About the Informal Economy

Definitions and Theories

Although the concept of the informal sector has been debated since its “discovery” in Africa in the early 1970s, it has continued to be used by many policy makers, labour advocates, and researchers because the reality it seeks to capture – the large share of the global workforce that remains outside the world of full-time, stable, and protected jobs – continues to be important and has likely been increasing over time. At present, there is renewed interest in informal work arrangements or informal labour markets. This current interest stems from the fact that informal work arrangements have not only persisted and expanded but have also emerged in new guises and unexpected places.

Definitions –

During the 1970s and 1980s, the informal sector was widely defined as unregulated economic enterprises or activities (Hart 1973). In 1993, the International Conference of Labour Statisticians (ICLS) adopted an international statistical definition of the informal sector so defined: namely, all unregistered (or unincorporated) enterprises below a certain size, including

a) micro-enterprises owned by informal employers who hire one or more employees on a continuing basis; and

b) own-account operations owned by individuals who may employ contributing family workers and employees on an occasional basis.

Source: ILO. 2002. Women and Men in the Informal Economy: A Statistical Picture. Geneva: ILO.

In so doing, the 1993 ICLS noted that an enterprise-based definition would not capture all dimensions of informal employment and recommended that further work was needed on the employment-based dimensions of informality. Since 1997 when they were both founded, the International Expert Group on Informal Sector Statistics (called the Delhi Group because the Government of India is its convenor) and the global policy research network Women in Informal Employment: Globalizing and Organizing (WIEGO) have worked closely with the Bureau of Statistics of the International Labour Office (ILO) to develop and promote an employment-based definition of the informal economy that would capture all dimensions of informal employment – i.e., employment that is not protected or regulated - both inside and outside informal enterprises.

In pushing for this expanded employment-based definition of the informal economy, the ILO Bureau of Statistics, the Delhi Group, and the WIEGO network sought to incorporate the whole of informality - including both enterprise and employment relations - as manifested in industrialized, transition, and developing economies. As such, this expanded definition helps to capture the real world dynamics in labour markets today – particularly the less visible segments of the labour force in which the working poor, especially women, are often engaged.

In 2003, the International Conference of Labour Statisticians adopted statistical Guidelines concerning this expanded concept of informal employment to complement the Resolution concerning statistics on the informal sector (ILO 1993). Informal employment includes

a) employment in the informal sector (as defined in 1993 by the ICLS); and

b) informal employment outside the informal sector.

Click here to read about the conceptual framework underlying the statistical guidelines, developed by Ralf Hussmanns of the ILO, or for more information see the 2002 ILO publication, Women and Men in the Informal Economy: A Statistical Picture.

In non-statistical terms, informal employment broadly defined includes the following:

Informal self-employment including:

• employers in informal enterprises;
• own account workers in informal enterprises;
• unpaid family workers (in informal and formal enterprises); and
• members of informal producers’ cooperatives (where these exist).

Theories –

Early debates regarding the causes and characteristics of the informal sector crystallized into four dominant schools of thought, as follows:

The dualist school, popularized by the ILO in the 1970s, subscribes to the notion that the informal sector is comprised of marginal activities – distinct from and not related to the formal sector – that provide income for the poor and a safety net in times of crisis (ILO, 1972; Sethuraman, 1976; Tokman, 1978). According to this school, the persistence of informal activities is due largely to the fact that not enough modern job opportunities have been created to absorb surplus labour, due to a slow rate of economic growth and/or a faster rate of population growth.

The structuralist school, popularized by Caroline Moser and Alexandro Portes (among others) in the late 1970s and 1980s, subscribes to the notion that the informal sector should be seen as subordinated economic units (micro-firms) and workers that serve to reduce input and labour costs and, thereby, increase the competitiveness of large capitalist firms. In the structuralist model, in marked contrast to the dualist model, different modes and forms of production are seen not only to co-exist but also to be inextricably connected and interdependent (Moser, 1978; Castells and Portes, 1989). According to this school, the nature of capitalist development (rather than a lack of growth) accounts for the persistence and growth of informal production relationships.

The legalist school, popularized by Hernando de Soto in the 1980s and 1990s, subscribes to the notion that the informal sector is comprised of ‘plucky’ micro-entrepreneurs who choose to operate informally in order to avoid the costs, time and effort of formal registration (de Soto, 1989). According to de Soto et al, micro-entrepreneurs will continue to produce informally so long as government procedures are cumbersome and costly. In this view, unreasonable government rules and regulations are stifling private enterprise. More recently, de Soto has championed property rights as a means of converting the informally-held property of informal entrepreneurs into real capital (de Soto 2000).

The il-legalist school, popularized by neo-classical and neo-liberal economists across the decades, subscribes to the notion that informal entrepreneurs deliberately seek to avoid regulations and taxation and, in some cases, to deal in illegal goods and services. This perspective is associated with the notion that the informal economy is an underground or black economy. According to this school of thought, informal entrepreneurs choose to operate illegally – or even criminally - in order to avoiding taxation, commercial regulations, electricity and rental fees, and other costs of operating formally (Maloney 2004).

Current re-thinking of the informal economy suggests the need for an integrated approach that looks at which elements of dualist, structuralist, legalist, and il-legalist theories are most appropriate to which segments of informal employment in which contexts. Clearly, some poor households and individuals engage in survival activities that have – or seem to have – very few links to the formal economy and the formal regulatory environment (dualist school); some micro-entrepreneurs choose to avoid taxes (il-legalist school) and regulations (legalist school); while other informal units and workers are subordinated to larger formal firms (structuralist school). For a summary of new and old thinking on the informal economy, click here.