Is Informal Normal? Toward more and better jobs

The financial and economic crisis that began in 2008 has far-reaching implications for employment around the world. The slowdown in economic activity can be expected to raise unemployment, reduce international labour mobility and lead to an increase in informal employment.

These developments will critically affect poverty levels and income distributions. Informal employment refers to jobs or activities in the production and commercialisation of legal goods and services that are not registered or protected by the state.

Informal workers are excluded from social security benefits and the protection afforded by formal labour contracts. The majority of them cannot opt for scarce better jobs in the formal sector. Others voluntarily opt out of the formal system. For them, the savings from being completely or partly informal – no social security contributions, no tax payments, no binding labour regulations, and more freedom for business activities – outweigh the benefits accrued through registration and compliance.

The prevalence of informal employment in the developing world is striking. Even before the current crisis, over half of non-agricultural jobs there could be considered informal.
The share of informal employment activities tend to increase during economic turmoil, since informal work can act as a buffer when people are laid off in the formal sector.

Despite offering a fallback option to sustain livelihoods, informal employment comes at a cost. First and foremost, informal work is vulnerable. In times of crisis, informal workers are exposed to a likely depression of wages due to the inflow of laid-off workers from the formal sector and return migrants. They are also the first to lose their jobs. Second, the potential increase of informal employment locks workers into vulnerable situations. Lack of formal social protection in the face of health and occupational risks, and no protection of labour rights, puts many informal workers at a higher risk of poverty that they would otherwise be and might substantially increase poverty levels.

This Policy Brief examines the phenomenon of informal employment and its impact on individuals and society, particularly in the context of a global economic downturn.