13. Informal Economy

Sustainable Development

Decent work

Economy Social Environment Employment Protection Rights Dialogue
Relevant SDG Targets
8.3, 10.2
Relevant Policy Outcomes
6

On this page: DWA-SDG Relationship | Cross-cutting policy drivers | Partnerships | ILO Capacity | Resources

The informal economy32 comprises more than half of the global labour force and more than 90% of micro and small enterprises (MSEs) worldwide. Informality is an important characteristic of labour markets in the world with millions of economic units operating and hundreds of millions of workers pursuing their livelihoods in conditions of informality.

The expression “informal economy” encompasses a huge diversity of situations and phenomena. Indeed, the informal economy manifests itself in a variety of forms across and within economies. Formalization process and measures aiming to facilitate transitions to formality need to be tailored to specific circumstances that different countries and categories of economic units or workers face.

Work in the informal economy is often characterized by small or undefined work places, unsafe and unhealthy working conditions, low levels of skills and productivity, low or irregular incomes, long working hours and lack of access to information, markets, finance, training and technology. Workers in the informal economy are not recognized, registered, regulated or protected under labour legislation and social protection. The root causes of informality include elements related to the economic context, the legal, regulatory and policy frameworks and to some micro level determinants such as low level of education, discrimination, poverty and, as mentioned above, lack of access to economic resources, to property, to financial and other business services and to markets. The high incidence of the informal economy is a major challenge for the rights of workers and decent working conditions and has a negative impact on enterprises, public revenues, government’s scope of action, soundness of institutions and fair competition.

The 2002 ILC Resolution and Conclusions on Decent Work and Informal Economy was a milestone in the ILO’s integrated approach to informality. It clarified that the term “informal economy” referred “to all economic activities by workers and economic units that are – in law or in practice – not covered or insufficiently covered by formal arrangements.” This description was endorsed 13 years later through the ILO Recommendation concerning the transition from the informal to the formal economy (R204), which further clarified that the term does not cover illicit activities, and that the expression “economic units” in the definition refers to units that (a) employ hired labour; (b) individuals working on their own account, and (c) cooperatives and social and solidarity economy units. R.204 constitutes a historic landmark for the world of work as it is the first international standard focusing exclusively on the informal economy in its entirety.

To promote decent work, there needs to be a comprehensive and integrated strategy cutting across a range of policy areas and involving a range of institutional and civil society actors that eliminates the negative aspects of informality, while preserving the significant job creation and income generation potential of the informal economy, and that promotes the protection and incorporation of workers and economic units in the informal economy into the mainstream economy.

In the follow-up to the adoption of R 204 the ILO Governing Body at its 325th session adopted an implementation strategy articulated around four interrelated components, namely: (1) a promotional awareness-raising and advocacy campaign; (2) capacity building of tripartite constituents; (3) knowledge development and dissemination; and (4) international cooperation and partnerships. The formalization strategy developed under the former Area of Critical Importance can be summarized as follows (47):

Box 1
Policies to promote the transition to the formal economy 
1. Targeted policies for specific groups of workers and economic units in the informal economy
  • Formalization of micro- and small enterprises
  • Sector-based approaches to formalization
  • Non-standard forms of employment and formalization. 
2. Policies tackling structural drivers of informality
  • Extension of social security coverage
  • Improved compliance with the law (including with international labour standards)
  • Labour market institutions and formalization
  • Organization of informal workers and employer
  • Integrated approaches to formalization


DWA – SDG Relationship

Informality is addressed directly in just one SDG target, namely SDG 8.3 “promote development-oriented policies that support productive activities, decent job creation, entrepreneurship, creativity and innovation, and encourage formalization and growth of micro-, small- and medium-sized enterprises including through access to financial services”; indirectly, however, many additional SDGs focusing on poverty (SDG 1), gender equality (5), equality (10), institutions (16) and partnerships (17) are relevant to informality, and will benefit from programmes aiming at gradually formalizing the informal economy. The central ambition of the 2030 Sustainable Development Agenda to leave no one behind certainly resonates with the billions of informal economy workers around the world. It will be crucial to address the decent work deficits affecting the informal economy so that informal economy workers have a chance to escape situations of working poverty.

ILO’s work on the formalization of the informal economy is subject to a specific Policy Outcome but it relates in practice to all other Outcomes, to all technical units of the Office, and to all thematic areas of the present publication. To quote the 2002 Conclusions: “The ILO should draw upon its mandate, tripartite structure and expertise to address the problems associated with the informal economy. An approach based on decent work deficits has considerable merit and should be pursued. The ILO approach should reflect the diversity of situations and their underlying causes found in the informal economy. The approach should be comprehensive involving the promotion of rights, decent employment, social protection and social dialogue. The approach should focus on assisting member States in addressing governance, employment-generation and poverty-reduction issues. The ILO should take into account the conceptual difficulties arising from the considerable diversity in the informal economy.” (48)

Crosscutting policy drivers

The informal economy is informal because formal arrangements, including laws and regulations, are not, or not sufficiently, applied, observed or applicable. A key element of ILO’s work on formalizing the informal economy therefore seeks to gradually improve the legal framework and compliance with the law and with international labour standards.

The share of women in the non-agricultural informal economy matches that of men, but occupations differ: many women work as street vendors, as unregistered domestic work, as unpaid contributing family workers or as manual workers in informal factories. Then they face more specifically some of the factors of informality such as discrimination, lack of access to economic resources, to property, to financial and other business service in addition to the greater need to combine family and work responsibilities. It is therefore important to devise gender-specific formalization strategies.

Informal economy operators and workers are usually not members of (formal) workers’ and employers’ organizations and are therefore often excluded from formal institutions for social dialogue. However, in recent years trade unions and business associations in various countries have begun reaching out to the informal economy by establishing special “windows” or membership categories. Moreover, informal economy workers/operators often establish their own organizations, associations and cooperatives to defend their interests and generate economies of scale.

Informal economy workers and operators engaged in harmful or dangerous activities such as waste-picking may benefit from programmes that seek to combine the protection or rehabilitation of the environment with the improvement of working conditions.

Partnerships

The multifaceted nature and omnipresence of the informal economy in all regions and countries makes it a potential target for a very board variety of partners. ILO’s constituents at the national and the global level are concerned about the extent of informality (which is growing rather than shrinking in some countries) and the damage it inflicts on people, the planet and prosperity. Many, if not all, UN operational agencies can contribute to the formalization of the informal economy in one way or another, making the subject an ideal target for joint UN programmes at the country level. The Office collaborates with the World Bank and other regional and international organizations on productivity and the cost and benefits of formalization, with the European Commission on reducing unregistered employment in Europe, with the OECD on drivers of informality, and with Women in Informal Employment: Globalizing and Organizing (WIEGO) and other relevant organizations on statistics.

ILO Capacity

The crosscutting nature of the informal economy means that no single organizational unit of the Office has the “monopoly” of the work on formalization; this was already recognized in 1998 when the then Director-General launched an Interdepartmental programme on the informal economy. All technical units at headquarters and all technical specialists in the field can and should contribute to the formalization of the informal economy, and field office directors have the challenge and obligation to coordinate such work into a coherent programme of action.

Resources

The ILO portal on the informal economy provides access to numerous publications, reports and statistics on the informal economy. In addition, the ILO Library guide includes a page on the informal economy which facilitates access to a broad range of material, grouped into different themes, sectors and regions. Because of the cross-cutting nature of the informal economy many other ILO units have published material on the phenomenon and its relationship with the specific technical area. The ITC Turin offers every two years an academy on the formalization of the informal economy, as well as economy learning series and academies on specific issues


32 - The term “informal sector” was first coined in 1972, at the outcome of a comprehensive ILO employment advisory mission to Kenya , and was later converted to “informal economy” to underline the fact that informality is not a “sector”, but a certain way carrying out economic activities. Interestingly, “The (Kenya mission) report acknowledges that the informal sector idea originated not with the high-level foreign “development experts” brought in for the mission but from the work and the staff of the Institute or Development Studies of the University of Nairobi, a fact which has been generally forgotten since then. In other words, it was not the ILO which invented the concept of the informal sector. It came out of the thinkers and analysts of the Third World” (74)

47. ILO. European Semester Thematic Fiche - Active Labour Market Policies. Geneva : ILO, 2015.

48. —. Conclusions concerning Decent Work and the Informal Economy. Conclusions concerning Decent Work and the Informal Economy.

74. Bangasser, Paul E. The ILO and the Informal Sector: an Institutional History. Geneva : ILO, 2000.