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To transcend the long-standing debate regarding whether workers are driven into the informal economy by either their involuntary “exclusion” or voluntary “exit” from the formal economy, the purpose of this paper is to propose and evaluate the existence of a dual informal labour market composed of an exit-driven “upper tier” and an exclusion-driven “lower-tier” of informal workers, and to explore its policy implications.

To do so, data are reported from a 2015 survey of the informal economy conducted in South-East Europe involving 6,019 face-to-face interviews in Bulgaria, Croatia and FYR Macedonia.

Identifying a dual informal labour market with three exit-driven informal workers for every exclusion-driven informal worker, a multinomial logit regression analysis reveals that, compared to the exclusion-driven “lower tier”, the exit-driven “upper tier” is significantly more likely to be populated by the formally employed, retired and those not struggling financially. Participation is not affected by the perceived severity of penalties and likely risks of detection, but relative to those in the exclusion-driven “lower tier”, there is a significant correlation between those doing so for exit rationales and their lack of both horizontal trust and vertical trust in formal institutions.

The outcome is a call to transcend the conventional deterrence approach of increasing the penalties and risks of detection. Instead, to tackle those driven by exit rationales, tackling both the lack of horizontal trust that other citizens are operating in a compliant manner and the lack of vertical trust in formal institutions is advocated. To tackle exclusion-driven informal workers, meanwhile, a focus upon the macro-level economic and social conditions which lead to their participation is required.

This is the first paper to empirically evaluate the existence of a dual informal labour market and to evaluate its policy implications.