Understanding Tax Wedge and Informality in Developing Countries

IMF senior Geerten Michielse explained that a tax wedge is the gap between the total labor cost borne by an employer and the net earnings workers receive after income tax and social‑security contributions. The remarks were made in Vienna on 7 November 2025.

OECD data for 2023 show an average tax wedge of 34.8 %, with Belgium at the top (52.7 %). Emerging economies such as Brazil (32.5 %) and China (30.7 %) are close to the OECD average, while Indonesia and India record only 7.8 % and 2.0 % respectively, reflecting limited social‑security coverage.

A high tax wedge can push labor and employers toward the informal sector, while a low wedge reduces fiscal revenue needed for public services. Policymakers therefore need to calibrate the tax wedge according to each country’s economic structure, labor market and administrative capacity.