ASYMMETRIC IMPACT OF INVESTMENT AND LABOUR FREEDOMS ON THE INFORMAL ECONOMY: EVIDENCE FROM NIGERIA

Abstract

Abstract This study examines the asymmetric relationship between economic freedoms and informal sector dynamics in Nigeria using a Nonlinear Autoregressive Distributed Lag (N-ARDL) approach. The analysis employs dynamic general equilibrium (DGE) model-based estimates of informal sector size to evaluate long-run and short-run asymmetries while accounting for macroeconomic and institutional factors. Wald test results confirm significant asymmetries in both temporal dimensions. The empirical results demonstrate that investment freedom changes generate pronounced asymmetric effects: a 1% increase reduces informal sector size by 0.15%, while a 1% decrease expands it by only 0.08%, indicating a "ratchet effect" in formalization. Labour freedom demonstrates similar but more modest asymmetry, with a 1% increase and decrease yielding -0.10% and +0.06% effects, respectively. This pattern aligns with theoretical expectations that positive regulatory changes elicit stronger responses than negative ones, with investment freedom showing greater asymmetry due to higher responsiveness of capital flow to favourable conditions compared to labour market adjustments. The analysis of control variables indicates that GDP per capita growth (-0.20%) and institutional quality (-0.30%) constrain informality, while unemployment (0.35%) and urbanization (0.50%) expand it. The error correction term (-0.52) indicates rapid equilibrium adjustment. The Practical policy implications of the findings are discussed.