History of the informal economy:

Various labels have been used by scholars to refer to the informal

economy: it has been called the irregular economy ( Ferman and ferman,
197!, the subterranean economy ( "utmann 1977!, the underground
economy (#imon $ %itte, 19&'( Houston, 19&7!, the blac) economy (*ilnot $
+orris, 19&1!, the shado% economy (Frey, ,ec), $ -ommerehne,
19&'(.assel $ .ichy, 19&/!, and yhe informal economy (+c.rohan $ #mith,
19&/!0 1he 2o2ular media used terms such as invisible, hidden, submerged,
shado%, non3o4cial, unrecorded, or clandestine (50# *e2artment of 6abor,
199'!0 1he common thread is that these activities are not rec7rded or
im2erfectly re8ected in o4cial national accounting system0
1he conce2t of the informal sector %as 9rst created in an :nternational
6abor ;rgani<ation (:6;! study of urban mar)et in "hana (Hart, 197!0 :t %as
then used in :6; re2orts of labor mar)et conditions in other =frican cities and
by the ,orld >an) in a series of studies of urbani<ation and 2overty during
the 1hird ,orld (#ethuraman, 19&1( +a<umdar, 197?!0 :n its a22lication to
issues of e@uity, economics chance, and social develo2ment, the term
informal economy 9rst came into eAtensive use as a means of relating a
dualistic economic structure found in develo2ing countries0 #uch an economy
involves both the normal formal economy and an uno4cial economy %ithin
%hich economic transactions occur outside outdated net%or)s and deliver
eA2licit economic and social bene9ts0 1he conce2t has changed to include
various ty2es of cash and non3cash transaction in both develo2ing and
industriali<ed economies3transactions that bene9t both the 2oor and non3
2oor0
*ra%ing on general theoretical and em2irical %or) on 1hird ,orld countries,
researchers began to ins2ect the nature and dynamics of the informal
economy in develo2ed countries (-ortes $ #assen3)oob, 19&7( #assen3)oob,
19&9( #te2ic), 19&9!0 =lthough similar activities had been observed in
Buro2ean countries (6ight, 1979( Feige 1979!0 1he conce2t did not gain much
2reliminary 2o2ularity in the 5nited #tates0 Ferman and FermanCs (197!
2a2er documented the informal economic eAchanges as mean of survival
among the urban 2oor of =merican cities that served as a maDor
brea)through in the 9eld0 Bthnogra2hic studies by #tac) (197E!, 6o%enthal
(197?!, and *o% (1977! highlighted the informal economic activity %ithin the
urban inner city0 :n 17&, Ferman began re2orting the results from his *etroit
study that combined anthro2ological ethnogra2hy %ith survey techni@ues0
1his techni@ue later became a standard methodological a22roach for similar
local3area studies (-ahl, 19&E!0
1y2ologies
;ur understanding of the informal economy may bene9t from ty2ologies that
categori<e various )inds of %or) and that classify various )inds of informal
economy activities, %e 2resent one of each in this section0
10 :nformal %or) as a labor mar)et
category
1he *ual 6abor +ar)et 1heory (*oeringer $ -iore, 1997! 2rovides one
a22roach to understanding the 2lace of informal %or) %ithin the labor
mar)et0 :t divides the labor mar)et into four categories: 2rimary, secondary,
informal and illegal0 1he 2rimary sector is regular, %age Dob that are taAed
and regulated F for eAam2le, heavy industry or %hite3collar Dobs0 1he
secondary sector is collected of Dobs that have less security than 2rimary
%or) and are not as %ell regulated, e0g0, lo%er %age Dobs in the service
sector (often referred to as 2in) collar Dobs!0 1he *ual 6abor +ar)et 1heory
argues that the informal sector is com2osed of 2eo2le %ho are unable to
access 2rimary or secondary %or)0 :nformal %or) includes 2eo2le %ho
control their o%n small business in a cash3only or unregulated arrangement
or 2eo2le %ho %or) for em2loyers but oG3the3boo)s0 1he fourth category is
illegal %or) and this includes all criminal activities that are revenue
generating0
6abor +ar)et .ategories
-rimary
#ector
#econdary
#ector
:nformal
#ector
:llegal #ector
High %age
High
security
,ell
regulated
6o% %age
6o%
security
-oorly
regulated
#elf3
em2loyment
.asual labor
unregulated
.riminal
unregulated
;ne 2roblem %ith this ty2ology is that it assumes discrete categories based
on class, race, or gender0 ;ther research has found that many 2eo2le %ho
have easy access to the 2rimary source of income or as a means to generate
additional income0
'0 .onteAt of informal %or)
=nother ty2ology 2resents categories of informal %or) based on the conteAt
of the %or)0 "iven the fairly broad de9nition of informal %or), it is not
sur2rising that there are varieties of forms or structures of informal %or)0
=s de2icted in belo% *iagram, informal %or) may involve a 2erson %or)ing
for someone else or a 2erson being self3em2loyed3and %ithin each of these
categories there are t%o measures0
#tructure of informal %or) ty2ology
-rimary %or) for
com2any
BAtra %or) current
em2loyer
-erson %or)s for
someone else
,or)s oG3the3
boo)s
,or)s under3the3
table
-aid in cash and
not taAed
,or)s eAtra hours
on %ee)ends or
evenings(2aid in
cash and not
taAed!
-erson o2erates
o%n small
business
*oes s2oradic odd
Dobs, services, or
2roducts
-erson self3
em2loyed
.ash3only
eAchanges
;n3going, regular
>usiness is seen
as 2rimary income
+ay invest income
into business
#easonal %or)
Hel2s )ee2
household
eA2enses do%n by
bartering for
services or
oGering lo%3cost
2roducts
Hot as formali<ed
as a small
business
-eo2le %ho %or) for someone else may be doing this as their 2rimary Dob as
eAtra %or), in addition to their maDor %or), for their 2rimary em2loyer0 :n one
instance the 2erson is em2loyed by a small, medium, or large scale
com2any, for eAam2le, a hotel cleaning contractor that em2loys 2eo2le
oG3the3boo) and 2ays them in cash0 :n another instance, this 2erson is
em2loyed by his or her current em2loyer to come in on %ee)ends or
evenings or to ta)e %or) home to add to his or her income0 =gain, this
arrangement is oG3the3boo)0 1he 2eo2le may have advanced the em2loyer
to increase their income or the em2loyer may have a22roached the
em2loyee0
;ther 2eo2le are self3em2loyed0 5nder this arrangement 2eo2le may o2erate
their o%n businesses, either as a 2rimary source of income or as a %ay to
su22lement their income from their 2rimary em2loyment0
.haracteristics of the informal
economy
#ince informal %or) ta)es so many forms, de9ning formal %or) 2resents
many challenges0 -ossibly the only %ay to de9ne it is to identify its
characteristics0 1he follo%ing 2resentation discusses four )ey characteristics
that are %idely acce2ted and includes multi2le as2ects of some of these
characteristics0
10 6egal vs0 illegal
,ithin this category of informal %or), activities may be legal or illegal0
Bconomics activities can be %ell3)no%n by the manner in %hich goods or
services are sha2ed or s%itched0 For eAam2le, food, clothing, and childcare
services are legal commodities but may originate in both legally regulated or
unregulated 2roduction 2re2arations (IaiDman, '771!0 1hese activities are
not intrinsically unla%ful but violate some non3criminal rule or la% such as
not 9lings taAes or not observing to labor la%s (.astells $ -ortes, 19&9(
2ortes $ #assen3)oob, 19&7( #assen3Joob, 19&9( #te2ic), 19&9!0
:ncome generated by economic activities may be diGerentiated by the
legality of the 2roduction or 2rovision of goods and services and the legal
status of the goods and services themselves0
6egal: income is generated from activities that are legal0 For a
2ortion activities that 2roduce legally3sourced income, the a22ro2riate
re2orting re@uirement to a taAing or regulatory authority (taA,
immigration, licensing! may not be ful9lled0 1hrough underre2orted,
unre2orted, or hidden, these activities 2roduce goods and services
%hose sale or eAchange is not 2rohibited0 For eAam2le, unrecorded and
unre2orted cash 2ayments made for oG3the3boo)s or under3the3table
%or) or income from second Dob is not re2orted to taA and social
security authorities (199':'!0
:llegal: :ncome is generated from activities that are illegal in
themselves (e0g0, %innings from illegal gambling( earnings from
smuggling( illegal trade in drugs, tobacco and alcohol and other
activities s2eci9cally banned by la%!0 >y its very nature, illegally3
sourced income is not recorded in o4cial statistics (199':'!0
1hus, there is a distinction bet%een informal economic activities that
derives its legality from noncom2liance %ith taA 9lings and re2orting from
activity that is criminal, such as that associated %ith illegal drug
distribution, gambling, money laundering0
'0 .ash as +ost common medium or
eAchange
=nother )ey as2ect of the informal economy is that cash is most commonly
eAchanged bet%een 2arties rather than a chec), 2ayroll statement, or credit
card0 1he 2ur2ose of using currency, rather than ban) credit, is to avoid
creating a record of the activities (+c.rohan, #mith, $ =dams, 1991:''3'!0
1he nature of this arrangement is ca2tured in the 2o2ular terms oG oG3the3
boo)s or under3the3table %hich bring to mind of a 2erson receiving
2ayment in a %ay that is not traceable0
#ome transaction in the informal economy may be based on an eAchange of
services, %hich is often called bartering or s%a22ing0
0 5nre2orted income or %ages
=s noted above, the nature of the eAchange is cash or bartering so there is
no record of the transaction( therefore, the income is not re2orted for
taAation0 :nformal %or)ers are not demanding this income on their state and
federal taA forms0 Bm2loyers %ho hire informal %or)ers are not 9ling
em2loyee records for state and federal taAes0
1he issue of taAation is an im2ortant consideration0 Hot all economic ta)e
2laces in full vie% of government o4cials %ho can record them, taA them,
and regulate them0 >oth revenue and measurement agencies are interested
in informal %or), but there are signi9cant diGerences bet%een the t%o
agencies0 For eAam2le, the :nternal Ievenue #ervice (:I#! becomes
interested in informal earnings %hen they sur2ass a certain level0 :n contrast,
Hational :ncome -roduct =ccount (H:-=! economists at the >ureau of
Bconomic =nalysis (>B=! are concerned %ith all earnings regardless of the
amount0
=lthough 2lacing economic activities into one of the four cells de2icted in
belo% diagram is some%hat 2articular, it can hel2 eA2lain the diGerent
2ers2ective that can be ta)en on the informal economy0 For eAam2le, if an
individual em2loyed as a high3school custodian %as to 9nish a neighborCs
basement, charging for materials 2lus K1777, and not 9le an income taA
return on it, both the :I# and >B= %ould be interested in the transaction( but
for diGerent reasons0 1he >B= %ould sim2ly %ant to add the money to the
national accounts, %hereas the :I# %ould %ant to collect the taAes due on
money0 :n this case the 2ayment for the 2ayment %ould be both taAable and
measured (.ell =!0 Ho%ever if this 2erson %ere unem2loyed, and the K1777
%ould not be included in the informal contractorCs income, the :I# %ould
have no interest in the money but the >B= %ould0 :n this case (.ell >!, the
2ayment %ould be measured but not taAable (+c.rohan, #mith, $ =dams,
1991!0
1he last t%o cells (.$*! relate to economic activity thai is not measured0
:llegal mar)et activity is omitted by de9nition from "H-, but is taAable and
not measured (.ell .!0 Finally, if a family a family sale a garage for more
money than they 2aid for it, the 2ro9t should be re2orted as income, and
taAes 2aid to :I#0 1he >B=, on the other hand, %ould not be concerned
because it is an intra3sector transfer (.ell *!
1=L=>6B H;1 1=L=>6B
+B=#5IB*
.ell =
6egal #ource +ar)et
.ell >
6egal #ource +ar)et
:ncome : :nformal
economy
BL=+-6B: -ayment to a
contractor, bartering of
vehicle re2air for
services
:ncome: :nformal
economy
BL=+-6B: 6a%n cutting
done by a teenager
H;1 +B=#5IB*
.ell .
:llegal #ource +ar)et
:ncome: :llegal sector of
informal economy0
BL=+-6B: #ale of drugs,
sale of stolen
automobiles0
.ell *
:ntra sector 1ransfer
BL=+-6B#: "arage sale,
sale of used refrigerator
to a neighbor