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Financial development may be an alternative policy for controlling informal employment. However, there is still an ambiguous relationship between financial development and informal employment. The purpose of this paper is to examine the impact of financial development on informal employment.

The paper is based on both the occupational choice model and on the concept of financial development and economic growth which can produce either a positive or negative relationship between financial development and informal employment. Consequently, the author formulated empirical specifications and applied an econometric technique to examine the actual relationship.

The empirical results indicated that financial development can reduce informal employment. The author also found that the relationship between financial development and informal employment varies, depending on the level of economic growth and development.

Even though there are many types of informal employment, this paper uses only informal self-employment as a proxy of informal employment. To implement it properly, all types of informal employment should also be examined.

Becoming informal employment depends on several factors; policy makers for each country should carefully examine the specific relationship between financial development and informal employment for their own country.

The paper presents alternative choices for policy makers to control informal employment by increasing financial development, especially in developing countries. This policy also includes promoting microfinance which will contribute to both formality and increasing the strength of the community.

From the two possible impacts of financial development on informal employment, this paper affirms that financial development can reduce informal employment.

There are several different factors that can influence self-employment. However, there is little evidence stemming from direct examination of the impact of financial development (FD) on self-employment. This study aims to formulate empirical specification models to examine the effect of FD on self-employment.

Panel data analysis of 136 sample countries was performed during the period from 2000 to 2017. This study initially implemented the new financial index developed by the International Monetary Fund (IMF) to examine the impact of FD on self-employment. Panel data analysis including the pooled model, fixed effect and random effect model has been carried out.

The empirical results show that the financial institutions index has a negative significant impact on self-employment by a considerable magnitude, whereas the financial markets index does not show any statistical significance. The results also find that the government effectiveness index is negative and statistically significant on self-employment.

There are several different factors which can influence self-employment. Nevertheless, there is little evidence for the direct examination of the impact of FD on self-employment. This study investigated the impact of FD on self-employment by using the new FD index created by the IMF. The finding may help policymakers to implement FD along with other institutional policies to control self-employment.