Institutional Frictions, Informality Traps, and Decent Work: An Institutional Perspective on <scp>SDGs</scp> 8 and 16 in Fragile Contexts

ABSTRACT Achieving decent work remains a persistent challenge, particularly in economies characterised by institutional fragility and pervasive informality. Although Sustainable Development Goals 8 and 16 emphasise productive employment and effective institutions, progress has often been constrained by the interaction between institutional frictions and labour market informality, especially in fragile and conflict‐affected settings. Despite growing recognition of the importance of these factors, limited cross‐country evidence exists on how their interaction shapes labour market vulnerability. This study examines the relationships between institutional frictions, informality, and decent work outcomes using a panel dataset of 90 countries covering the period 2005–2022. The analysis employs the Dynamic Common Correlated Effects Mean Group (DCCE‐MG) estimator, which is well suited to cross‐country panels because it accounts for cross‐sectional dependence, heterogeneous country‐specific dynamics, and unobserved common shocks. The findings indicate that institutional frictions and informality are each positively associated with vulnerable employment, while their interaction is associated with higher levels of labour market vulnerability. The relationship is significantly stronger in fragile and conflict‐affected settings, consistent with the informality trap framework. The study contributes theoretically by demonstrating how institutional frictions condition the relationship between informality and labour market vulnerability, thereby extending existing discussions of informality in fragile contexts. Methodologically, it applies a robust estimation framework capable of capturing complex cross‐country dynamics. Empirically, the study provides evidence that the relationship between institutional frictions, informality, and vulnerable employment is context‐dependent. The findings underscore the importance of policy approaches that jointly address institutional weaknesses and structural informality to improve decent work outcomes.