The Informal Economy: A Case Study in Unrestrained Competition

The New Labour government in Britain is the first post-deregulation regime in Europe and the first to attempt to re-regulate the labour market. In particular, its welfare-to-work programme and New Deal for Lone Parents are aimed at shifting activities from the informal to the formal economy, and at enlarging labour market participation. Its commitment to social justice and inclusion is closely linked to increased employment opportunities and a responsibility for contributing to national prosperity. The new programmes must also reconcile these aims with the retention of the flexibility that it sees as giving Britain a competitive edge over other European economies. In order to combine efficiency and equity, increased participation must not involve excessive transaction and enforcement costs. The problem is that those at present engaged in the informal economy (and especially in undeclared cash work while claiming) do not have strong incentives to cooperate with the new schemes. This paper uses the example of the informal relations of taxi-driving in a small town to illustrate the paradoxes of this situation. It is a case study in the rational strategies of individual actors, which collectively frustrate each other; and in the difficulties of starting collective action for mutual restraint of competition. The New Labour government must solve many such problems if its policies are to succeed.