An Empirical Analysis of the Informal Sector in Ghana

This paper examines the determinants of the decision of owners of small enterprises in Ghana to participate in the informal sector at start-up. For enterprises participating in the informal sector, the paper evaluates whether there are linkages with formal sector enterprises, and the determinants of the linkage. Data for the analysis is from the 2013 World Bank Enterprise survey. Using binary choice models, it is evident from the analysis that the informal sector in Ghana is dominated by people who have low levels of education, and hence, do not have otherwise employable skills. Undertaking economic activities in the informal sector becomes a means to survival, and not necessarily an attempt to evade compliance with formal sector regulations. The challenge to policy makers in Ghana is to find the right balance between policies that reduces the costs to enterprises of participating in the informal sector, whiles increasing the benefits for participating in the formal economy.