The Informal Economy

The term informal economy refers to the exchange of goods and services outside of national and
international regulatory guidelines. The informal economy includes all unincorporated
nonagricultural businesses that produce marketable goods and services, but it does not include
informal work that goes toward producing goods for one's own household.

The ILO notes in “Informal Economy” (2016) that in most countries of the developing world
between half and three-quarters of all nonagricultural jobs are informal rather than official and
that conditions in such jobs tend to be less than ideal. The ILO states, “Although it is hard to
generalize concerning the quality of informal employment, it most often means poor
employment conditions and is associated with increasing poverty. Some of the characteristic
features of informal employment are lack of protection in the event of non-payment of wages,
compulsory overtime or extra shifts, lay-offs without notice or compensation, unsafe working
conditions and the absence of social benefits such as pensions, sick pay and health insurance.
Women, migrants and other vulnerable groups of workers who are excluded from other
opportunities have little choice but to take informal low-quality jobs.”

The informal economy occupies a larger share of all economic activity in developing countries
than in developed countries, but informal labor does exist in wealthier countries as well, mostly
in the form of self-employment and part-time and temporary work (the latter two are known as
nonstandard wage employment). In the United States informal workers include casual laborers,
as well as some employees with nonstandard pay arrangements, including those who work
“under the table” (they are paid in cash and are not reported as official employees).

Although the informal economy resists objective measurement because of its secretive nature,
the ILO has since 2003 worked to implement data gathering and reporting efforts aimed at
increasing understanding of the informal economy in the developing world, and it has begun
issuing reports based on its findings. In Measuring Informality: A Statistical Manual on the
Informal Sector and Informal Employment (2013), the ILO distinguishes between “informal
employment,” which includes jobs with unregistered employers as well as unregistered or under-
the-table jobs in the formal sector; and “employment in the informal sector,” which includes only
those jobs undertaken on behalf of unincorporated businesses. Informal work constitutes more
than half of all nonagricultural work in much of the developing world, with the informal sector
generally accounting for most informal work. In Brazil, for example, 51.1% of all
nonagricultural work was informal, 37.4% on behalf of unincorporated businesses and 17.1% on
behalf of formal employers or otherwise outside of the informal sector. In six of the 12 countries
for which the ILO presents data, informal work constituted more than two-thirds of all
employment, and the figure was over 80% in Mali and India (“Table 2.6. Informal Employment,
Employment in the Informal Sector and Informal Employment Outside the Informal Sector, as a
Percentage of Total Non-Agricultural Employment in Selected Countries by Sex,”).

Although the informal economy acts as a resource for those left out of the formal economy and is
in most cases preferable to unemployment, international organizations generally seek to help
developing countries transition away from the informal economy. Besides the risks that workers
in the informal economy face, informal economic activity imposes costs at the national level, as
the World Bank notes in “Workers in the Informal Economy” (2016). Informal work amounts to
a loss in tax revenues that countries might have been able to use to improve infrastructure and
social services, and it places an extra tax burden on those who are formally employed. In both
human rights and development terms, then, formal employment is preferable to informal
employment.

Reference

https://www.gale.com/open-access/poverty