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When asked whether trade unions have a place in a liberal society, the economist F. A. Hayek answered in the affirmative. Not only that: he went a step further and said that, if unions did not exist, he would invent them, since unions could provide some help for the workers – but under no circumstances would he allow them to acquire exclusive monopolistic control.
Hayek’s words point to the deeply individual character of liberalism, which cannot, under the principle of personal freedom, prohibit workers from associating or from seeking better wages through collective bargaining. W. H. Hutt’s now-classic study on the subject reminds us that many old ideas remain fully alive despite their falsehood. In his view, notions such as workers’ supposed bargaining disadvantages or the indeterminacy of their wages were highly questionable and inaccurate.
Both authors took an important first step in challenging ideas that, dominant in their time, were largely taken for granted. Since the rise of syndicalist socialism, associated above all with Beatrice and Sidney Webb, the necessity of unions remained largely uncontested for nearly a century. Only in recent years, as union dynamics were pushed to their outer limits, did their costs become impossible to ignore: the harm imposed on more skilled workers and consumers alike, and the emergence of a rent-seeking class sustained by resources extracted from the very workers it claimed to represent. It was under these conditions that the necessity of unions or, at the very least, the assumption of their moral untouchability – began to be called into question.
Informality, as an idea, has followed a similar path. It is treated as the ugly creature that must be eliminated, while the academic consensus constantly develops public policies aimed at ensuring its disappearance. The current discussion on informality is usually approached from the standpoint of the need to eradicate it. In Bolivia, for example, the informality rate, which would be around 80–90 percent, is repeated endlessly as evidence of the deep problems affecting the economy.
Why should libertarians be concerned with informality in the first place? In its various forms, the attack on informality often entails the implicit assimilation of several statist assumptions which, in the end, weaken individual freedom in exchange for even greater state power. It is therefore necessary to rethink informality from a libertarian perspective.
The Idea of Informality
To properly understand this phenomenon, we must first distinguish between the conventional understanding of informality and the liberal conception. The dominant, orthodox view treats informality as an anomaly – a market failure characterized by precariousness, evasion, and a lack of social protection. From this perspective, the informal worker is a victim waiting to be rescued by state intervention.
However, a liberal approach turns this premise on its head. Informality is thus understood not as a defect of free exchange, but as a rational, spontaneous response to an exclusionary legal system. It is the natural refuge of individuals who, barred from the formal market by artificial and costly regulatory barriers, choose to work and trade outside the State’s purview rather than succumb to poverty.
When we speak of informality, we refer to a situation in which a worker does not comply with certain elements in his labor relationship with his employer. Thus, for example, if a worker does not have a written contract, does not contribute to social security, or does not receive at least a minimum wage, we say that we are dealing with a case of informality.
In this way, behind the concept of informality there appears, at first glance, to be a noble objective: to ensure workers a minimum standard of conditions that allows them to live a dignified life, with a wage above subsistence level, with job stability, and with pension contributions that allow them to enjoy a more stable old age, among other things.
At first sight, then, the struggle against informality presents itself as a noble ideal. Who, in his right mind, could oppose written contracts or the idea that, upon reaching old age, a worker should have contributed to a pension that we consider dignified? The problem, however, does not lie in these well-meaning intentions, but in the consequences that flow from this concept.
We must begin by recognizing that, even from liberal perspectives, this dominant approach to informality has ended up generating harmful effects on the very workers it theoretically seeks to protect.
Informality and Statism
The first thing that must be pointed out is that the conception of informality described above is nothing other than a statist conception. Most of its elements end up gravitating, consciously or unconsciously, around the State as the central agent. Let us observe how this applies to different understandings of informality.
A review of the literature on informality shows that, within academia, informality has largely been conceived as that which escapes the gravitational field of the State and its regulations. Thus, for example, according to Lipton (1984: 198–201), cited by Kanbur (2009), the informal sector was characterized by operational and even organizational elements, such as a “substantial overlap between providers of capital and providers of labour” or the “prevalence of perfect, or rather … near-perfect, competition.” For the author, there was also a third characteristic: non-compliance with “legal restrictions on employment (wage minima, regulations affecting working conditions, etc.) and on acquisitions of non-labour inputs (licences, quotas, etc.).” Hence Kanbur (2009) himself reaffirms the idea that formality and informality “are dichotomies relative only to specific interventions or regulations.”
In this sense, as Polese (2023) notes, informality can be defined as “an activity, performed by an individual or a group of individuals (organization, family, clan), that eventually bypasses the state or the overarching entity regulating the life of that group or society.” If an entrepreneur decides to bypass state regulations —for example, bribing an officer— , then his business will be classified as informal, regardless of whether those regulations make sense or whether their effects are economically and socially desirable. The State, then, becomes the yardstick by which informality is measured.
The problem begins when the criteria used to define informality are minimum wages — that is, the rejection of a price of labor determined by supply and demand — or laws that regulate employer-employee relations while setting aside contractual freedom. Whoever speaks of reducing informality, then, does so by demanding that the employer comply with the state mandate of minimum wages, compulsory social security contributions, and the imposition of doing business according to the preferences of legislators who, for the most part, are detached from the actual dynamics of enterprise.
In the very act of advocating for less informality, one ends up implicitly recognizing the need for practices such as the minimum wage and the coercive subtraction of part of the worker’s salary to allocate it to public pension funds. This, evidently, cannot be compatible with a liberalism that emphasizes voluntariness and free agreement in all social relations, including labor relations.
Rethinking Informality from Liberalism
Does the above imply that the liberal must abandon any aspiration for higher wages, contributions for the future, or written contracts that provide job stability? Absolutely not. What is being questioned, in any case, are the methods used to achieve those objectives.
The liberal approach to informality does not deny that improving wages, having retirement funds, or having a written contract are noble and, above all, desirable objectives. Rather, it argues that the means employed by the State, such as minimum wages or forced contributions, are inefficient ways of pursuing those goals.
A high minimum wage, set above the average productivity of the worker, will cause unemployment. Thus, instead of receiving a given wage, however modest or insufficient it may seem to us, the consequence is that the real wage effectively received by a low-productivity worker will be equal to zero.
Unable to find employment in the formal sector as a result of a restrictive minimum wage, the person seeking work will also be unable to enjoy the other benefits that the law, with all its good intentions, has established for labor relations. Thus, one ends up with neither the rope nor the goat.
For all these reasons, it is indispensable to abandon the deeply statist approach that has taken hold in discussions on informality. It is imperative to move toward mental frameworks that recognize that the free market, voluntary negotiation, and competition are more effective mechanisms for pursuing those common objectives that most people share: better wages, provision for the future, and less contractual uncertainty.
From this point of view, informality can be seen as a means for self-defense against bureaucracy, unjust regulations and the tax-burden imposed by the State. Informality should not be associated with the rejection of law, order and contracts, but a rejection of a coercive system that hinders productivity and freedom, in favor of voluntary and agreed transactions.
This brings us to a crucial realization: informality is not the evidence of a market failure, but of State failure. It is the visible manifestation of a regulatory framework that has lost touch with the economic reality of the people it claims to govern. Therefore, the libertarian argument is not a mere defense of operating outside the law for its own good, but a profound challenge to the moral and economic legitimacy of the regulatory architecture that make those laws impossible for ordinary citizens to follow in the first place.
The goal, hence, is not to drag workers and business from informality to an expensive and inefficient system of formality, for the sake of “reducing informality”, but to reduce and, eventually, eliminate any cost of transaction associated with formality, that is, the legal barriers that made formality costly in the first place, opening the doors to the existing and the new business to come.
Conclusion
Informality is seen as an overwhelming problem in numerous developing economies, Bolivia among them. When its high level of informality is emphasized, the implication is that there is a problem to be solved, and that the one responsible for solving it is none other than the State.
What this reasoning ignores is, first, that it begins from a conceptual error: defining informality as something necessarily bad simply because it does not conform to state regulations, instead of first asking whether those regulations are justified at all. Second, it ignores that, on many occasions, high informality – that is, the fact that economic agents deliberately and systematically avoid state regulations – is living proof of the bureaucratic labyrinth and burdens faced by those who seek to undertake productive activity.
The dominant approach places the emphasis on issues associated with state mandates which, like the minimum wage, end up harming the interests of the very workers they are supposed to protect. An alternative, libertarian approach seeks to achieve those same objectives without needing to speak the language of interventionism. With the same aspiration, it pursues better wages, security in old age, and contractual certainty by appealing to competitive markets, simple but clear rules, and voluntary agreements.
References
Polese, A. (2023). What is informality?(mapping)“the art of bypassing the state” in Eurasian spaces-and beyond. Eurasian Geography and Economics, 64(3), 322-364.
Kanbur, R. (2009). Conceptualising informality: regulation and enforcement (No. 4186). IZA discussion papers.
Lipton, Michael (1984), “Family, Fungibility and Formality: Rural Advantages of Informal Nonfarm Enterprise versus the Urban-Formal State”, in S. Amin (ed.) Human Resources, Employment and Development, Vol. 5: Developing Countries, MacMillan, London, for International Economic Association, pp. 189-242.
