their incomes grow (Saracoglu 2008). Moreover, limited access to credit, often associated with lower development, constrains firms’ ability to overcome barriers to entry into the formal sector.<sup>10</sup> 29. **Informality is more pervasive in countries with a lower level of per capita income, regardless of the measure of informality.** As a result, informality tends to be considerably more pervasive in EMDEs than in advanced economies (figure 8, La Porta and Shleifer 2014). In 2019, informal output and informal employment in advanced economies fell below the levels in EMDEs by 16 percentage points of GDP and 29 percentage points of total employment, respectively.

30. **Informality is associated with a large rural population and a lack of urbanization.** As shown in Loayza (2016), a developing economy passes through three stages of development. In the first phase, modern informal employment expands as the falling relative cost of urban living encourages rural workers (in the rudimentary informal sector) to migrate to cities. In the second phase, rural-urban migration slows, and the relative shares of the modern informal and formal sectors stabilize, but the relative size of the rudimentary informal sector shrinks. In the third phase, modern informal employment declines as rural-urban migration stalls and a rising capital-labor ratio reduces the relative (and absolute) size of the modern informal sector.<sup>11</sup> In EMDEs with above-median informality, about half of the population still resided in rural areas during the past decade, while the ratio fell to two-fifths or one-third in EMDEs with below-median informality (Ohnsoge and Yu 2021).

31. **Informality tends to be concentrated in the agriculture sector, especially in EMDEs.** About 90 percent of employment in the agriculture sector is informal in EMDEs (Ohnsorge and Yu 2020). Consequentially, in EMDEs with above-median informality, the agriculture sector accounted for about 20 percent of GDP and nearly 40 percent of total employment on average over the period 2011-2019. This is almost twice as much as in EMDEs with below-median informality. Meanwhile, informal firms in EMDEs tend to be small, less productive, and concentrated in laborintensive sectors, such as low-value-added service sectors (Amin, Ohnsorge, and Okou 2019).

32. **Informal workers tend to be less skilled and lower paid than their formal counterparts (Loayza 2018; Perry et al. 2007).** A meta-analysis of worker-level empirical studies shows that informal workers are, on average, paid 19 percent less than formal workers, which largely reflects the fact that informal workers tend to be less skilled and inexperienced (World Bank 2019). The negative link between informality and labor productivity is also supported by data, which could be driven by the significantly lower school attainment in EMDEs with abovemedian informality than in other EMDEs (figure 8).

> 10 See, for instance, Ferreira-Tiyaki (2008), D’Erasmo and Moscoso Boedo (2012), and Capasso and Jappelli (2013). 11  As modeled in Loayza (2016), a developing economy consists of two co-existing economies: a modern economy that is organized in firms and uses high-productive technology and a rudimentary, informal economy that captured the self-employed who only use labor and low-productive technology. The former further consists of two sectors: a capital-intensive modern formal sector and a modern informal sector that is more labor-intensive.

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