Figures illustrating decomposition:
  - Figure 12 (Percentage points, Schneider index) and Figure 13 (Percent, pension scheme) show country-level breakdowns of Policies vs Development contributions for Algeria, Egypt, Mauritania, Morocco, Tunisia.

### Informality Trends in North Africa (2005–17 principal component analysis)
- Approach: principal component analysis constructs country-specific composite indices of informality (first principal component capturing at least 60 percent of combined variation) for five North African countries over 2005–17; contributors to changes in composite index then calculated.
- Key result:
  - On average across North African economies, more than 30 percent of the changes in the composite informality index between 2005 and 2017 is explained by changes in the policy variables considered.
  - Country differences:
    - Egypt, Mauritania, and Morocco: improvement in policy variables plays some role in explaining decline of composite informality index over 2015–17 (though most of decline reflects nonpolicy variables).
    - Algeria and Tunisia: higher informality reflects failure to remove policy distortions, in addition to slower progress in economic development.
- Figure 14 presents the Contribution of Development and Policy Variables to the Change in Informality between 2005 and 2017 (Index points, 2005–2017) for Algeria, Egypt, Mauritania, Morocco, Tunisia.

*Source: IMF staff estimates, IMF Departmental Papers • Informality, Development, and the Business Cycle in North Africa (figures, tables, and text excerpts provided).*

### 4. Policies to Reduce Informality:

### 4. Policies to Reduce Informality: A Model Approach

### Model framework and rationale
- General equilibrium dynamic small open-economy model with formal and informal labor and product markets; builds on Lambert, Pescatori, and Toscani (2020).
- Representative household consumes both formal and informal goods; consumption of the informal good is independent of income level (quasi-linear preferences), implying that, for a given relative price of the informal good, the informal-good expenditure share declines as income increases and producing a negative relationship between GDP per capita and informality.
- Firms and workers choose formal versus informal activity based on three key variables:
  - (1) firm entry costs,
  - (2) payroll taxes,
  - (3) hiring costs.
- Payroll taxes raise the formal-sector wage employers must offer and lower formal labor demand; higher hiring costs reduce expected formal-sector profits and discourage formality.
- Model calibrated to Moroccan data (quarterly and annual) for 1991–2020.

### Calibration: steady-state fit to Moroccan moments (Table 4)
- Informal labor share: Data 0.54; Model 0.63
- Formal-to-informal-wage ratio (W_F / W_I): Data 1.25; Model 1.26
- Unemployment rate: Data 0.09; Model 0.17
- Informal output share (P_I Y_I / GDP): Data 0.29; Model 0.49
- Investment-to-GDP ratio (P_inv I / GDP): Data 0.33; Model 0.21
- Import-to-GDP ratio (P_f M/GDP): Data 0.41; Model 0.31
- The model reproduces Morocco’s main labor market ratios (share of informal labor, relative wages) and does reasonably well for other macro ratios.

### Simulation experiments and steady-state impacts (Table 5)
- Four counterfactual steady-state simulations (each –50% relative to baseline):
  - (1) Lower entry costs (–50%)
  - (2) Lower hiring costs (–50%)
  - (3) Lower payroll taxes (–50%)
  - (4) Flexible equilibrium (–50% all bottlenecks: entry costs, payroll taxes, hiring costs)
- Steady-state Real GDP impacts:
  - Lower Entry Costs (–50%): + 5.6%
  - Lower Hiring Costs (–50%): + 1.5%
  - Lower Payroll Taxes (–50%): + 8.9%
  - Flexible Equilibrium (–50% all bottlenecks): + 19. 3%
- Employment informality share (baseline and post-reform direct vs total):
  - Baseline employment informality share: 63%
  - Lower Entry Costs (–50%): Direct: 59.4% ; Total: 58.7%
  - Lower Hiring Costs (–50%): Direct: 61. 8 % ; Total: 61. 6%
  - Lower Payroll Taxes (–50%): Direct: 50.9% ; Total: 49. 8%
  - Flexible Equilibrium (–50% all bottlenecks): Direct: 45.8% ; Total: 44.4%

### Quantitative interpretation of simulation results
- A 50 percent cut in entry costs: GDP + 5.6 percent; labor informality from 63 percent to 58½ percent (Total: 58.7%).
- A 50 percent cut in hiring costs: GDP + 1.5 percent; labor informality reduced by 1.4 percentage points (Total: 61.6%).
- A 50 percent cut in payroll taxes: GDP + 8.9 percent; labor informality falls by about 13 percentage points (Total: 49.8%).
- Simultaneous 50 percent reductions in entry costs, payroll taxes, and hiring costs: GDP + 19. 3% ; informality falls by about 30 percentage points (Total: 44.4%).
- The direct channel (lowering bottlenecks increases expected formal profits and induces firm/worker formalization) accounts for almost the totality of the reduction in informality; the indirect channel (reform‑driven GDP growth reduces informal-good consumption share via quasi-linear preferences) plays a minor role.

### Policy implication and external validity
- For Morocco, payroll-tax cuts appear the single most powerful contributor to formalization among the three measures considered.
- General implication: in North African economies with similar economic and institutional development, structural reforms that reduce distortions preventing formal-sector entry can lower informality and boost long-term growth.
- Greatest impact arises from simultaneous implementation of multiple reforms rather than isolated measures.

### Informality, the labor market, and business cycles (introductory findings)
- Context: chapter examines employment informality’s role in short-term labor-market adjustments to output fluctuations (Okun’s law) in North Africa (Algeria, Egypt, Mauritania, Morocco, Tunisia).
- Key labor-market stylized facts (two decades up to 2019):
  - High and stable unemployment rates: averaging nearly 11 percent in 2019.
  - Low participation and employment-to-population ratios: average labor force participation rate about 45 percent in 2019.
  - Female labor force participation about 22 percent in 2019 compared with an average of about 50 percent in EMDEs.
  - Informal employment (proxy: share of self-employed) about 40 percent of total employment in 2019; EMDE average ~50 percent.
- Cyclicality and Okun’s law:
  - Okun’s gap specification: u_t − u_t* = β_g (y_t − y_t*) + ε_t ; β_g expected negative.
  - Change specification: u_t − u_{t−1} = a + β_c (y_t − y_{t−1}) + ν_t ; a/β_c gives output growth rate consistent with stable unemployment.
  - Panel regressions show Okun’s coefficients are statistically significant and less negative (unemployment responds less to output fluctuations) in high-informality countries versus low-informality countries.
  - Okun’s coefficient in advanced economies is about 3 and 30 times larger than that in emerging markets and LICs, respectively.
  - Country-specific illustrative results:
    - Morocco: a 1 percentage point increase in output above trend corresponds to a 0.1 percentage point reduction in cyclical unemployment.
    - Algeria, Egypt, Tunisia: on average, a 1 percentage point positive output deviation is associated with a 0.4–0.5 percentage point decline in cyclical unemployment (comparable with advanced-economy averages).
- Possible determinants of cross-country differences in Okun’s responsiveness include:
  - Economic structure (sectoral composition),
  - Labor and product market rigidities,
  - Large public sector employment and high public-sector wage premiums,
  - Quality of institutions.

*Source: IMF staff calculations, IMF Departmental Papers — Informality, Development, and the Business Cycle in North Africa.*

### 1. Okun’s Coefficient across Informality and Income

### 1. Okun’s Coefficient across Informality and Income

### Key findings on Okun’s coefficients and structural determinants
- Informality remains an important determinant of Okun’s coefficients even after controlling for other structural factors.
- Regression analysis (stepwise introduction of variables) shows:
  - Labor informality and the indicator of the quality of institutions have the expected sign and remain statistically significant.
  - The labor market institution variable does not seem to matter for the Okun’s coefficient.
  - The regression with employment informality has the highest R-squared value.
- The regression also controls for the level of real GDP per capita; global panel regressions show that the Okun’s coefficient decreases (in absolute value) with the level of income—that is, it is larger for advanced economies than for EMDEs and for LICs.

### Quantitative relationships and correlations
- Correlation between informal employment and cyclical output (difference between GDP growth and its trend):
  - Medium- and high-informality countries: –0.3 (negative and statistically significant).
  - Low-informality countries: –0.1.
- Country examples within North Africa where informal employment appears countercyclical: Algeria, Mauritania, and Morocco.
- In Mauritania and Morocco, the share of informal employment is high enough to make overall employment countercyclical (a pattern usually observed only for countries in the high-informality group).

---

### Employment Informality and the Business Cycle

### Behavior of informal employment across cycles
- Informal employment behaves more countercyclically in economies with higher informality, indicating it acts as a safety net during downturns when the formal sector sheds jobs.
- Formal regression analysis:
  - The cyclical component of informal employment (deviation from its trend) is regressed on cyclical output.
  - The elasticity of informal employment to cyclical output is quantitatively larger (in absolute value) in medium- and high-informality groups.
  - Country-by-country regressions confirm countercyclicality in North Africa, especially in Mauritania and Morocco.

### Event analysis methodology
- Events identified using GDP growth deviations from country average:
  - Thresholds: 1.5 standard deviations in advanced economies and 1 standard deviation in emerging markets and LICs.
  - Sample period for event analysis: 1991–2019 (with robustness checks using the Harding and Pagan (2002) algorithm yielding similar results).
- The event analysis examines how unemployment, labor force participation, and employment rates behaved during downswings and upswings in high- and medium-informality groups versus low-informality group.

### Event analysis results (downswings vs upswings)
- During economic downturns:
  - Informal employment tends to rise in medium- and high-informality groups (including North African economies), offsetting contraction in formal employment and dampening the fall in total employment.
  - In high-informality countries, total employment actually increases during recessions.
  - The rise in unemployment is more limited in medium- and high-informality countries compared with low-informality ones.
- During economic upturns:
  - Informal employment tends to fall only modestly in medium- and high-informality countries—less than it increased during downswings.
  - This pattern is consistent with (a) new job opportunities being created in the informal sector during recovery and (b) an incomplete return to formal jobs by workers who lost them during downturns.
  - Risk of hysteresis associated with informality is highlighted: workers moving to informality in recessions may have difficulty transitioning back to formality during recoveries due to potential loss of human and social capital.

---

### Is the Pandemic Recession Different?

### Observed deviations in the COVID-19 recession
- Contrary to past recessions, informality did not provide much of a buffer to the pandemic shock in North Africa.
- In 2020, informal employment contracted sharply in countries with relatively higher informality, including those in North Africa.
- The unusual response reflects:
  - The extraordinary nature of the shock and drastic containment measures (lockdowns, social distancing).
  - Many informal workers operate in highly contact-intensive service sectors (accommodation and food services, entertainment, wholesale, retail trade) that were severely affected.
- In all informality-level groups, employment in market services (trade, transportation, accommodation, and food) plunged in 2020, whereas it was resilient during past downturns.

### Recovery dynamics and outlook
- The unusual severity of the pandemic suggests a faster-than-usual labor market recovery is possible in North Africa, driven by more informal jobs.
- Historical experience: quarterly labor market statistics for Egypt and Tunisia in 2011 show very sluggish job recoveries, pointing to risks of labor market hysteresis due to rigidities.
- Recent evidence (as of third quarter of 2020):
  - Employment in Egypt, Morocco, and Tunisia remained below its prepandemic levels.
- However, a faster recovery of employment could not be ruled out because:
  - Informal employment did not increase in 2020 as in past recessions, potentially lowering the risk of hysteresis associated with informality.
  - Lockdown-affected sectors have high informality and informal jobs have minimal hiring and setup costs, implying potential for a postpandemic rebound of informal employment.

### Implications for policy and formalization
- The potential for a strong rebound of informal jobs underscores the importance of measures to reach informal workers and encourage formalization.
- Short-term pandemic lessons include how social safety nets were extended to informal workers in several countries (for example, targeted cash transfer programs leveraging financial innovation and digitalization).
- Medium- to long-term priorities for encouraging formalization:
  - Reducing the burden from cumbersome government regulations and distortionary taxation.
  - Strengthening the quality of governance.
  - Removing unnecessary rigidities in labor market codes.
  - Invigorating private sector activity.
  - Facilitating access to financial services.

---

### Digitalization and the Informal Economy (Box summary)

### Channels through which digitalization can reduce informality
- Digitalization of government services can reduce informality through two channels:
  1. Better enforcement of laws and regulations by facilitating identification and verification of individuals and firms in interactions with the public sector.
  2. Incentives for voluntary compliance by simplifying requirements for firms to start operating and for individuals to pay taxes and apply to social-protection programs.
- Digitalizing government services (tax filing, company registration) helps create digital footprints for businesses and individuals, facilitating greater access to financial services.

### Measures and indices cited
- E-government capacity index (United Nations 2020) captures provision of online services, telecommunication connectivity, and human capacity for digitalization.
  - Based on this index, Tunisia has the most developed e-government in North Africa.
- An alternative measure by the Economist Intelligence Unit (2018) focuses on the extent to which interactions between government and citizens occur through digitalization (government-to-business and government-to-citizen services).
  - Morocco scores high on this index, reflecting progress in digitalizing government-to-business and government-to-citizen services: the overall number of operations that are digitalized is five times higher than in 2016, and 93 percent of tax receipts are now paid electronically.
- Tunisia’s position in e-government rankings changed from 66th in 2010 to 91st in 2020 (in a sample of 193 countries).

*Source: IMF Departmental Papers — Informality, Development, and the Business Cycle in North Africa (excerpts).*

### Box 2. Digitalization and the Informal Economy (continued)

### Box 2. Digitalization and the Informal Economy (continued)

### COVID-19 and government digitalization of services
- COVID-19 provided an opportunity to digitalize government services, including social benefits.
- Morocco: authorities launched an online platform for informal workers affected by the health crisis; informal workers were asked to register in March 2020 and were able to start claiming transfers in April via text messages on their mobile phones.
- Tunisia: in 2020 introduced a unique individual identifier number for accessing government services and social benefits, enabling a one-off cash transfer to approximately 370,000 households working in the informal sector.
- Egypt: one-off monetary compensation was provided for three months to informal workers registered in the database of the Ministry of Labor and Manpower Payment.

### The role of digital payments and financial inclusion
- Increased use of mobile and digital payments could reduce informality by facilitating financial inclusion and reducing the role of cash (G20 2018; Rogoff 2016).
- Jacolin and others (2019): using parametric and nonparametric methods on panel data from 101 emerging market and developing economies over 2000–15, they find that mobile financial services negatively affect the size of the informal sector by 2–4 percentage points of GDP. Formalization effects may operate via easier access to credit, increased productivity and profitability of informal firms, and indirect effects from stronger growth of firms already in the formal sector.
- A. T. Kearney and others (2018): find a negative correlation between digital payments and the informal economy; about two-thirds of government policies aimed at reducing informality now focus on greater access to and use of digital payments (compared with only a third in 2007). Policies include incentives to use digital payments (lower tax rates, simplified tax filing procedures) and measures to discourage cash use (numerical limits on individual cash transactions, as recently implemented in Egypt and Tunisia).
- Evidence from Peru (Bellon and others 2019): electronic invoicing for the value-added tax enhances compliance by lowering compliance costs and strengthening deterrence.

### Adoption of digital payments in North Africa and constraints
- North Africa has high mobile connectivity: OECD (2021) notes the region has 68 percent mobile penetration and 83 percent 4G coverage.
- Despite connectivity, digital payments are underdeveloped in North Africa relative to other economies in the Middle East and North Africa and other regions; cash remains dominant, especially for small transactions, as evidenced by high share of currency in circulation in broad money (noted in particular for Algeria and Mauritania).
- Adoption lag reflects regulatory constraints, lack of competition among financial service providers, and limited access to data.
- Mobile money regulatory index (GSMA 2019): except Morocco, North African countries fare relatively poorly. The index analyzes six dimensions: (1) authorizations, (2) consumer protection, (3) transaction limits, (4) Know Your Client (KYC), (5) agent networks, and (6) investment and infrastructure environment. In a sample of 81 countries, Morocco ranks 37th, Egypt 68th, Tunisia 72nd, and Mauritania 81st.
- Regulatory reforms underway:
  - Morocco (2014): Bank Al-Maghrib passed legislation allowing nonbank entities to provide electronic payment solutions and allowed marketplace actors (including telecom operators) freedom to position e-wallets and adapt offerings.
  - Egypt and Tunisia: central banks have opened regulatory sandboxes for fintech and put in place regulatory frameworks to enable e-banking.
- Despite extensive mobile phone usage, many informal workers and businesses remain excluded from digitalization. Example: in Africa 50 percent of all own-account workers have a smartphone (Chacaltana and others 2018), but OECD (2021) estimates only 16 percent of self-employed workers regularly use the internet (compared with 58 percent in formal jobs).

### Country case — Algeria: informality drivers and recent measures
- Estimated output informality in Algeria: 32 percent in 2019, above the regional average.
- Currency in circulation to broad money ratio averaged 31 percent in 2015–17, one of the highest levels in the MENA region.
- Public sector employment in 2017 accounted for 37 percent of the total workforce, about twice as much as the rest of North Africa on average.
- Employment informality decline in recent years largely due to public sector expansion; public sector created nearly four times as many jobs as the private sector between 2009 and 2013.
- Output informality increased in Algeria after 2008, partly reflecting persistent policy distortions: complex regulation, red tape, pervasive price controls, and limited access to financial services.

Recent measures deployed to reduce informality (high-level summary from Table 6 and text):
- Administrative simplification: simplifying business registration procedures and setting up a one-stop shop to comply with customs obligations; online portal for business registration in less than 12 hours.
- Temporary voluntary schemes (August 2015 Supplementary Budget Law):
  - Voluntary tax compliance program: deposit funds from nonillicit informal activities with domestic banks in exchange for payment of a 7% flat tax.
  - Temporary possibility for all nonaffiliated employees and their dependents to benefit from health and maternity coverage for three years, in exchange for a flat social security contribution of 12% of the minimum wage.
  - Staged repayment of overdue social contributions and waiver of penalties and fines.
  - Exemption from sanctions for employers who regularize the situation of nonaffiliated employees within a set timeframe.
- Temporary partial exemption of low-income workers from the flat income tax.
- Market infrastructure and temporary permits: construction of indoor and outdoor market facilities; temporary work permits for young traders; temporary tax exemptions and rebates for newly settled traders.
- Youth employment and VSME support: multiple schemes to support youth employment and long-term unemployed; subsidized loans to young entrepreneurs and VSMEs; privileged access to public procurement bids and tax exemptions for young entrepreneurs.
- Strengthening enforcement:
  - Enhancing third-party reporting obligations (creation of reporting obligations regarding customer identity and key features of transactions for suppliers subject to the professional tax, that is, large suppliers) — 2018 Budget Law.
  - Substantial increase in fines and creation of imprisonment punishment for employers in cases of nonaffiliation of their employees with social security — 2015 Budget Law.
- Financial inclusion, digitalization, and discouraging cash:
  - Mandatory use of bank checks for settlement of transactions exceeding a certain threshold (measures taken in 2011 and 2014).
  - Measures to encourage Islamic finance, including uniform tax treatment with traditional finance under the 2021 Supplementary Budget Law.
  - Nondeductibility of eligible expenses exceeding DA 300,000 settled in cash (2018 Budget Law).
  - Launch of online portals for tax declaration and payment on a trial basis (Jibaya’tic and Moussahama’tic).

Implementation outcomes and challenges in Algeria:
- Measures have been only partly successful; available data on implementation are scant.
- Persistent pervasive cash use despite promotion of bank-based payments.
- Low take-up rates for voluntary tax compliance and affiliation schemes (Charmes and Remaoun 2016).
- Potential explanations for limited success:
  - Temporary nature of incentives did not permanently alter costs and benefits of informality.
  - Voluntary compliance schemes not followed by adequate enforcement, risking inequality among taxpayers and weakening tax system credibility.
  - Coordination challenges due to the wide range of measures and number of state agencies involved.

### Policy priorities and recommendations for Algeria
- Implement a comprehensive national formalization strategy with coordinated policy efforts and recognition of informality’s multiple dimensions.
- Collect ex ante survey-based information on informality demography and carry out ex post impact studies to adapt formalization policies and tailor measures to diverse informal actors (from large tax evaders to subsistence workers).
- Reform priorities (some identified in the 2021 Government Action Plan):
  - Press ahead with governance reforms to create trust, accountability, and reciprocity between the state and the public; reform local taxation and develop local property taxes; ground formalization policies in social dialogue to secure broad support.
  - Product and labor market reforms: enhance competition, remove barriers to entry on product markets, minimize price distortions; reduce labor market rigidities and align wage gains with productivity dynamics while protecting vulnerable groups through social-protection reforms to encourage formal job creation.
  - Discourage cash use: credible enforcement of bank-based settlement for transactions exceeding a certain value to improve traceability and tax administration monitoring; pair with financial deepening and improved access to credit to increase benefits of formality.
  - Fiscal reforms: streamline tax exemptions, eliminate unproductive taxes, develop simplified tax regimes with optimal coverage to improve transaction registration; modernize taxpayer services in cooperation with the private sector and enhance tax administration autonomy to reduce compliance costs; strengthen enforcement and control (for example, intensifying audits) to reinforce tax system credibility and taxpayer equality.

*Source: IMF staff summary of Box 2. Digitalization and the Informal Economy (continued).*

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### Egypt — findings and recommended policies
- Findings:
  - Bureaucratic steps to issue an industrial license were reduced from 11 to 1.
  - A notification licensing system was introduced for low-risk industries.
  - According to the World Bank (2020) Enterprise Survey, Egyptian firms cite high tax rates and an inefficient tax administration as the most significant obstacles to setting up a business.
  - Only 4.4 percent of firms in Egypt have access to finance (World Bank, 2020), compared with 25 percent in the MENA region and 32 percent worldwide.
  - Informality may reflect a relatively higher share of self-employed workers who are informal, a relatively higher share of informal employees (the intensive margin of informality), or both (as indicated in Chapter 2).
- Policy recommendations:
  - Improvement in business regulations and governance:
    - Simplify requirements to obtain licenses and permits for firms in nonindustrial sectors to reduce the cost of establishing a business in the service sector.
    - Reduce high Lawyers Syndicate fees (legal registration of companies).
    - Continue improving control of corruption through automation and digitalization of government services, enhancing transparency in government procedures and procurement, and simplifying and clarifying regulations governing the business environment.
    - Improve efficiency of the justice system through further investment in infrastructure (including digitalization) and the number and training of judges.
  - Continued enhancement of the tax system and administration:
    - Adopt automation and digitalization in public administration to reduce regulatory burden and cost of compliance (Box 2).
  - Access to finance:
    - Facilitate know-your-customer regulations for informal SMEs to encourage access to banks.
    - Develop nonbank financial institutions (NBFIs) to cater to SMEs (leasing, factoring, support for public listing and start-up financing).
    - At the macro level, lower the budget deficit to reduce crowding out of lending to SMEs caused by abundant supply of high-yield Treasury bills.

*Source: IMF staff estimates.*

### Mauritania — findings and recommended policies
- Findings:
  - Schneider index estimated the informal sector at about 30 percent of GDP in 2017; the 2017 National Survey on Informality reported about 50 percent of GDP.
  - The 2017 National Survey showed 63 percent of the employed population was informal.
  - World Bank data show that 87 percent of workers are not contributing to a pension scheme.
  - Policy distortions account for about half of Mauritania’s higher informality relative to advanced economies.
  - Mauritania exhibits a relatively high burden from government regulation, low quality of governance, and scarce access to financial services (Figure 25).
  - Recent measures: tax identification number for firms introduced in 2019 (obtainable through a single window without a fee) but procedures remain cumbersome and lengthy; requirement of a minimum of three employees for a firm; self-employment not recognized.
  - Tax code made available in Arabic in 2020.
  - A credit bureau was set up in 2019, a centrale des risques at the central bank, and a new law on electronic payments was introduced in 2021.
- Policy recommendations:
  - Reduce the burden of government regulations by simplifying procedures to register land and helping small firms access information on registration; streamline tax collection across central and local branches and strengthen capacity and tax inspector availability.
  - Lower the tax burden:
    - Health insurance contributions are 9 percent of gross wages for both employers and employees, yet access to health services remains limited, forcing many to purchase private health insurance.
    - The simplified tax regime for small businesses is based on the maximum of a 2.5 percent tax on turnover or 25 percent income tax.
  - Improve governance:
    - Better enforcement of technical regulations and competition laws.
    - Invest in infrastructure to address capacity limitations in the court system.
    - Bring penalties up to date.
  - Ease access to finance:
    - Expand bank services to individuals (about 70 percent of the population still does not have a bank account).
    - Create an effective SME guarantee fund and improve debtor-creditor information sharing.
    - Enhance financial infrastructure and digitalization (central bank preparing regulations for money transfer institutions and payment institutions to implement the new law on electronic payments).
    - Under the African Development Bank project, establish a new payment system including a real-time gross system, a central securities depository, and an automated clearing house.

*Source: IMF staff estimates.*

### Morocco — findings and recommended policies
- Findings:
  - Schneider estimate of informal activity at 30 percent of GDP in 2017.
  - Morocco shows a relatively higher share of informal workers driven by a large agricultural sector, low education levels, and a relatively young population.
  - Main areas for improvement: quality of governance (low scores on rule of law and control of corruption) and government regulatory quality (Figure 26).
  - The New Model of Development (April 2021) sets an objective to reduce the share of informal jobs in Morocco to 20 percent by 2035; GDP per capita is expected to double over the next 15 years according to the report.
  - Morocco scores relatively well on labor market flexibility indicators, but the labor market code has rigidities:
    - Fixed-term contracts cannot exceed a one-year period, are renewable only once, and are allowed only to temporarily replace an employee, with a temporary increase in the business’s activity, for seasonal work, and when opening a business.
    - The minimum wage represents 50 percent of the average wage in the formal private sector (compared with 40 percent on average in the world) and accounts for 70 percent of the average value added per Moroccan worker.
  - The “auto-entrepreneur” tax regime (effective 2015) had only about 5 percent of the potential population joined as of 2021.
- Policy recommendations:
  - Systematically eliminate administrative and regulatory barriers, licenses, and permits (including via a “guillotine approach” reversing the burden of proof on regulators).
  - Implement a system of “professional cards” to give informal workers access to vocational training, public procurement, and government services (including health care and family allowances) consistent with generalization of the social-protection system.
  - Improve efficiency and transparency of the judicial system:
    - Accelerate digitalization of internal procedures.
    - Publish court decisions and create an e-justice platform.
    - Strengthen enforcement mechanisms, pass legislation on illicit enrichment, and publish beneficial ownership information of legal entities awarded public procurement contracts.
  - Generalize social protection and introduce a single professional contribution tax for low-income self-employed workers (launched in 2020):
    - Self-employed with revenues below a certain threshold can opt to pay a single tax replacing the flat-rate income tax, the professional tax, and the tax on communal services.
    - Opting in allows access to the health-care insurance scheme (Assurance Maladie Obligatoire, AMO) by paying a (small) supplementary contribution.
    - Tax rate and health-care contribution rates are fixed and vary by activity.
  - Consider aligning the minimum wage more closely with productivity while balancing effects on vulnerable groups via stronger safety nets.

*Source: IMF staff estimates.*

### Tunisia — findings and recommended policies
- Findings:
  - Informal activity at about 36 percent in 2019, among the highest in the region and compared with other emerging markets.
  - Tunisia fares better than others on the share of workers who don’t pay pension contributions or are self-employed, consistent with a relatively large public sector (about 22 percent of overall employment in 2017).
  - Policy indicators attribute a relatively high share of Tunisia’s informality surplus to policy distortions; deterioration in governance, business climate, and labor policies contributed to increases between 2005 and 2017.
  - Major areas for improvement: cumbersome government regulatory framework, rigid labor market regulation, and low access to financial services (Figure 27).
  - High informal activity also reflects significant smuggling and price controls:
    - Administered prices account for nearly 30 percent of the consumer price basket, including food items.
    - Strict foreign exchange regulation and limited availability of exchange bureaus act as incentives to hoard foreign currencies.
  - Under the simplified, flat-tax régime forfaitaire, 60 percent of existing businesses have registered but only 35 percent declared their turnover to the tax administration in 2020 (down from 61 percent in 2018).
- Policy recommendations and recent measures:
  - Measures considered or implemented:
    - Lower ceiling for cash purchases from the equivalent of $1,700 to $1,000.
    - A tax amnesty for the regularization of funds deposited in the banking system.
    - Discussions about introducing an “auto-entrepreneur” taxation regime to attract more people into the formal sector.
  - Suggested policy actions:
    - Address regulatory and labor market rigidities to reduce incentives for informality.
    - Improve financial inclusion and access to banking to reduce reliance on cash and hoarding of foreign currencies.
    - Reform administered price and foreign exchange regulations that incentivize informal and smuggling activities.
    - Strengthen incentives to declare turnover under simplified tax regimes and broaden compliance.

*Source: IMF staff estimates.*

### 0.2 percent of total tax revenues). The low level of the threshold for opting in, the large difference between

### Tunisia: Formalization Strategy and Microeconomic Correlates of Informality

### Policy context and incentives
- The low level of the threshold for opting in, the large difference between standard tax rates and the flat-tax rate, and the relatively limited controls from tax administration all act as an incentive to opt in to the flat-tax regime, but also to underdeclare revenues and number of employees.
- The new auto-entrepreneur regime would seek to offer more incentives to formalization thanks to simplified administrative procedures (including registration through a digital platform), lower tax rates, and access to social protection at a lower cost.
- The new system is still to be implemented, as the digital platform to be used for registration and compliance and the implementing decrees are not yet in place.

### Tunisia: Key reform areas and recommendations
- Improving the efficiency of regulatory and legal systems to promote business creation, foreign direct investment, market competition, and innovation.
  - The adoption in 2019 of a Start-Up Act, providing tax and foreign exchange regulation benefits for start-ups, is a step in this direction.
  - Complementary action could include elimination of investment authorizations in key economic sectors (education, tourism, transportation, and agriculture).
- Reforming the social-protection system to address existing loopholes and build a fairer, simpler, more efficient system.
  - According to the OECD (2017), the tax wedge on labor is relatively high in Tunisia, with personal income taxation and social security contributions at about 35 percent of the gross salary.
  - Lowering the size of social contributions would likely require a comprehensive reform to make the system more efficient and targeted; there is no formal unemployment insurance in Tunisia.
  - Registration in the social security system (Caisse Nationale de Sécurité Sociale) is frequently cited by workers as the most important benefit from formalization.
- Reforming labor market regulations.
  - Wage bargaining results in mismatches between wages and firm-level productivity.
  - Sectoral collective agreements impose similar wage grids across workers, firms, and regions, based on seniority and irrespective of productivity and cost of living.
  - These factors may contribute to higher unemployment in interior areas of the country, especially for youth.
- Easing access to financial services.
  - Access to financial services in Tunisia is low compared with countries at similar income levels.
  - Measures could include: (1) operationalizing the National Collateral Registry, (2) establishing a national credit registry, (3) introducing credit bureaus, (4) repealing limits on interest and deposit rates, and (5) rolling out e-payment centers.
  - Broaden measures aimed at reducing cash use and linking bank accounts to bank cards for low-income households (building on COVID-19 experience).
  - Promote digitalization of financial services, improve competition in the banking sector, reduce crowding-out from large financing needs of the central government and state-owned enterprises, and resolve the overhang from legacy nonperforming loans.

### Microeconomic analysis: model and variables
- Method: linear probability model for each country:
  - Informal_i = a_i + β * X_i + ε_i
  - Informal = dummy variable equal to 1 if a worker is engaged in informal employment and 0 otherwise.
- Independent variables X include:
  - (1) marital status (dummies for being married or being head of the household),
  - (2) sector of employment,
  - (3) age group,
  - (4) level of education,
  - (5) gender and locational characteristics,
  - (6) household characteristics (household size, access to internet, having a formal worker in the household, and income quintile),
  - (7) size of the firm that employs the worker.
- Separate regressions are provided for the whole sample (All) and workers in the private sector (Private).

### Selected regression findings (marginal effects and significance)
- Sample sizes and fit:
  - Egypt: Number of observations = 14,975; R–squared = 0.797 (All).
  - Tunisia: Number of observations = 26,060; R–squared = 0.504 (All).
  - Mauritania: Number of observations = 3,312; R–squared = 0.777 (All).
  - Morocco: Number of observations = 25,726; R–squared = 0.513 (All).

- Consistently large negative effect of having a formal worker in the household:
  - Egypt (All): –0.649*** (0.014)
  - Tunisia (All): –0.690*** (0.005)
  - Mauritania (All): –0.606*** (0.009)
  - Morocco (All): –0.526*** (0.011)

- Head of household dummy:
  - Egypt (All): –0.082*** (0.009)
  - Tunisia (All): –0.222*** (0.008)
  - Mauritania (All): –0.000 (0.005)
  - Morocco (All): –0.035*** (0.009)

- Married dummy:
  - Egypt (All): –0.030*** (0.008)
  - Tunisia (All): –0.051*** (0.008)
  - Mauritania (All): 0.000 (0.004)
  - Morocco (All): –0.035*** (0.009)

- Age group effects (relative to 15–24):
  - Tunisia (All):
    - 25–34: –0.114*** (0.012)
    - 35–54: –0.178*** (0.013)
    - 55–64: –0.178*** (0.014)
    - 65+: –0.186*** (0.020)
  - Egypt (All):
    - 25–34: –0.058*** (0.014)
    - 35–54: –0.078*** (0.013)
    - 55–64: –0.062*** (0.015)
    - 65+: –0.049*** (0.019)

- Education (relative to no education):
  - Tunisia (All):
    - Primary: –0.028 (0.022)
    - Secondary: –0.088*** (0.022)
    - Tertiary: –0.160*** (0.023)
  - Mauritania (All):
    - Tertiary: –0.074*** (0.007)

- Sectoral effects (relative to secondary sector):
  - Tunisia (All):
    - Agriculture: 0.099*** (0.008)
    - Services: 0.045*** (0.006)
    - Public administration: –0.109*** (0.009)
  - Morocco (All):
    - Agriculture: 0.270*** (0.016)
    - Services: 0.201*** (0.010)

- Female dummy:
  - Tunisia (All): 0.029*** (0.008)
  - Morocco (All): –0.134*** (0.010)

- Urban dummy:
  - Mauritania (All): 0.016** (0.006)
  - Morocco (All): –0.032*** (0.012)

- Household size dummy (above country average):
  - Egypt (All): 0.023*** (0.005)
  - Tunisia (All): 0.026*** (0.005)
  - Morocco (All): 0.082*** (0.006)

- Internet access dummy:
  - Tunisia (All): –0.047*** (0.007)

- Poorest dummy (Q1):
  - Egypt (All): –0.014** (0.007)
  - Tunisia (All): 0.013* (0.008)
  - Mauritania (All): 0.012*** (0.004)

- Firm size effects (relative to firm size 1–4):
  - Egypt (All):
    - 10–24: –0.037*** (0.010)
    - 25–49: –0.107*** (0.013)
    - 50–99: –0.127*** (0.015)
    - 100+: –0.139*** (0.012)
  - Tunisia (All):
    - 5–9: –0.011** (0.005)
    - 10–24: –0.019*** (0.007)
    - 100+: –0.156*** (0.016)
  - Morocco (All):
    - 100+: –0.574*** (0.047)

Note: Robust standard errors in parentheses. Omitted categories: Sector = secondary sector; Age group = 15–24; Education = no education; Firm size = 1–4. Q1 = poorest quintile. * p < .10; ** p < .05; *** p < .01.

*IMF staff estimates; tables and figures as presented in the source document.*

### Annex Table 1.4. Marginal Increase in the Likelihood of Being Informal

### Annex Table 1.4. Marginal Increase in the Likelihood of Being Informal

### Key marginal effects (by independent variable)
- Married dummy
  - Egypt: –3.0 (All), –1.8 (Private)
  - Tunisia: – 5 .1 (All), –5.2 (Private)
  - Mauritania: N.S. (All), N.S. (Private)
  - Morocco: N.S. (All), N.S. (Private)
- Head of household dummy
  - Egypt: –8.2 (All), –9. 3 (Private)
  - Tunisia: –22.2 (All), –24.6 (Private)
  - Mauritania: N.S. (All), N.S. (Private)
  - Morocco: –3.5 (All), –3.7 (Private)
- Sectoral dummy (Secondary sector) — Agriculture
  - Egypt: N.S. (All), N.S. (Private)
  - Tunisia: 9.9 (All), 10.4 (Private)
  - Mauritania: N.S. (All), N.S. (Private)
  - Morocco: 2 7. 0 (All), 26.6 (Private)
- Sectoral dummy (Secondary sector) — Services
  - Egypt: N.S. (All), –1.4 (Private)
  - Tunisia: 4.5 (All), 5.0 (Private)
  - Mauritania: 20 .1 (All), 20.5 (Private)
  - Morocco: (no entry for All), (no entry for Private)
- Sectoral dummy (Secondary sector) — Public administration
  - Egypt: –17. 6 (All), –17. 2 (Private)
  - Tunisia: –10.9 (All), –34.2 (Private)
  - Mauritania: (no entry)
  - Morocco: (no entry)
- Age group dummy (15–24) — 25–34
  - Egypt: –5.8 (All), –4.8 (Private)
  - Tunisia: –11. 4 (All), –11. 3 (Private)
  - Mauritania: –2.8 (All), –1.0 (Private)
  - Morocco: –3.3 (All), –3.3 (Private)
- Age group dummy (15–24) — 35–54
  - Egypt: –7. 8 (All), –7. 2 (Private)
  - Tunisia: –17. 8 (All), –18.0 (Private)
  - Mauritania: –1.8 (All), –1. 2 (Private)
  - Morocco: N.S. (All), N.S. (Private)
- Age group dummy (15–24) — 55–64
  - Egypt: –6.2 (All), – 5 .1 (Private)
  - Tunisia: –17. 8 (All), –17. 8 (Private)
  - Mauritania: – 2.1 (All), –1.5 (Private)
  - Morocco: 5.7 (All), 6.7 (Private)
- Age group dummy (15–24) — 65+
  - Egypt: – 4.9 (All), –3.9 (Private)
  - Tunisia: –18.6 (All), –19.0 (Private)
  - Mauritania: N.S. (All), N.S. (Private)
  - Morocco: 14. 3 (All), 15.0 (Private)
- Education dummy (No education) — Primary
  - Egypt: N.S. (All), –1.6 (Private)
  - Tunisia: N.S. (All), N.S. (Private)
  - Mauritania: N.S. (All), N.S. (Private)
  - Morocco: N.S. (All), N.S. (Private)
- Education dummy (No education) — Secondary
  - Egypt: –1.6 (All), –1.7 (Private)
  - Tunisia: –8.8 (All), –7.9 (Private)
  - Mauritania: N.S. (All), –1. 2 (Private)
  - Morocco: –4.0 (All), –3.6 (Private)
- Education dummy (No education) — Tertiary
  - Egypt: –2.6 (All), –3.7 (Private)
  - Tunisia: –16.0 (All), –16. 2 (Private)
  - Mauritania: –7. 4 (All), – 6.9 (Private)
  - Morocco: –11. 0 (All), –15.7 (Private)
- Female dummy
  - Egypt: N.S. (All), 3 .1 (Private)
  - Tunisia: 2.9 (All), 3.9 (Private)
  - Mauritania: N.S. (All), N.S. (Private)
  - Morocco: –13.4 (All), –14. 2 (Private)
- Urban dummy
  - Egypt: N.S. (All), N.S. (Private)
  - Tunisia: N.S. (All), N.S. (Private)
  - Mauritania: 1.6 (All), 1.2 (Private)
  - Morocco: –3.2 (All), –3.4 (Private)
- Household size dummy
  - Egypt: 2.3 (All), 2.0 (Private)
  - Tunisia: 2.6 (All), 2.5 (Private)
  - Mauritania: N.S. (All), –0.7 (Private)
  - Morocco: 8.2 (All), 8.7 (Private)
- Internet access dummy
  - Egypt: N.S. (All), N.S. (Private)
  - Tunisia: –4.7 (All), –5.3 (Private)
  - Mauritania: N.S. (All), N.S. (Private)
  - Morocco: (no entry)
- Having a formal worker in the household dummy
  - Egypt: – 64.9 (All), –55.8 (Private)
  - Tunisia: – 69.0 (All), – 67.9 (Private)
  - Mauritania: –60.6 (All), –36.7 (Private)
  - Morocco: –52.6 (All), – 52.1 (Private)
- Poorest dummy (Q1)
  - Egypt: –1.4 (All), –1.3 (Private)
  - Tunisia: 1.3 (All), N.S. (Private)
  - Mauritania: 1.2 (All), 1.3 (Private)
  - Morocco: N.S. (All), N.S. (Private)
- Firm size dummy (1–4) — 5–9
  - Egypt: –1.5 (All), –1.3 (Private)
  - Tunisia: –1.1 (All), –2.2 (Private)
  - Mauritania: (no entry)
  - Morocco: (no entry)
- Firm size dummy (1–4) — 10–24
  - Egypt: –3.7 (All), – 2.1 (Private)
  - Tunisia: –1.9 (All), N.S. (Private)
  - Mauritania: (no entry)
  - Morocco: (no entry)
- Firm size dummy (1–4) — 25–49
  - Egypt: –10.7 (All), –11. 4 (Private)
  - Tunisia: N.S. (All), –3.2 (Private)
  - Mauritania: (no entry)
  - Morocco: (no entry)
- Firm size dummy (1–4) — 50–99
  - Egypt: –12.7 (All), –16.6 (Private)
  - Tunisia: N.S. (All), N.S. (Private)
  - Mauritania: (no entry)
  - Morocco: (no entry)
- Firm size dummy (1–4) — 100+
  - Egypt: –13.9 (All), –18.8 (Private)
  - Tunisia: –15.6 (All), – 5 7. 4 (Private)
  - Mauritania: (no entry)
  - Morocco: (no entry)

### Sample sizes and model fit
- Number of observations
  - Egypt: 14,975 (All), 11, 3 9 9 (Private)
  - Tunisia: 26,060 (All), 23,256 (Private)
  - Mauritania: 3, 312 (All), 3,066 (Private)
  - Morocco: 25,726 (All), 23,300 (Private)
- R-squared
  - Egypt: 0.797 (All), 0.620 (Private)
  - Tunisia: 0.504 (All), 0.490 (Private)
  - Mauritania: 0.777 (All), 0.469 (Private)
  - Morocco: 0. 513 (All), 0.477 (Private)

*Note: All = all workers; Private = private sector workers. Omitted categories: Sector: secondary sector; Age group: 15–24; Education: no education; Firm size: 1–4. All coefficients are multiplied by 100. Coefficients that are not statistically significant are denoted by N.S. Q1 = poorest quintile.*

*Source: Annex Table 1.4. Marginal Increase in the Likelihood of Being Informal.*

### Annex Table 3.1.  (continued)

### Annex Table 3.1.  (continued)

### Determinants of Okun’s Coefficient—Gap Specification: Global Sample
- Column (1):
  - Labor market informality: –0.00387*** (0.000489)
  - Constant: 0.328*** (0.0312)
  - Number of observations: 150
  - R-squared: 0.265
- Column (2):
  - Labor market informality: –0.00309*** (0.000882)
  - Constant: 0.305*** (0.0821)
  - Number of observations: 136
  - R-squared: 0.023
- Column (3):
  - Labor market regulations: –0.0273* (0.0164)
  - Constant: 0.292*** (0.0674)
  - Number of observations: 136
  - R-squared: 0.021
- Column (4):
  - Labor market regulations: –0.000553 (0.0165)
  - Product market regulations: –0.0293* (0.0153)
  - Constant: 0.107*** (0.0207)
  - Number of observations: 149
  - R-squared: 0.100
- Column (5):
  - Product market regulations: –0.0647*** (0.0186)
  - GDP per capita: 0.00327*** (0.00108)
  - Agriculture, share of GDP: –0.00933*** (0.00114)
  - Constant: –0.216*** (0.0480)
  - Number of observations: 140
  - R-squared: 0.258
- Column (6):
  - GDP per capita: –0.00264** (0.00104)
  - Legal system: 0.0728*** (0.00939)
  - Public wage bill, % total expenditures: –0.00507*** (0.00168)
  - Constant: 0.124*** (0.0432)
  - Number of observations: 146
  - R-squared: 0.010
- Column (7):
  - Legal system: 0.0760*** (0.0138)
  - Manufacturing, share of GDP: 0.00336 (0.00286)
  - Constant: 0.282*** (0.0246)
  - Number of observations: 150
  - R-squared: 0.267
- Column (8):
  - Manufacturing, share of GDP: –0.000749 (0.00344)
  - Public wage bill, % total expenditures: –0.000698 (0.00139)
  - Constant: 0.339*** (0.0587)
  - Number of observations: 128
  - R-squared: 0.055
- Column (9):
  - Public wage bill, % total expenditures: (included)
  - Constant: 0.232* (0.128)
  - Number of observations: 116
  - R-squared: 0.438
- Note: Robust standard errors in parentheses. *** p < 0.01; ** p < 0.05; * p < 0.1.

### Determinants of Okun’s Coefficients: Global Panel Estimation with Interaction Term
- Modified equation (A1) adding interaction between potential determinant D_i and cyclical output:
  - β_2^g captures impact of interaction term on magnitude of Okun’s coefficient.
  - Given Okun’s coefficient is negative, a negative (positive) coefficient on interaction term implies the factor amplifies (dampens) the impact of cyclical output on the unemployment gap.

### Countercyclicality of Informality
- Baseline panel specification (A2):
  - L_t^I − L_t^{I*} = a + γ (y_t − y_t^*) + μ_t
  - L_t^I is labor informality proxied by share of self-employment in total employment.
  - y_t is log of output measured with real GDP; L_t^{I*} and y_t^* are trends smoothed with the Hodrick-Prescott filter.
  - (y_t − y_t^*) is cyclical output.
- References cited for methodology examples: An and others (2017); Dixon, Lim, and van Ours (2017); Banerji, Lin, and Saksonovs (2015).

### Annex Table 3.3. Panel Regression—Gap Specification: Global Sample with Interaction Terms
- Benchmark (1):
  - Cyclical GDP: –0.124*** (0.0207)
  - Interaction term: 0.00289*** (0.000688)
  - Number of observations: 2,989
  - R-squared: 0.167
  - Number of ifs_code: 150
- Informality (2):
  - Cyclical GDP: –0.246*** (0.0449)
  - Interaction term: 0.000515 (0.0172)
  - Number of observations: 2,989
  - R-squared: 0.238
  - Number of ifs_code: 150
- Labor market regulations (3):
  - Cyclical GDP: –0.185** (0.0911)
  - Interaction term: –0.00201 (0.0158)
  - Number of observations: 2,209
  - R-squared: 0.265
  - Number of ifs_code: 136
- Business regulations (4):
  - Cyclical GDP: –0.176** (0.0697)
  - Interaction term: –0.00172 (0.00135)
  - Number of observations: 2,177
  - R-squared: 0.271
  - Number of ifs_code: 136
- GDP per capita (5):
  - Cyclical GDP: –0.0907*** (0.0258)
  - Interaction term: –0.0761*** (0.0102)
  - Number of observations: 2,978
  - R-squared: 0.182
  - Number of ifs_code: 149
- Institutions (6):
  - Cyclical GDP: 0.246*** (0.0492)
  - Interaction term: –0.00475 (0.00296)
  - Number of observations: 2,652
  - R-squared: 0.313
  - Number of ifs_code: 140
- Manufacturing share (7):
  - Cyclical GDP: –0.0829** (0.0419)
  - Interaction term: 0.00322* (0.000174)
  - Number of observations: 2,648
  - R-squared: 0.202
  - Number of ifs_code: 146
- Public Wages (8):
  - Cyclical GDP: –0.234*** (0.0644)
  - Interaction term: (included)
  - Number of observations: 2,499
  - R-squared: 0.186
  - Number of ifs_code: 128
- Note: Robust standard errors in parentheses. *** p < 0.01; ** p < 0.05; * p < 0.1.

### Annex Table 3.4. Informality Response to Output Fluctuations—Gap Specification
- Global sample (1):
  - Cyclical GDP: –0.0667*** (0.00814)
  - Constant: 0.0103*** (0.000390)
  - Number of observations: 2,989
  - R-squared: 0.084
  - Number of ifs_code: 150
  - Fixed effects: Yes
- Low (2):
  - Cyclical GDP: –0.0259*** (0.00622)
  - Constant: –0.00807*** (0.000836)
  - Number of observations: 1,040
  - R-squared: 0.030
  - Number of ifs_code: 52
  - Fixed effects: Yes
- Medium (3):
  - Cyclical GDP: –0.117*** (0.0170)
  - Constant: 0.0436*** (0.000869)
  - Number of observations: 1,031
  - R-squared: 0.133
  - Number of ifs_code: 52
  - Fixed effects: Yes
- High (4):
  - Cyclical GDP: –0.0638*** (0.0146)
  - Constant: –0.00934*** (0.000781)
  - Number of observations: 918
  - R-squared: 0.101
  - Number of ifs_code: 46
  - Fixed effects: Yes
- AE (5):
  - Cyclical GDP: –0.0399*** (0.0117)
  - Constant: –0.0218*** (0.000127)
  - Number of observations: 700
  - R-squared: 0.060
  - Number of ifs_code: 35
  - Fixed effects: Yes
- EM (6):
  - Cyclical GDP: –0.0703*** (0.0115)
  - Constant: 0.0159*** (0.000175)
  - Number of observations: 1,411
  - R-squared: 0.084
  - Number of ifs_code: 71
  - Fixed effects: Yes
- LIC (7):
  - Cyclical GDP: –0.0758*** (0.0174)
  - Constant: 0.0252*** (0.000904)
  - Number of observations: 878
  - R-squared: 0.101
  - Number of ifs_code: 44
  - Fixed effects: Yes
- Note: Robust standard errors in parentheses. *** p < 0.01; ** p < 0.05; * p < 0.1.

### Key statistics and model outputs (selected)
- Informality is negatively associated with Okun’s coefficient in columns showing labor market informality:
  - –0.00387*** (0.000489) and –0.00309*** (0.000882).
- Cyclical GDP coefficients (informality response, gap specification):
  - Global: –0.0667*** (0.00814)
  - Low: –0.0259*** (0.00622)
  - Medium: –0.117*** (0.0170)
  - High: –0.0638*** (0.0146)
  - AE: –0.0399*** (0.0117)
  - EM: –0.0703*** (0.0115)
  - LIC: –0.0758*** (0.0174)
- Interaction effects in panel regressions:
  - Benchmark interaction: 0.00289*** (0.000688)
  - GDP per capita interaction: –0.0761*** (0.0102)
  - Manufacturing share interaction: 0.00322* (0.000174)

*Source: Annex Tables 3.1–3.4 and accompanying text, Informality, Development, and the Business Cycle in North Africa (IMF Departmental Papers).*

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_Source: https://www.imf.org/-/media/files/publications/dp/2022/english/idbcnaea.pdf_