What is the informal economy

Informal economy, underground economy or shadow economy is the term to describe business deals outside of government regulation. The term may seem dark but it has existed since the early civilizations and so does the attempts of government regulation. Politicians are trying their best to eliminate or convert the informal sector into the formal sector through tax reform or welfare benefit programs like child care.

Informal economy usually means any under table deal, legal or illegal. Hence when an old woman pays a teenager $20 to shovel the snow outside of her house in a snow day, a company is having irregular working hours, self-employed unlicensed street vendors, hiring an illegal immigrants without reporting the hiring, and illegal drug trafficking are all counted as informal economy. None of the people who engaged in these activities paid tax for their business activity.

Informal economy — System of trade or economic exchange used outside state controlled or money based transactions. Practiced by most of the world’s population, it includes barter of goods and services, mutual self-help, odd jobs, street trading, and other such direct sale activities. Income generated by the informal economy is usually not recorded for taxation purposes, and is often unavailable for inclusion in gross domestic product (GDP) computations. -BusinessDictionary

It is difficult to find accurate data or even estimated data about the informal economy. First, people involved in the informal economy are trying into more financial liability for reporting, such as taxation. Second, some of them are very small scaled, oral temporary contract works which the government would careless of. At last, it could be criminal activities like drug trafficking.

In popular belief, developing countries usually have a larger underground economy and more significant in GDP than developed countries since developing countries’ government are less efficient at regulating. In reality, no one can accurately calculate the exact size of the underground economy.


Report of estimated size of informal economy in different regions, source: Urban Institute 

As employment, formally hired employees usually can enjoy employee benefits like insurance and retirement plans like social security and the 401K plan. In the same time, their income are taxed. For informal employed employees, it is possible that they can claim they have $0 income as they don’t need to report any earning. Yet, they can spend their earning on whatever they need to. In the same time, they don’t have employee benefits and worker protection like minimum wage.


Perk comparison of informal vs formal economy, source: Urban Institute


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.