Informal Economy

The informal economy is the diversified set of economic activities, enterprises, and workers that are not regulated or protected by the state. Since its discovery in the early 1970s, the informal economy and its role in economic development have been hotly debated. Some observers view the informal economy in positive terms, as a pool of entrepreneurial talent or a cushion during economic crises. Others view it more problematically, arguing that informal entrepreneurs deliberately avoid regulation and taxation. Still others see the informal economy as a source of livelihood for the working poor. Each of these perspectives has merit in regard to specific components or aspects of the informal economy. Contrary to early predictions, the informal economy has continued to grow and has appeared in new forms. Today, it represents a significant share of the global economy and workforce.

Originally applied to self-employment in small unregistered enterprises, the concept of informality has been expanded to also include wage employment in unprotected jobs. The self-employed in small unregistered or unincorporated enterprises include: employers, own-account operators (both heads of family enterprises and single person operators), and unpaid but contributing family workers. Wage workers without worker benefits or social protection include: employees of informal enterprises, informal employees of formal firms, casual or day laborers, unregistered or undeclared workers, industrial outworkers (also called homeworkers), most domestic workers, and some temporary or part-time workers.

So defined, the informal economy comprises half to three-quarters of the nonagricultural labor force in developing countries. When informality in agriculture is also measured, the share of informal employment in total employment is higher still: as high as 90% in some countries in South Asia and sub-Saharan Africa. Although comparable estimates are not available for developed countries, evidence suggests that nonstandard jobs and self-employment represent a sizeable (more than 25%) and growing share of total employment in Western Europe and North America.