Informal Economy
The informal economy is the economic activity of workers and businesses that are not covered, or not adequately covered, by formal arrangements such as registration, tax, labour law and social protection. Most of it is legal work done outside those systems.
Also called: informal sector · informal employment · shadow economy · grey economy
The definition comes from the International Labour Organization, and its 2015 Recommendation No. 204 on the transition from the informal to the formal economy sets it out for policy. The ILO separates two things: informal enterprises, which are unregistered or very small, and informal jobs, which lack legal and social protection and can exist inside registered firms. A street vendor is informal on both counts; a cleaner paid off the books by a registered company holds an informal job in a formal firm.
The scale is large. The ILO's 2018 statistical study estimated that about two billion people, 61 percent of the world's employed population, worked informally, with the share far higher in low-income countries. Informal does not mean illegal. Most informal activity produces lawful goods and services; it is simply unregistered, untaxed or unprotected. Crime is a separate category, though the two can overlap.
Informal activity is not necessarily missing from GDP. National statisticians aim to measure all production and use surveys and estimates to capture much of it, as the IMF's work on measuring the informal economy explains.
Money is where informality is most visible. Informal businesses run on cash, on mobile money and on informal transfer systems. Digital payments create a record, which can help a business prove income and gain credit, and which also makes it visible to the tax authority. That trade-off is why financial inclusion and formalisation tend to be discussed together, and why formalisation works best when it offers something in return.
In practice
Estimates of the informal economy vary widely with the definition and method used. Figures for employment, output and the "shadow economy" measure different things and should not be compared directly.
Learn more on Money Wiki
This page gives the short answer. Money Wiki has a longer guide to Informal Economy, with more detail and background.
Commonly confused with
| Term | How it differs |
|---|---|
| Shadow economy | Shadow economy estimates usually aim at activity hidden from the authorities, often to avoid tax, and may include illegal activity. The ILO's informal economy is defined by missing legal and social coverage, and is mostly lawful. |
See also
- Gross Domestic ProductGross domestic product is the total market value of final goods and services produced within a country over a period, usually a quarter or a year. It is the standard measure of the size of an economy and how fast it is growing.
- Financial InclusionFinancial inclusion means individuals and businesses having access to useful, affordable financial services, such as accounts, payments, savings, credit and insurance, delivered responsibly. The first step is usually an account that can send and receive money.
- Mobile MoneyMobile money is a stored-value account held on a mobile phone and run by a mobile network operator or other provider, letting users deposit cash, send and receive money and pay bills without needing a bank account.
- Informal Value Transfer SystemAn informal value transfer system (IVTS) is any network that moves money for customers outside the conventional banking system, typically by having an operator in one place instruct a counterpart elsewhere to pay out, with the operators settling between themselves later.
- RemittanceA remittance is a cross-border transfer sent by one individual to another — typically a migrant worker sending money home to family. It is distinct from a commercial payment between businesses, and regulators define it more narrowly than everyday speech does.