What is the informal economy?

The conceptualization of the informal economy focuses on some features of the business dynamics and employment conditions. That is why the definition includes not only enterprises that are not legally regulated, but also employment relations that are unregulated and unprotected, that is to say, employment without any kind of social protection.

In most of the developing countries, the small businesses’ challenges have contributed to the expansion of the informal economy. Small and micro-entrepreneurs are usually subject to complex regulatory barriers. Besides, the access to credit is restricted. As a result, micro and small enterprises reveal poor performance in competitive environments, a lower capacity for innovation and a weak international orientation. Among other obstacles to survival and expansion in the formal economy, the costs of starting up a formal enterprise are outstanding in developing countries. Among these transaction costs, we can highlight: i) the number of procedures that includes all necessary licenses and permits and completion of any notifications, verifications or registrations required by the relevant authorities; and ii) business legislation, specific regulations and fee schedules that are used as sources for start-up cost calculation.

Current global transformations in labor markets have also been characterized by the decline in the formalization rate of employment and an increase in the rate of self-employment. In many countries, the decreasing weight of industrial jobs promoted new relations and interactions between formal and informal economy. Today, informal unemployment includes self-employment in small unregistered enterprises, unpaid workers, own account operators and also unpaid work in family businesses. Actually, the total amount of informal workers include: employees of informal enterprises; casual or day workers, domestic workers, temporary or part-time workers; home workers and workers occupied in the context of outsourcing agreements.

In the middle 2000s, in the developing world, the percent of informal employment was almost 50% of the total in Latin America, nearly 60% in Africa and more than 60% in Asia. These data, from WTO, is considered one of the alternative measures of informality and its evolution shows that there is substantial heterogeneity across the world regions. In African countries, the level of informal employment seemed to have slightly decreased, mainly in urban areas. However, it slightly increased in Latin American countries. Besides, in Asia, the level of informal unemployment rose after the Asian crisis.

In addition to this informal employment indicator, governments try to measure the incidence of informality in production in other ways. For instance, the percent of the informal economy in relation to the total gross domestic product gives an indication as to the low overall productivity in the informal economy. In accordance to the WTO data, the percent of the informal economy (excluding agriculture) in relation to the total gross domestic product, as of 2006, was 37.7% in South Saharan Africa, 30.4% in North Africa, 26.8% in Asia, 25.9% in Latin America, 21.2% in the Caribbean countries and 13.9% in the transition economies.

However, the global scenario reveals that the level of informality is also growing in advanced economies since various forms of informal working conditions have been included in the new global production networks. Actually, many formal enterprises hire wage workers under informal employment relations.

Therefore, it is worth thinking about the  description of the current economic relations presented by Chen:

“… economic relations – of production, distribution and employment- tend to fall to some point on a continuum between pure ‘formal’ relations (i.e., regulated and protected) at one pole and pure ‘informal’ relations (i.e., unregulated and unprotected) at the other, with many categories in between” (Chen, 2007: 236).

References

Chen, M. A., (2007). Rethinking the informal economy; linkages with the formal economyand the formal regulatory environment. In: Ocampo, J. A., Jomo, K. S.(Eds.), (2007). Towards Full and Decent Employment, Canada, Zed Books.

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