Discuss two reasons why economies have an informal sector.

Answer: Due to labor absorption and the cost of a regulatory barrier.

Explanation:

Thus, labor absorption occurs, especially in areas with high population and urbanization rates. The reason why the economy also has an informal sector is the fact that there are too many costs and a regulatory barrier to entry into the formal economy, often motivated by corruption. The informal sector is needed in order not to weaken the institutions, which entails a weakening of the economy.