What is the informal economy and how many people work in it?

For billions of people worldwide, making a living happens entirely off the books.

From street vendors to unregistered ride shares, domestic workers to handicraft makers – working in the informal economy is the only way to make ends meet. Understanding the scale, impact and challenges of informal work is crucial for creating inclusive policies and sustainable development.

The International Monetary Fund (IMF) defines the informal economy as; “activities that have market value and would add to tax revenue and GDP if they were recorded”. Another definition, from the women’s advocacy organization WIEGO, describes the informal economy as “a diversified set of economic activities, enterprises, jobs and workers that are not regulated or protected by the state”.

It’s also important to understand what the informal economy does not cover. Despite the stigma attached to informal work, illegal activities such as drug running or people trafficking are not included. In fact, WIEGO and other organizations are working to dispel what they term “the myth of the shadow economy”, where informal work is associated with crime and unethical activities.

That’s a view supported by Erika Kraemer-Mbula, Professor of Economics at the University of Johannesburg in South Africa. Speaking at the World Economic Forum’s #SpecialMeeting2024 in Saudi Arabia, she explained the context of informal work.

“We are referring to entrepreneurs that are providing legitimate products and services but that do not comply with some of the regulatory requirements. Perhaps they don't have a permit. They don't have registration of the business. That is what we talk about when we talk about the informal economy.”

Kraemer-Mbula went on to say that many people working in today’s flexible economy don’t realize they are operating in the informal sector.

“We are now in this space where freelancers and … high-skilled individuals are also engaged in informal activities providing all sorts of consulting, research and creative activities. So I think we have to acknowledge first and foremost, how diverse the informal economy is and how it manifests in different regions and in different contexts.”

It can be tempting to think that unregulated work only happens on the margins of society – but in many regions it accounts for the bulk of economic output.

According to the International Labour Organization (ILO) – more than half of the global labour force is engaged in informal work. The IMF says 60% of all workers are involved in unregulated jobs. That amounts to around two billion workers employed in informal jobs and four out of every five businesses are not formally registered.

While informal work is most prevalent in emerging and developing economies, it is not exclusively confined to them. Research from the IMF finds that; “on average it represents 35 percent of GDP in low- and middle-income countries versus 15% in advanced economies.

“Latin America and sub-Saharan Africa have the highest levels of informality, and Europe and East Asia are the regions with the lowest levels of informality.”

The World Economic Forum’s Global Gender Gap Report 2023 says informal work pushes women into unregulated roles with poor working conditions more frequently than men. Four out of every five jobs (80%) created for women are in the informal economy while, for men, the rate is two out of every three jobs (66%), it says.

An OECD/ILO report finds “informal employment is more common among women than men in sub-Saharan Africa, Latin America, southern Asia and, more generally, in low- and lower-middle-income countries. Up to 92% of all employed women in low-income countries are in informal employment, compared with 87% of men.

The financial consequences for women with few options other than informal work can be significant. According to UN Women, more than 342 million women and girls will be living on less than $2.25 per day by 2030. Part of the explanation for this, the UN says, is that “the gender pay gap originates from ingrained inequalities … (and) women, particularly migrant women, are overrepresented in the informal sector”.

Leaders are increasingly recognizing the vast economic contribution that women entrepreneurs in the informal sector are making. Speaking at #SpecialMeeting2024, Wamkele Mene, Secretary General of the African Continental Free Trade Area said their role must not be understated.

“Women traders are the drivers of Africa's informal economy. In February, the African Union heads of state adopted the Protocol on Women and Youth in Trade. That is a first-of-its-kind protocol that moves us beyond expressions of aspiration for SMEs to be part of inclusion, particularly those that are led by women.”

Policy approaches like increasing access to finance, skills training, property rights and extending legal protections can help transition informal operations into the formal sector over time.

There is no single quick fix to formalize informal work and many challenges to be overcome, as advocacy group WIEGO points out. “Formalization of the informal economy can take different forms: registration, taxation, organization and representation, legal frameworks, social protection, business incentives and support.”

Formalizing the jobs of billions of people – and the unregulated businesses that employ them will take time. WIEGO urges governments to take a long-term view with a range of steps that lead to varying degrees and types of formality.