Effects of wage and hour law enforcement on informal work

A growing body of knowledge contains both theoretical and empirical assessments of what causes informal work (for a review of the literature, see Chapter 2 in this book). Most agree that the tax and regulation burdens imposed by the state play a major role (Schneider and Enste, 2000; Fugazza and Jacques, 2003). As taxation and regulation cause the cost of labor in the formal economy to rise above wages paid directly to workers, employers and employees face an economic incentive to enter the informal sector (Schneider and Enste).