High SSCs create a significant tax burden on labour income, they reduce employees’ work incentives by reducing their after-tax earnings and make it expensive to hire workers, especially low-income and low-skilled workers. The larger the difference between total labour costs in the formal sector and after-tax disposable income for workers (the “tax wedge”), the greater the incentive for employers and employees to avoid taxes by remaining or joining the informal economy. Moreover, the average tax wedge is highly regressive in Albania, the Former Yugoslav Republic of Macedonia and Serbia at the bottom of the income distribution, meaning that the average contribution rate is higher for low-income workers (see Chapter 4, Tax policy). While the general consensus is that stricter employment protection legislation is associated with higher rates of informality (Marshall, 2007), research also shows that this relationship is moderated by strong enforcement of labour regulation and good governance (Loayza and Rigolini, 2006).