Background
The term informal economy refers to economic activities and transactions that occur outside the purview of official regulatory frameworks and are often not reflected in government statistics. These include a wide range of activities from street vending and freelance work to unregistered small businesses and under-the-table employment.
Historical Context
The concept of the informal economy gained prominence in the 1970s when researchers began to examine economic activities that did not fit into the traditional categories recognized by official economic measures. Initial studies were often conducted in developing countries where formal employment was not available to large segments of the population. However, subsequent research has shown that the informal economy exists in both developing and developed nations.
Definitions and Concepts
Informal Economy
The informal economy encompasses all economic activities that are not regulated by governments and do not adhere to formal and codified labor laws, taxation systems, and regulatory environments.
Hidden Economy
The term “hidden economy” is often used interchangeably with the informal economy. It highlights the element of concealment from governmental oversight.
Shadow Economy
The shadow economy refers to legal income-generating activities deliberately concealed from authorities to avoid taxes or social security contributions.
Underground Economy
The underground economy includes illegal activities, such as drug trafficking or unlicensed gambling, mostly concealed to avoid legal or regulatory consequences.
Major Analytical Frameworks
Classical Economics
Classical economics usually emphasizes formal structures, but the informal economy is implicit in its discussions of trade and labor outside governmental oversight.
Neoclassical Economics
Neoclassical economics might explore the informal economy in the context of market imperfections and the roles of individuals’ rational choices outside formal sectors.
Keynesian Economics
Keynesian economics could examine the informal economy concerning aggregate demand and supply, focusing on how these unregulated activities impact overall economic stability.
Marxian Economics
Marxian economics often views the informal economy as a manifestation of capitalist exploitation, where workers lack formal protections and benefits.
Institutional Economics
Institutional economics would focus on how institutional structures and regulatory frameworks interact with the informal economy, often emphasizing the role of governance and corruption.
Behavioral Economics
Behavioral economics might look at the informal economy through the lens of individual and group behaviors, focusing on motivations behind opting for informal over formal employment.
Post-Keynesian Economics
Post-Keynesian economics would address the informal economy in the context of economic inequality, wage structures, and the macroeconomic impacts of informal labor markets.
Austrian Economics
Austrian economics would emphasize individual entrepreneurship in the informal economy, seeing it as a natural response to over-regulation within the formal sector.
Development Economics
The informal economy is a critical focus in development economics, being crucial for understanding economic activities and livelihood strategies in developing countries where formal employment can be scarce.
Monetarism
Monetarism would explore how the informal economy influences monetary aggregates and the challenges it poses for monetary policy and controlling inflation.
Comparative Analysis
Comparing the informal economies of different countries can reveal much about the efficacy of governance, the adaptability of labor markets, and cultural attitudes towards state regulations. For instance, whereas a significant informal economy might indicate economic resilience in times of crisis in one country, it might indicate regulatory failure in another.
Case Studies
- Latin American Markets: Informal retail markets are vital in many Latin American cities, providing employment and affordable goods but posing challenges in regulation and tax collection.
- Sub-Saharan Africa: Agriculture and small-scale trade form significant parts of the informal economy, crucial for livelihoods but often keeping workers in poverty.
Suggested Books for Further Studies
- The Informal Economy Revisited by Alejandro Portes and William Haller
- Illegal Tender: Gold, Drugs, and the Informal Economy in Southeast Asia by Andrew Grub
Related Terms with Definitions
Gray Economy The segment of the economy involving legal business transactions not reported to the government to avoid taxes.
Black Market Markets dealing in trading illegal goods or services.
Gig Economy Economic activity involving short-term, flexible jobs, often facilitated by digital platforms.
Microenterprise Small-scale businesses often operating within the informal economy due to limited regulations.
Subsistence Economy A system where people produce enough to satisfy personal needs, often overlapping with informal economic activities.
Tax Evasion Illegally avoiding paying taxes, a strategy commonly employed in the informal sector.
