About the Informal Economy

Old and New Views of the Informal Economy

The Old View The New View
The informal sector is the traditional economy that will wither away and die with modern, industrial growth. The informal economy is ‘here to stay’ and expanding with modern, industrial growth.
It is only marginally productive. It is a major provider of employment, goods and services for lower-income groups.

It contributes a significant share of GDP.
It exists separately from the formal economy. It is linked to the formal economy – it produces for, trades with, distributes for and provides services to the formal economy.
It represents a reserve pool of surplus labour. Much of the recent rise in informal employment is due to the decline in formal employment or to the informalization of previously formal employment relationships.
It is comprised mostly of street traders and very small-scale producers. It is made up of a wide range of informal occupations – both ‘resilient old forms’ such as casual day labour in construction and agriculture as well as ‘emerging new ones’ such as temporary and part-time jobs plus homework for high tech industries.
Most of those in the sector are entrepreneurs who run illegal and unregistered enterprises in order to avoid regulation and taxation. It is made up of non-standard wage workers as well as entrepreneurs and self-employed persons producing legal goods and services, albeit through irregular or unregulated means. Most entrepreneurs and the self-employed are amenable to, and would welcome, efforts to reduce barriers to registration and related transaction costs and to increase benefits from regulation; and most non-standard wage workers would welcome more stable jobs and workers’ rights.
Work in the informal economy is comprised mostly of survival activities and thus is not a subject for economic policy. Informal enterprises include not only survival activities but also stable enterprises and dynamic growing businesses, and informal employment includes not only self-employment but also wage employment. All forms of informal employment are affected by most (if not all) economic policies.

Source: Chen, Martha, Joann Vanek and Marilyn Carr. 2004. Mainstreaming Informal Employment and Gender in Poverty Reduction: A Handbook for Policy-makers and Other Stakeholders. London: Commonwealth Secretariat.