Informality and aggregate labor productivity growth: Does ICT moderate the relationship?

Abstract

This paper attempts to understand whether digitization, measured in terms of ICT capital and penetration of the internet, helps reduce the negative impact of informality on labor productivity growth, especially in emerging & developing countries. Informality is argued to be a drag on productivity growth in emerging & developing countries. We argue that increased use of digital technologies can help informal sector reduce transaction and coordination costs; enhance the linkages between the informal and formal sectors; facilitate the integration of the informal sector in the global value chain; and also increase the potential for the formalization of the economy in general - all of these are likely to contribute to aggregate productivity growth. Our econometric analysis using panel data for 118 countries from 1997-2017 provides some evidence of ICT capital deepening helping to reduce informality's negative impact on aggregate productivity growth. However, the moderating effect is modest compared to the magnitude of the negative impact of informality, indicating the need for a faster and more intense digitization efforts in emerging & developing economies. Moreover, investments in complementary factors including skills and infrastructure are imperative to fully unleash the potential of ICT in reducing the negative impact of informality.