The urban informal sector and development in China: Institutions and feedback effects

Abstract

Similar to many other developing countries, China has a large urban informal sector and the number of informal sector workers was estimated to be over 200 million in recent years. The large size of the informal sector may imply a high likely urban poverty with low productivity. Based on research from a series of recent studies, the urban informal workers have lower income and social protection, compared to their counterpart in the formal sector. In this paper, we argue that the intergovernmental fiscal system, performance evaluation system for officials and the household registration system (hukou) should be highlighted as the major institutional reasons for high compliance costs for labor regulations. With high regulatory compliance costs, the size of the informal sector is large and increasing. Interestingly, from the results of some recent research, feedback effects, which are defined as responses from the urban informal sector workers to high regulatory compliance costs, may offset some of the welfare losses under the dualistic labor market.