LOCAL GOVERNMENT EFFECTIVENESS AND SOCIAL NORMS, IN INFORMAL EMPLOYMENT.(ELBASAN MUNICIPALITY.)

Abstract

This paper analyses the role  of  local government effectiveness and social norms in the determination of informal employment. A 
theoretical model is developed, in which local governance affects worker productivity and in which non-compliance with local social norms constitutes a non-pecuniary cost to the worker. These effects, together with skill level, are assumed to influence the decision of the worker whether to seek employment in the formal or informal sector. The model is assessed empirically using data from Albania , where almost half of the urban labour  force is employed informally. The empirical analysis supports the predictions of the model and suggests that informal employment is lower in regions with better governance, stronger social norms for compliance with tax and labour regulation, and higher average education.