Informal Economy

Informal economy—also referred to as the “unorganized,” “unprotected,” or “unregistered” sector—is a process of income generation that is unregulated by the political institutions of a society, in a legal and social environment in which similar activities are regulated.

The absence of institutional regulation in the informal economy affects various elements of the work process. First, it influences the status of labor, which may be undocumented, working below minimum wage, lacking social benefits, or employed under circumstances that legal or societal norms would not other otherwise allow. Second, it influences the conditions of work under which labor is employed, which may involve ignoring health, hygiene, and other safety requirements. Third, it refers to a particular form of institutional management. For instance, a company may engage in systematic fiscal fraud or the generalized use of unrecorded cash payments as a means of economic transaction. Scholars of the informal economy emphasize that there is no theoretical [Page 1591]reason to exclude the unrecorded practices of large corporations from the informal economy since they are closely linked with the growth of other informal activities. In a seminal collection of articles titled The Informal Economy: Studies in Advanced and Less Developed Countries, Alejandro Portes and Manuel Castells emphasized the existence of an informal economy in all countries by including case studies ranging from New York City and Madrid to Uruguay and Colombia. This perspective reinforces that the informal economy is not a marginal phenomenon but a fundamental politico-economic process at the core of many developing and developed countries. The basic distinction between formal and informal economic activities does not hinge on the character of the final product but on the manner in which it is produced and exchanged. Articles of clothing, restaurant food, meat, fruits, and vegetables, for example, are not illicit commodities, but they may have their origins in legally regulated or unregulated production arrangements.