## Five Things to Know about the Informal Economy _IMF News, July 28, 2021_ ## Source details **Canonical URL:** [Five Things to Know about the Informal Economy](https://www.imf.org/en/news/articles/2021/07/28/na-072821-five-things-to-know-about-the-informal-economy) ## Other formats - [Markdown version](/en/news/articles/2021/07/28/na-072821-five-things-to-know-about-the-informal-economy/index.md) - [Structured JSON version](/en/news/articles/2021/07/28/na-072821-five-things-to-know-about-the-informal-economy/index.json) - [Bundle manifest](/en/news/articles/2021/07/28/na-072821-five-things-to-know-about-the-informal-economy/bundle-manifest.json) ## Bibliographic details - Published: July 28, 2021 --- ### Overview - The informal economy is a global and pervasive phenomenon. - Some 60 percent of the world’s population participates in the informal sector. - Although mostly prevalent in emerging and developing economies, it is also an important part of advanced economies. - The informal economy consists of activities that have market value but are not formally registered. - Examples: - Minibus drivers in Africa, market stands in Latin America, hawkers at traffic lights. - In advanced economies: gig and construction workers, domestic workers, registered firms that engage in informal activities. - The International Labor Organization estimates that about 2 billion workers, or over 60 percent of the world’s adult labor force, operate in the informal sector—at least part time. - On average, the informal economy represents 35 percent of GDP in low- and middle- income countries versus 15 percent in advanced economies. - Regional variation: - Latin America and sub-Saharan Africa have the highest levels of informality. - Europe and East Asia are the regions with the lowest levels of informality. ### Measurement challenges and methods - The informal economy is difficult to measure because activities cannot be directly observed and participants generally do not want to be accounted for. - Importance: measuring the informal economy matters because of its scale and because it employs some of the world’s most vulnerable people. - Two measurement approaches: - Direct approach: based on surveys, voluntary replies, and other compliance methods to directly measure the number of informal workers and firms. - Indirect methods: focus on observable characteristics or proxies related to informal activity (examples: electricity consumption, night-light satellite data, cash in circulation) to measure the share of the informal economy in total output. ### COVID-19 impact on informal workers - The COVID-19 pandemic hit informal workers particularly hard, especially women, because the majority are employed in contact-intensive sectors and in insecure jobs without paid leave or the ability to work from home. - Key figures: - Close to 95 million more people—many of them informal workers—are estimated to have fallen below the threshold of extreme poverty in 2020 compared with pre-pandemic projections. - Women make up 80 percent of domestic workers globally, and 72 percent of them have lost their jobs as a result of the pandemic. - In sub-Saharan Africa, 41 percent of women-owned businesses closed, compared with 34 percent of those owned by men. ### Informality and economic development - Understanding drivers and consequences of informality is central to sustainable and inclusive development because informality is critically related to growth, poverty, and inequality, including gender inequality. - Participation by choice vs necessity: - Whereas some individuals and firms operate informally by choice, 85 percent of all informal workers are in precarious employment, not through choice but due to a lack of opportunities in the formal sector. - Economic consequences: - Countries with large informal sectors tend to grow below their potential: informal firms tend to remain small, with low productivity and limited access to finance. - Informal firms do not contribute to the tax base, depriving governments of resources to provide basic services. - Informal workers are more likely to be poor and to earn lower wages, lack social protection, lack access to credit, and are generally less educated. - Gender dimension: Globally, 58 per cent of employed women work in the informal sector and are more likely to be in the most precarious and low-paid categories of informal employment. In sub-Saharan Africa, women’s average share of informal employment in the region’s nonagricultural sector is 83 percent. ### Policy implications and recommendations - A balanced approach is crucial because the informal sector currently represents the only source of income and a critical safety net for millions. - Broad strategy: focus on policies that reduce informality gradually by tackling country-specific drivers (including social exclusion and incentives to operate informally) rather than punitive attacks based on illegality or tax evasion. - Policies found to be effective include: - Reforms to ensure equitable access to education for boys and girls. - Increasing access to finance, including by leveraging mobile money and digital reforms. - Measures to improve the business environment, including: - Simplifying registration and regulatory requirements for new firms. - Simple tax systems including easy registration and electronic payment of taxes. - Labor market reforms. *Source: Five Things to Know about the Informal Economy (July 28, 2021).* --- ## References - [https://www.imf.org/en/News/country-focus](https://www.imf.org/en/News/country-focus) - [PRESS CENTER](http://presscenter.imf.org/) - [What is the informal economy](https://www.imf.org/external/pubs/ft/fandd/2020/12/what-is-the-informal-economy-basics.htm) - [Rethinking the world of work](https://www.imf.org/external/pubs/ft/fandd/2020/12/rethinking-the-world-of-work-dewan.htm) - [The global informal workforce](https://www.imf.org/en/News/Podcasts/All-Podcasts/2021/07/29/Informality) - [https://www.imf.org/en/home](https://www.imf.org/en/home) _Source: https://www.imf.org/en/news/articles/2021/07/28/na-072821-five-things-to-know-about-the-informal-economy_