## What is the Informal Economy? ## Source details **Canonical URL:** [What is the Informal Economy?](https://www.imf.org/en/publications/fandd/issues/2020/12/what-is-the-informal-economy-basics) ## Other formats - [Markdown version](/en/publications/fandd/issues/2020/12/what-is-the-informal-economy-basics/index.md) - [Structured JSON version](/en/publications/fandd/issues/2020/12/what-is-the-informal-economy-basics/index.json) - [Bundle manifest](/en/publications/fandd/issues/2020/12/what-is-the-informal-economy-basics/bundle-manifest.json) ## Bibliographic details - Authors: CORINNE DELECHAT, LEANDRO MEDINA - Published: December 1, 2020 --- ### Overview and scale - The informal economy comprises activities that have market value and would add to tax revenue and GDP if they were recorded. - According to the International Labour Organization, about 2 billion workers, or 60 percent of the world’s employed population ages 15 and older, spend at least part of their time in the informal sector. - The informal sector slowly decreases as economies develop, but with wide variations across regions and countries. - Today, the informal sector still accounts for about a third of low- and middle-income countries’ economic activity and 15 percent in advanced economies. ### Causes and forms of informality - Informality covers a wide range of situations within and across countries and arises for a number of reasons: - Voluntary avoidance: individuals and firms may choose to remain outside the formal economy to avoid taxes and social contributions or compliance with standards and licensing requirements. - Safety-net and access constraints: individuals may rely on informal activities because they lack education and skills for formal employment or are too poor to access public and financial services. - Informality is a response to a set of country-specific characteristics and institutions; there is no one-size-fits-all solution. ### Economic and social consequences - Fiscal and growth impacts: - Informal firms do not contribute to the tax base and tend to remain small, with low productivity and limited access to finance. - Economic growth in regions or countries with large informal sectors remains below potential. - Poverty and inequality: - Informal workers are more likely to be poor than workers in the formal sector because they lack formal contracts and social protection and tend to be less educated. - The prevalence of informal work is associated with high inequality: workers with similar skills tend to earn less in the informal sector than their formal-sector peers, and the wage gap between formal and informal workers is higher at lower skill levels. - The large decline in informality in Latin America over the past 20 years was associated with significant reductions in inequality. - Gender dimensions: - In two out of three low- and lower-middle-income countries, women are more likely than men not only to be in informal employment, but also to be in the most precarious and low-paying categories of informal employment. - COVID-19 implications: - The COVID-19 pandemic’s crushing impact on informal activities worldwide highlighted the need for governments to provide a lifeline for large segments of the population not covered (or not well covered) by existing social protection programs. ### Policy guidance and effective interventions - Guiding principles: extensive research and policy experiments point to a common set of guiding principles despite country-specific differences. - Four types of policies that have proved effective: - Improving access to and quality of education: - Education reforms that enhance equality of access and ensure that students remain in school until the end of the secondary cycle. - Ample technical and vocational training opportunities. - Described as "probably the single most powerful way to lower informality." - Tax system design and social protection: - Tax design should avoid inadvertently increasing incentives to remain informal. - Simpler value-added and corporate tax systems (with no or minimal exemptions and loopholes) with lower rates, as well as low payroll taxes, help reduce informality. - Supportive social protection systems, including progressive income taxes and protection for the poorest, help address distributional aspects. - Financial inclusion: - Policies to enhance financial inclusion by promoting expanded access to formal (or bank-based) financial services can help lower informality. - Lack of access to finance is a key constraint for informal firms and entrepreneurs, stifling productivity and business growth. - Countries where access to finance is greater tend to grow faster and have lower income inequality. - Structural and regulatory reforms: - Labor market regulations can be simplified to ensure greater flexibility and facilitate informal workers’ entry into formal employment. - Competition policy can boost entry of small firms in some sectors by eliminating monopolies. - Elimination of excessive regulations and bureaucratic requirements also helps. - Digital platforms, including government-to-person mobile transfers, can bring financial accounts to the unbanked, empower women financially, and help small and medium-sized enterprises grow within the formal sector. ### Policy implications and trajectory - Informality critically affects how fast economies can grow, develop, and provide decent economic opportunities. - Sustainable development requires a reduction in informality over time, but this process will inevitably be gradual because the informal sector is currently the only viable income source for billions of people. - Informality is best tackled by steady reforms—such as investment in education—and policies that address its underlying causes. - Approaches focused on attacking the sector as generally illegal and tax-evading are not the recommended solution. *Source: F&D Magazine — "What Is the Informal Economy?" CORINNE DELÉCHAT and LEANDRO MEDINA, December 2020.* --- ## Content in this bundle - **عودة إلى الأسس - ما هو الاقتصاد غير الرسمي؟** - [عودة إلى الأسس - ما هو الاقتصاد غير الرسمي؟ (Markdown version)](/-/media/files/publications/fandd/article/2020/december/ar/basics.pdf.md){rel="alternate" type="text/markdown"} - [عودة إلى الأسس - ما هو الاقتصاد غير الرسمي؟ (PDF)](/-/media/files/publications/fandd/article/2020/december/ar/basics.pdf){rel="external" type="application/pdf"} - **Vuelta a lo esencial: ¿Qué es la economía informal? ● Finanzas y Desarrollo ● Diciembre de 2020** - [Vuelta a lo esencial: ¿Qué es la economía informal? ● Finanzas y Desarrollo ● Diciembre de 2020 (Markdown version)](/-/media/files/publications/fandd/article/2020/december/es/what-is-the-informal-economy-basics.pdf.md){rel="alternate" type="text/markdown"} - [Vuelta a lo esencial: ¿Qué es la economía informal? ● Finanzas y Desarrollo ● Diciembre de 2020 (PDF)](/-/media/files/publications/fandd/article/2020/december/es/what-is-the-informal-economy-basics.pdf){rel="external" type="application/pdf"} - **Qu’est-ce que l’économie informelle ?** - [Qu’est-ce que l’économie informelle ? (Markdown version)](/-/media/files/publications/fandd/article/2020/december/fr/what-is-the-informal-economy-basics.pdf.md){rel="alternate" type="text/markdown"} - [Qu’est-ce que l’économie informelle ? (PDF)](/-/media/files/publications/fandd/article/2020/december/fr/what-is-the-informal-economy-basics.pdf){rel="external" type="application/pdf"} - **What is the Informal Economy? – IMF F&D** - [What is the Informal Economy? – IMF F&D (Markdown version)](/-/media/files/publications/fandd/article/2020/december/what-is-the-informal-economy-basics.pdf.md){rel="alternate" type="text/markdown"} - [What is the Informal Economy? – IMF F&D (PDF)](/-/media/files/publications/fandd/article/2020/december/what-is-the-informal-economy-basics.pdf){rel="external" type="application/pdf"} --- _Source: https://www.imf.org/en/publications/fandd/issues/2020/12/what-is-the-informal-economy-basics_