Informal economy

Informal sector of economy is an area of economy in which the manufacture and turn-over of goods are not statistically evidenced. Characteristic of this activity is that it is unregulated, hence it is not included in the GDP.

Reasons for informal economy existence

Major reason for the existence of informal sector:

• criminal activity (e.g. production and turn-over of counterfeit goods),
• tax evasion (e.g. provision of all sorts of non-evidenced services),
• lack of social acceptance for the manufacture of certain goods.

More often than not, informal sector is referred to as black market or shadow economy. As a social phenomenon, informal economy involves an unregulated labour market, which allows the employer to evade paying social security benefits. It is a means of lowering employment costs for the employer while the employee benefits from greater pay or from the only way to get employed. Thousands of jobs are filled due to informal business activities, thanks to tax evasion or other means of cutting costs. In the case of immediate registration of such a work place, the result is an increase in costs and often a bankruptcy of the employer and a subsequent increase in unemployment.

Types of activity on the informal sector

Business activity on the informal sector falls into two groups:

• non-prohibited
• prohibited or covert activities

As far as non-prohibited activity is concerned, it is carried out to protect against the taxation and additional charges, including social insurance, participation in compulsory funds etc. As regards prohibited or illicit sources, these include but are not limited to: moon-shining, manufacture and sale of narcotics etc. As a rule illegal market activities are highly profitable.

Research of informal economy sector

Two methods are applicable for estimating the amount of goods on the grey market. The first one is a close analysis of incomes from a selected number of households. It serves as a statistically representative sample for the entire population. Its purpose is to reveal the non-evidenced income of its subjects. The second method relies on research of circulation of legal tender. However measured, the estimates of the informal sector are hazy at best.

Informal economy — recommended articles

Income Shifting — Illegal work — Parallel economy — Trade exchange — Permanent employment — Collateral Source Rule — Imperfect information — Self funding — Third sector

References

• Chen, M. A. (2005). Rethinking the informal economy: Linkages with the formal economy and the formal regulatory environment.

Author: Damian Iskra