The Informal Economy: Definitions, Theories and Policies

Today, there is renewed interest in the informal economy worldwide. This is because a large share of the global workforce and economy is informal and because the informal economy is growing in many contexts and appearing in new places and guises. This working paper, the first in the WIEGO series, provides an overview of the definitional, theoretical, and policy debates on the informal economy. The paper opens with a brief historical overview of the informal sector concept and related debates, focusing on the four dominant schools of thought about the informal economy. It then turns to recent rethinking of the concept, detailing the expanded statistical concept of informal employment and holistic conceptual models of the composition and causes of informality. The paper also examines the linkages between the informal economy, formal firms, and formal regulations and the “formalize the informal economy” debate. The paper proposes a comprehensive policy response to the informal economy with four main pillars: create more formal jobs; regulate informal enterprises and informal jobs; extend state protections—social and legal—to the informal workforce; and increase the productivity of informal enterprises and the incomes of informal workers. The paper concludes with a call for a fundamental rethinking of the future of the informal economy