What Is an Informal Economy?

An informal economy may be defined as an economy that operates outside the regulated or controlled economy. The informal economy is characterized by various distinguishing factors. For example, this type of economy is composed of different types of activities that are not subject to taxation. Another distinguishing factor is the fact that the economy is sort of underground in the sense that it is sometimes a succor for those in the labor market who may not be able to qualify for employment in the formal labor sector due to issues like lack of formal residency. Something else that sets the informal economy apart from the formal economy is the fact that the economy is constituted of transient, or migratory, and exceedingly small-scale workers who may not easily lend themselves and their activities to any form of strict accountability.

A good example of an informal economy can be seen in the case of workers in a country who do not qualify to work in the recognized or formal labor sector due to the fact that they are illegal immigrants. Sometimes this category of workers are fully qualified by training, experience or education to work in the formal sector, but due to their illegal status they are forced to find work outside of the regulated economy. Graduates with illegal documents often find themselves doing menial jobs in other countries due to the laws in such countries that preclude people without proper documentation from working. In such cases, they might have an understanding with whoever employs them, their payment will usually be in cash, and they will probably be underpaid in relation to their efforts. Such money earned by this category of people is not formally accounted for and will not be included in calculations of the Gross Domestic Product (GDP).

Some people may have a fully legal status, but their jobs might be so minuscule that it does not register on the radar of the formal economy. An example of this is a shoe shiner whose tools of trade are the materials used for shining shoes. Such a person could go from one street to the next, or from one city to another, in search of customers. Since the person makes an insignificant amount of money and his or her migratory status makes it hard to apply the taxation laws of any particular state to these activities, the earnings from such endeavors, while legal, are part of the informal economy.