This article evaluates critically the contrasting explanations for the cross-national variations in the prevalence and nature of informal employment, which variously view such work as more prevalent in poorer, under-developed economies; driven by high taxes, corruption and state interference that lead workers to exit formal employment; or driven by inadequate state intervention leading to the exclusion of workers from formal employment and state welfare provision. By analysing cross-national variations across the European Union in the size of informal employment using indirect measurement methods and in its varying character using evidence from a 2007 Eurobarometer survey, it was found that wealthier, less corrupt and more equal economies with higher levels of labour market intervention, social protection and redistribution via social transfers have lower levels of informal employment, much of which is conducted to exit formal employment. The paper concludes by exploring the theoretical and policy implications.