Abstract
The informal economy, meaning employment and production that operate outside the regulatory and tax systems, tends to be overlooked in U.S. policy discussions. When it is considered, it is often viewed in terms of black market (i.e., criminal and illegal) activities, undocumented immigrants, or white-collar tax evasion. Beyond these stereotypes, millions of workers are in various informal employment arrangements performing activities not otherwise criminal in nature. This brief presents background information on the informal sector and policy options that could improve economic conditions for low-wage informal workers and their families.
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Introduction
For many years, policy analysis on informal
employment primarily focused on less-developed
economies. Informal workers are often concentrated
in agricultural, domestic service, or manual
activities; they can include individuals who are
self-employed in the sense that they do not work
for any particular employer or firm. Whether
self-employed or working for others, individuals
(and their employers) who do not report earnings
or income for tax purposes are part of the informal
economy.
As capitalist economies mature and develop,
regulatory and worker protection policies become
established, and social assistance expands, informal
work should decline. Yet, today, informal
work remains a major part of the economies of
developed as well as developing countries. Some
analysts suggest that the rate of informal work
may be increasing partly in response to expanding
globalization. New businesses are expanding in
urban areas, but costs of starting up enterprises are
high, causing some entrepreneurs to operate in
the informal sector and pay lower wages to minimize
expenses (Schneider 2002; Williams 2011).
The literal definition for the informal sector
is straightforward: economic activities that are
outside tax and regulatory policies. This definition
applies to both workers and the individuals or
companies for which they work. In contrast,
formal, or standard, employment generally refers
to regular wage and work arrangements at an
employer's location or under the employer's supervision
or policies, where the wages and income are
reported to the government as required by law.
In developed countries, including the United
States, the distinction between formal and informal
economic activities is not always clear. For
example, informal employment is similar in some
ways (e.g., operating without a regular attachment
to a particular firm, not covered by employersponsored
benefits) to nonstandard or contingent
employment (such as temporary, intermittent,
part-time, day labor, and contract workers), which
may operate in the formal sector. In addition,
individuals often mix formal, informal, and nonstandard
work - for example, working a second
job or moonlighting, sometimes "off the books."
This brief describes informal and nonstandard
employment and explores the policy implications
for low-skilled workers in those arrangements.1
Individuals in both informal and nonstandard
employment have relatively high poverty rates
and low earnings, and women represent a disproportionate
share of the workers. The poor, who
work mainly in the informal sector, may find it
even more difficult than low-wage formal workers
to raise themselves and their families out of poverty
through work alone because informal wages are
lower and there is less chance for wage increases.
End of excerpt. The entire brief is available in PDF format.
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