The informal economy: measurement, productivity and the path to better work

Informality describes arrangements, not personal worth

The informal economy includes diverse activities and working arrangements that are not fully covered by relevant formal systems in law or practice. It is not a synonym for criminal activity, low effort or lack of enterprise. A street trader, a home based producer, an employee without effective protection and an unregistered business can face different circumstances. Treating them as one uniform group obscures the reasons people work informally and the policies that could improve their opportunities.

The ILO framework distinguishes economic units from the jobs and activities carried out within them. That distinction is essential because a registered enterprise can employ people informally, while a worker's status can change without the enterprise itself changing category. This guide focuses on measurement, productivity and transition rather than presenting formality as a simple moral division. The practical question is which arrangements improve income, protection and productive capacity while preserving viable livelihoods.

Informal employment and the informal sector differ

The informal sector classifies production units, while informal employment classifies jobs or work arrangements under the applicable statistical standards. The two overlap but are not identical. Informal employment can exist within formal enterprises and households as well as informal enterprises. Consequently, a measure of employment in informal businesses does not necessarily capture all workers lacking formal arrangements.

A hypothetical registered restaurant may employ ten people, with six covered by the relevant formal arrangements and four not covered. Counting the restaurant as formal does not make all ten jobs formal. Conversely, the exact treatment of workers and units must follow the statistical framework rather than assumptions based on size alone. ILO standards have evolved, including the resolution adopted in 2023, so comparisons should identify which definitions countries implemented. A break in a series can reflect a methodological change rather than an immediate transformation in working conditions.

Household and enterprise surveys see different things

Enterprise registers can miss units that are not registered, while household surveys can identify workers whose activities are absent from business records. Labour force surveys, mixed household and enterprise surveys and administrative data therefore provide complementary evidence. Each has limitations involving recall, seasonal work, multiple jobs and the ability to describe employment protections accurately. A comprehensive estimate needs clear coverage and consistent classification.

A hypothetical business survey based only on tax registration will not discover every unregistered producer by increasing its sample within that register. A household survey may find the workers but lack detailed accounts of their output and intermediate costs. Combining sources helps, but differences must be reconciled rather than averaged away. ILOSTAT's harmonization work and IMF measurement guidance emphasize the importance of concepts and source quality. A precise percentage is not automatically a precise description of every activity outside administrative records.

Unregistered does not necessarily mean absent from GDP

National accounts aim to measure production within their boundary, including relevant activity that is not directly observed in business registers. Statistical agencies can use surveys, benchmarks and estimation methods to account for nonobserved production. The informal economy is therefore not simply an amount that can be added to published GDP as though statisticians had ignored it entirely. Doing so can double count activity already included through estimation.

Suppose a hypothetical national account already estimates 20 units of production from small unregistered businesses. A separate study identifying those same 20 units does not imply GDP should rise by another 20. The useful question is whether coverage or estimation needs improvement. Informal employment shares and estimates of informal output also measure different things: employment can be concentrated in low output activities. Always identify the concept, accounting boundary and existing statistical treatment before comparing informality measures with GDP or claiming a hidden economy has been newly discovered.

Low productivity has multiple causes

Informality is often associated with low productivity, but association alone does not show which direction causality runs. Small scale, limited capital, weak infrastructure, skills constraints and restricted market access can reduce productivity and make formal compliance difficult. Informal status can in turn limit finance, contracts and growth. The relationship is a feedback process rather than a single cause that registration automatically removes.

Consider a hypothetical workshop producing 100 units of value added with five workers. Its output per worker is 20. Registering the business changes its legal or administrative position, but does not by itself raise that ratio. Better equipment, skills, demand or organization could do so. Equally, registration may help obtain a contract that makes those investments viable. The analytical task is to identify the binding constraint and sequence of change. World Bank research links informality with weaker outcomes while highlighting the need for broader policy design.

Formality must offer usable benefits

Registration and compliance impose costs in time, fees, reporting and recurring obligations. Formal arrangements can offer access to markets, contracts, finance, legal protection and social insurance, but those benefits must be credible and usable. A simplified registration form may have little effect if subsequent obligations remain unpredictable or if the business cannot access the services that formal status is supposed to provide.

A hypothetical owner compares a predictable compliance cost with uncertain future benefits. Reducing initial paperwork helps, but may not change the decision if financing, infrastructure or customer access remain the main constraints. Enforcement also matters, especially where firms deliberately avoid obligations while competing with compliant businesses. The appropriate mix differs between subsistence activity and a capable firm evading requirements. ILO Recommendation 204 treats transition as an integrated process that preserves and improves livelihoods rather than a campaign measured only by the number of new registrations.

Social protection needs effective coverage

A worker may be legally eligible for protection yet unable to access it in practice because of irregular income, documentation barriers or contribution rules designed for stable salaried work. Effective coverage therefore differs from a legal promise. Informal workers also vary in their capacity to contribute, making one financing model unsuitable for every group. OECD and ILO work distinguish the design of protection from a simple formal versus informal label.

For a hypothetical worker earning irregularly, a fixed monthly contribution can be manageable in a strong month and impossible in a weak one. Flexible payment arrangements may help, but the system still needs sustainable financing and meaningful benefits. Noncontributory support and contributory insurance serve different roles and may complement each other. Evaluate access, adequacy, portability and reliability rather than enrolment alone. A policy that increases administrative membership without usable protection should not be described as a complete transition to secure employment.

Different workers need different transition paths

Informal employment includes employees, own account workers and other arrangements with different bargaining power and resources. Gender, location, migration status, care responsibilities and sector can affect access to formal opportunities. A policy built around a small shop owner may not address a domestic worker, a seasonal farm worker or an employee whose employer controls the contract. Diagnosing the group comes before choosing the instrument.

A hypothetical training programme can help an own account producer reach new customers but do little for an employee denied protection by a profitable firm. That case may require enforcement and representation rather than entrepreneurship support. Conversely, punitive closure of a survival activity can remove income without creating a better job. ILO diagnostic guidance calls for understanding drivers, working conditions and institutions. The objective is a feasible route toward better work, with differentiated measures and evidence about who benefits, who bears costs and who remains excluded.

Structural change matters as much as registration

A sustained reduction in informality often requires more productive firms and better jobs, not only moving existing activities into a register. Education, infrastructure, finance, competition and demand can influence the creation and growth of those opportunities. Transition may occur when workers move to expanding formal enterprises, when existing firms improve and formalize, or when employment arrangements become effectively protected. These are distinct pathways with different timing.

Suppose a hypothetical economy adds 100 formal jobs while losing 80 informal jobs. Net employment rises by 20, but the welfare result depends on who moves, earnings and conditions. If displaced workers cannot access the new jobs, aggregate improvement can coexist with hardship. Measure transitions between states rather than only two snapshots. ILO, OECD and UNDP work on structural transformation emphasizes this broader perspective. A successful strategy links productivity and protection so that formalization becomes economically sustainable rather than an administrative achievement that quickly reverses.

Read informality indicators with their boundaries

When an informality statistic appears, identify whether it measures workers, jobs, enterprises or output. Check the reference period, agricultural coverage, age range and statistical standard. Separate national observations from modelled estimates and look for changes in survey design or definitions. A decline in the share can reflect formal job growth, informal job loss or a reclassification, each with different implications for livelihoods.

Then connect the measure to outcomes: real earnings, productivity, protection, business survival and access to opportunity. Avoid assuming that every informal activity is illegal or that every registered job is secure. The strongest analysis states the mechanism behind a change and the evidence needed to judge it. Informality is an institutional and economic relationship, not a single hidden sector that can be fixed with one form. Progress means better productive opportunities and effective protection, supported by statistics that make both visible.

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