Trading permits and informal entrepreneurship: evidence from South Africa

Abstract We present an empirical analysis of the relationship between trading permits, informal entrepreneurship and unemployment. We exploit a unique regulatory framework of the informal sector in South Africa to estimate the effects of trading permits in the informal sector using individual panel data. To provide a causal effect of these regulations, we apply a difference-in-difference strategy. Trading permits decreased informal entrepreneurship and informal trading by respectively 11.5 per cent and 9.6 per cent for those who were working in the informal sector. We investigate potential indirect effects on formal entrepreneurship, unemployment, and informal wage employment. The adoption of trading permits in the informal sector significantly increases the probability of being unemployed by 4.5 per cent and significantly decreases the probability of being informally employed by 15.5 per cent for those who were in the informal sector. The results suggest that a policy increasing the costs of informality might reduce informality but at the cost of rising unemployment.