INFORMAL ECONOMY: CHARACTERISTICS, TYPES, CAUSES AND EXAMPLES - ECONOMY - 2024

The informal economy is the part of an economy that is not taxed or supervised by any form of government. It is the diversified set of economic activities, companies, jobs and workers, which are not regulated or protected by the state.

It is also known as the informal sector, shadow economy, or gray economy. The concept originally applied to self-employment in small unregistered companies. It has been expanded to include paid employment in unprotected jobs.

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The concept of the informal economy was introduced internationally in 1972 by the International Labor Organization (ILO). Since then, different authors and the ILO itself have introduced many definitions.

Other concepts that can be characterized as the informal economy can include the black market and the underground economy. Associated idioms include "under the table," "off the books," and "working for money."

Part of the market economy

Although the informal economy constitutes an important part of the economies of developing countries, it is often stigmatized as problematic and unmanageable.

However, the informal sector offers critical economic opportunities for the poor and has expanded rapidly since the 1960s. Integrating the informal economy into the formal sector is a major political challenge.

The informal economy is part of the market economy, which means that it produces goods and services for sale and to generate profit. Unpaid domestic work and caring activities do not contribute to that, and as a result, they are not part of the informal economy.

It is historically recognized as opposed to the formal economy. This means it includes all income-generating activities beyond legally regulated businesses.

Unlike the formal economy, activities in the informal economy are not included in the gross national product or the gross domestic product of a country. The informal sector can be described as a gray labor market.

People who participate in the informal sector are not usually classified as unemployed.

Characteristics of the informal economy

The informal economy is much larger than most people realize. Women play a very important role in this economy. The type of work that makes up the informal economy is diverse, particularly in terms of capital invested, technology used, and income generated.

The spectrum ranges from unpaid family work to self-employment. Includes street vendors, garbage collectors, shoe shiners, car guards, gardeners, etc.

At the higher end of the spectrum are higher-level informal activities, such as small-scale manufacturing or service companies. These have a more limited entry and irregular hours of operation.

The role of the informal economy in most countries increases during a recession and decreases when the economy is healthy and growing.

These characteristics differ from businesses and employees in the formal sector, which have regular location and hours of operation, and other structured benefits. The informal economy is characterized by having the following qualities:

Easy entry

This means that anyone who wants to join this industry can usually find some type of work that results in cash earnings.

Lack of stable relationships

The majority of informal sector workers, even those who are self-employed or salaried, do not have access to secure work, benefits, social protection or representation.

Labor relations, where they exist, are mainly based on casual employment, kinship or personal and social relationships, rather than contractual agreements with formal guarantees.

Job security just doesn't exist. The work is low-paying. There is no stable relationship between employers and employees, there is no safety in the workplace or social security.

This sector includes situations where people must work without receiving any payment. It also includes sectors in which people work and, in return, receive more than money.

Small scale

All operations in the informal economy are small-scale.

People working in the informal sector commonly operate at a fairly low level of organization, with little or no division between capital and labor as factors of production.

Abilities

In most cases, it is an unskilled job. The skills necessary for this type of work are acquired outside of formal education.

Types

The informal sector covers a wide range of activities that combine two main types of activities, whose reasons for participating are very different and are described below:

-Resistance strategies

Also known as survival activities. Individuals and families work in an economic environment where opportunities are extremely rare.

These include unpaid jobs, temporary jobs, casual jobs, subsistence farming, and holding multiple jobs simultaneously,

-Deliberate unofficial profit strategies

It is the rational behavior of businessmen who do not want to pay taxes and want to escape state regulations.

You want to avoid labor regulations and other institutional or government regulations. You don't want to register businesses. Some of these activities are illegal or criminal. Therefore, they can be subdivided into:

Unofficial business activities

Tax evasion, escape from labor regulations and other governmental or institutional regulations, failure to register the company;

Underground activities

Corresponds to criminal activities, or corruption. They are activities not registered by the statistical offices.

-Types of workforce

The ILO International Symposium on the Informal Economy in 1999 proposed that the informal sector workforce can be classified into three broad groups:

Owners

They own micro-businesses that employ a few paid workers, whether they are apprentices or not.

Free-lancers

They are their own bosses, operating one-man businesses. They work alone or with the help of unpaid workers, usually family members and apprentices.

Within this type of worker, the most prevalent in the informal economy are home workers and street vendors.

Home workers are more numerous, while street vendors are more visible. The two fields combined represent about 10-15% of the non-agricultural workforce in developing countries and more than 5% of the workforce in developed countries.

Dependent workers

Paid or not, they include salaried workers in micro-enterprises, unpaid family workers, apprentices, contract workers, home workers and paid domestic workers.

Causes

There are three points of view that attempt to explain the causes of informality. The first argues that the informal sector is a reservoir of potentially productive entrepreneurs who are kept out of formality due to high regulatory costs, especially entry regulations.

The second sees informal people as "parasitic" because they are productive enough to survive in the formal sector, but choose to remain informal in order to obtain higher profits, because of the advantages of not having to comply with taxes and regulations.

The third argues that informality is a survival strategy for low-skilled people, who are too unproductive to become formal.

A study on informality in Brazil shows that the first point of view corresponds to 9.3% of all informal people, while the second, the parasitic vision, corresponds to 41.9%.

The rest correspond to low-skilled entrepreneurs who are too unproductive to become formal and use informality as a survival strategy.

These results suggest that informal enterprises are largely "parasitic species." Therefore, its eradication could, in principle, have positive effects on the economy.

Other factors

A study of informal workers in Costa Rica illustrated other economic reasons for staying in the informal sector, as well as non-economic factors.

First, they felt that they would earn more money through their work in the informal sector than through a job in the formal economy.

Second, even if they made less money, working in the informal sector offered them more independence, the opportunity to select their own hours, the opportunity to work outside and near friends, etc.

In developed countries, some people who are formally employed may choose to do some of their work outside the formal economy, precisely because it gives them more benefits.

Although jobs in the formal economy provide more security and regularity, or even pay much better, the combination of monetary and psychological rewards of working in the informal sector is attractive to many workers.

Consequences

The informal economy plays a controversial and important role. It provides jobs, thus reducing unemployment and underemployment. It probably also helps fight malnutrition in many parts of the world.

Poverty

The working poor, particularly women, are concentrated in the informal economy. Likewise, most low-income households rely on this sector to protect them.

However, informal companies lack the potential for growth, trapping employees in menial jobs indefinitely.

On the other hand, the informal economy can allow a large proportion of the population to emerge from extreme poverty and obtain an income that is satisfactory for their survival.

Governments

From the point of view of governments, the informal economy can create a vicious cycle. By not being able to collect taxes from the informal sector, the government can be hampered in financing public services. This in turn makes the informal sector more attractive.

The nature of the informal economy has anti-regulation and tax-free standards as a standard. This diminishes the material and political power of government agents.

On the other hand, some governments consider informality to be a benefit. This is because it allows absorbing excess labor, thus reducing unemployment problems.

Governments recognize that the informal economy can produce meaningful goods and services, create needed jobs, and contribute to imports and exports.

As work in the informal sector is not checked or registered with the state, its workers do not have the right to social security, nor can they form unions.

Workers in the informal economy lack an important voice in government policy. The political power of informal workers is not only limited, but the existence of the informal economy creates challenges for other politically influential actors.

Competition for the formal economy

Unions are inclined to oppose the informal sector, highlighting the costs and disadvantages of the system. Producers in the formal sector may also feel threatened by the informal economy.

The flexibility of production, low labor and production costs, and the bureaucratic freedom of the informal economy can be seen as consequential competition for formal producers. This leads them to challenge and object to that sector.

Examples

In any system of government, the informal economy is diverse and contains occasional members. For example, garbage recyclers and street vendors, as well as larger and more common companies, such as the transit systems of Lima, Peru.

The term includes illegal activities, such as smuggling. It also includes cleaning car windshields at traffic lights, or doing construction or plumbing work, that is, legal work.

Informal economies also contain garment workers who work from home. Likewise, people who have an informal job in formal companies.

A child forced to work in a maquiladora for fourteen hours a day works in the informal economy. The same goes for an adult who mowed someone's lawn, received $ 40, never declared it, and paid no income tax.

Illegal work

In the UK today, taxes are extremely high on cigarettes. The black market for tobacco in Britain is big business and employs thousands of people.

Criminal business activities such as human trafficking, illegal arms sales, and drug sales occur within the informal economy.

However, this does not mean that all activities in the informal economy are criminal. A teenager who sells cigarettes at traffic lights in downtown Mexico City is working in the informal sector. However, their activity is not criminal.

Statistics

Statistics regarding the informal economy are unreliable, but can provide a rough sketch of its size.

For example, informal employment represents 58.7% of non-agricultural employment in the Middle East-North Africa, 64.6% in Latin America, 79.4% in Asia, and 80.4% in sub-Saharan Africa.

If agricultural employment is included, the percentages increase in some countries such as India, and in many sub-Saharan African countries, exceeding 90%. Estimates for developed countries are around 15%.

Recent surveys indicate that in many regions the informal economy has declined over the last 20 years to 2014. In Africa, the share of the informal economy has decreased to an estimated around 40% of the economy.

In developing countries, the majority of informal work, around 70%, is self-employed.

References

1. Wikipedia, the free encyclopedia (2018). Informal sector. Taken from: en.wikipedia.org.
2. Wiego (2018). About the Informal Economy. Taken from: wiego.org.
3. The World Bank Group (2018). Concept of Informal Sector. Taken from: lnweb90.worldbank.org.
4. Market Business News (2018). Informal sector - definition and meaning. Taken from: marketbusinessnews.com.
5. Encyclopedia (2016). The Informal Economy. Taken from: encyclopedia.com.
6. The Global Development Research Center (2018). Concept of Informal Sector. Taken from: gdrc.org.