Studies

Informality encompasses legal economic activities parallel to a nation's regulated economy. The absence of adequate documentation inherent to the informal sector contributes to the legal and economic disempowerment of workers, robbing them of the protections and benefits formalized institutions provide.

The parallel economy informality creates tends to be larger in developing nations. In these countries, informal employment functions as a short-term survival strategy. With rapid population growth and urbanization, developing nations have yet to develop adequate social safety nets and regulatory structures to legally represent the majority of their populations. Thus, informal employment absorbs labor force expansion resulting from rapid growth in the absence of sufficient income-generating employment opportunities.

Under these conditions, informal employment contributes substantially to job creation and income generation. Chronically high informality levels, however, are indicative of legal and political vulnerability, allowing institutional and regulatory inefficiencies to persist in the long run. Ultimately, informal employment undermines economic stability, providing a short-term solution for long-running, systemic problems. The broad scope of societal, economic, legal, and political issues associated with high informality renders favorable macroeconomic conditions alone insufficient to reduce informal employment in developing nations.

This report examines the implications of informality in 15 developing nations, focusing on civil society, government, labor, and the private sector. Primary findings include:

• The causes of informality are variable and not mutually exclusive; they tend to exist on a continuum.
• The informal economy may contribute to short-term economic growth by bolstering income and production levels in developing nations. However, the long-term effects of informality are associated with underdevelopment and stagnation.