Informal Economy, The

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INFORMAL ECONOMY, THE

Informal economic activity can only be understood in relationship to its counterparts in the institutions of the formal economy, most notably in markets for labor, goods, and services. In most modern, industrial, capitalist societies, economic activity occurs in the form of exchanges of cash for labor, consumer goods, and services within well-regulated economic institutions located within the

formal economy. The labor market, in particular, provides the framework for regulating the exchange of work and wages between sellers and buyers of labor (workers and employers) under the auspices of a legal and regulatory environment enforced by the state. At the same time, it is also widely recognized that livelihood strategies may entail all manner of exchange outside these formal institutions and regulations. That is, exchanges may occur in the informal economy. Goods and services may be bartered, traded for nonmonetary compensation, or produced under conditions that flaunt health and safety regulations. Earned income may go unreported and untaxed. Individuals may self-provision, using their own resources to produce and consume household necessities even when they are readily available for purchase. Credit may be extended on the basis of kinship and trust. Numerous other types of unrecognized exchanges create value "under the table," that is, in the informal economy.

In some societies the informal economy is the dominant mode of economic activity. It is especially prominent in developing countries where the majority of the population may engage in various types of economic exchanges outside any formal regulation, cash economy, or state supervision. Yet informal activity is not limited to developing nations. Increasingly, economists, sociologists, and others who study work and labor markets recognize that the informal economy is very much present in first world industrial and postindustrial economies. The shadow, black, gray, underground, subterranean, or parallel economy are among the common euphemisms for an informal economy that exists side by side with its more studied and theorized counterparts in developed as well as developing nations, first and third worlds, urban and rural communities, and everything in between.


DEVELOPMENT OF THE CONCEPT

History. The term informal economy has numerous uses and meanings and few precise definitions. Its original formulation is attributed to an anthropologist, Keith Hart, studying emerging urban labor markets in Africa for the International Labour Office (ILO) (Hart 1973). Hart distinguished between waged employment in large firms or government agencies and self-employment in his studies of the urban labor force, noting the wide variety of small-scale entrepreneurial activities that were central to the livelihood strategies and economic life of residents of urban centers in Africa. Small traders, food vendors, and sellers of goods or services from shoe shines to haircuts are the familiar mainstays of urban economies. Subsequent use of the term by the ILO came to mean self-employment and small-scale family enterprise correlated with poverty, underemployment, and low productivity, particularly in poor, developing nations. This view was widely adopted by analysts and policy makers for whom the informal economy was a phenomenon of poverty and underdevelopment, with the implication that development of a modern economy decreases the need for and significance of informal activity. Ultimately, informal work should be absorbed into the regulated economy.

More recently, assumptions about the scope, location, and importance of informal work have come under scrutiny, since it has been recognized that informal work is neither unique to impoverished Third World countries nor necessarily diminishing in size or importance. Several developments in diverse areas of economic sociology, but all of them linked to global economic restructuring, have led to renewed interest in informal work and a growing understanding that it is both more widespread and less understood than previous accounts suggested. Studies of urban ethnic enclaves, patterns of employment for new immigrants, and the explosion of the global division of labor in "world cities" have generated interest in informal work. Similarly, there has been a corresponding interest in livelihood and income-generating strategies of both the urban and rural poor, and in wide-scale economic restructuring that sought increased flexibility in production processes and labor practices, as well as recognition of the persistence of noncash exchanges in communities of all sizes and locations. Additionally, periodic headline-grabbing media accounts of sweatshops, child and immigrant labor abuses, and other gross violations of labor law and workplace protections have fueled broad awareness of the persistence and pervasiveness of informal activity.

Definitions. Despite growing awareness of the ubiquity of the informal sector, a precise definition remains elusive, and numerous issues remain unresolved. Typically, informal activity is defined by what it is not; that is, it is not formal, it is not regulated, and it is not counted in official statistics and national accounting schemes. Castells and Portes (1989) provide an influential definition using this approach: "The informal economy is . . . a process of income-generation characterized by one central feature: it is unregulated by the institutions of society, in a legal and social environment in which similar activities are regulated" (p. 12).

While broadly inclusive, this definition provides little guidance for distinguishing between different types of activities conducted under different circumstances. For example, should overtly criminal activities, such as drug dealing, be classified in the same way as work that is otherwise legal, such as flea market sales, except that is unreported and untaxed? Should both production and consumption processes be classified as part of the informal sector? In other words, are the goods that are produced in sweatshops comparable to those produced at home for private consumption? When do self-employment and the use of family labor become informal work? These questions illustrate both the diverse approaches found in the literature and the confusion that exists there.

Other analysts emphasize specific defining characteristics of the informal economy rather than focusing on what it is not. For example, Roberts (1994), while accepting the basic outline of the standard definition, argues that the key feature of informality is not the absence of regulation but instead the existence of a specific type of regulation that dominates the activity. Thus, the informal sector is marked by the dominance of regulation based on personal relations and networks embedded in family, community, friendship, or ethnicity rather than on regulation organized on formal, legal, or contractual bases. Similarly, Mingione (1991) suggests that income strategies organized around reciprocal networks, such as those found in family and household labor and relations, characterize the informal sector. These analysts emphasize the interpersonal networks that create obligations and responsibilities that permit exchanges that bypass formal institutions. This approach has found expression in the many studies of immigrant labor and ethnic enclave enterprise where kinship and co-ethnic personal ties are the means for conducting business.

A number of taxonomies and typologies have been proposed in an effort to codify characteristics of informal activity. Feige (1990) distinguishes between illegal, unreported, unrecorded, and informal categories of a more encompassing underground economy. While there is much overlap, these categories appear to represent a continuum ranging from those most thoroughly in violation of the law to those that merely forgo its protections. Castells and Portes (1989) clearly differentiate informal from illegal by separating processes of production and distribution from the product itself. Thus, a perfectly legitimate product or service may be produced informally in violation of the law. Cappechi (1989) cross-classifies three types of labor markets (nonmonetary, informal monetary, official) with the equivalent three markets for goods and services to derive a nine-cell typology. Informality in either labor or product markets creates five types of informality.

Still other analysts argue that, fundamentally, informality can only be understood on a case-specific basis. For example, Gaughan and Ferman (1987) contend "that the term informal economy will mean different things in advanced industrial nations from what it does in developing countries. . . . poor communities as opposed to middle-class communities, or in an urban as opposed to a rural setting" (p. 18). In keeping with this notion of the variability of forms of informal activity, Miller (1987) discusses informal economies in the plural rather than the singular.

Regardless of specific emphasis, virtually all analysts agree that informal economies, sectors, activities, and labor can only be understood vis-àvis their relationship to their formal counterparts and in the context of their relationship to the state (Roberts 1994). There is no such thing as an informal economy in the absence of a formal economy. Portes (1994) even suggests that the extent of informal activity depends on the degree of state regulation, with greater informal development representing a response to an overly restrictive formal sector. Furthermore, while many analysts discuss informal activity as outcomes or in terms of structural elements that comprise a form of economic institution, there appears to be greater utility in conceptualizing it as a process that varies in time and space. Thus, the concepts of informality and informalization, in which economic activity is evaluated in terms of its degree of adherence to state regulation and particular labor practices, permit an assessment of variation in levels and development of informal sectors and their shares of the larger economy.

Forms of Informal Activity. Empirical studies of informal activity identify a wide range of actual practices. Ultimately, what is included and what is excluded depends on the specific definition and the specific context for the activities, as discussed above. Nevertheless, certain broad categories are regularly found in the literature. They can be categorized in terms of what type of exchange relationship is involved and the specific kinds of goods and services transacted. Thus, goods and services can be exchanged for income that goes unreported in any official venue, as exemplified by the babysitter or maid who gets paid in cash that is not taxed or reported by either employer or employee. They may be bartered and exchanged directly for the same or other goods or services, as in the trade of child-care services or child care for firewood. They may be supplied and consumed to save money or to self-provision, as when members of a household raise a garden and preserve food for home consumption.

Specific goods, services, and activities vary from place to place. Urban dwellers are unlikely to raise livestock or cut wood for home consumption, but they are no less likely than their rural counterparts to engage in child care or household and auto repair (Tickamyer and Wood 1998). Sweatshops and street vendors are most likely to be found in large urban labor markets (Gaber 1994; Sassen-Koob 1989), but industrial subcontracting and home assembly operations are well documented in rural communities as well (Gringeri 1994).

One of the problems in specifying types of informal activity is distinguishing informal from related forms of work and exchange. At the margins it may be extremely difficult to draw this line. For example, where does engaging in an activity for recreation or personal satisfaction end and self-provisioning begin? Should the avid gardener whose vegetable consumption is a by-product of the hobby be classified as engaged in informal work? Where should volunteer work done for charitable purposes be classified? Informal labor overlaps with many other forms of waged and unwaged labor, including social and generational reproduction, self-provisioning and subsistence activities, consumption work, and community service as well as simple commodity production, self-employment, and subcontracting.


SOCIAL, SPATIAL, AND TEMPORAL DIMENSIONS

The expanding literature demonstrates that informality is not limited to a particular time, place, type of economy, or population group. Nevertheless, clear themes that focus on specific groups and places emerge in the research literature. Some of it is empirically based; some is speculative and yet to be tested or verified regarding who participates, where, and under what circumstances; and some is contradictory or unfounded. The most common assumption is that informal labor involves categories of workers who are disadvantaged in some manner and, therefore, are shut out from the opportunities available in the formal sector. For example, informal workers have been identified as particularly prevalent among racial and ethnic minorities, immigrants, women, and children (Hoyman 1987; Portes et al. 1989; Sassen-Koob 1984). Other studies would add rural residents (Fitchen 1981; Jensen et al. 1995) and the urban poor (Edin and Lein 1998).

While there are many specific accounts and case studies to illustrate the importance and workings of informal labor and sectors among these specific populations and locations, there is little evidence at this time to suggest that informal work is any more prevalent in one group compared to another. Furthermore, it is not always clear from these accounts whether informality adheres to the group or to the type of jobs certain groups are more likely to hold. For example, women are sometimes identified as more likely to operate in the informal sector, as is work that is typically female, such as child care and domestic service. If it is the case that women are more likely to work informally, is it because of gender or because they hold gendered jobs?

Informalization is often assumed to be increasing in both developing and developed countries as a response to the social and economic restructuring that has transformed and linked core and peripheral economies in the last several decades. Globalization, the growth of transnational capitalism, and increased international competition have led capital to seek more flexible production processes, to escape from state regulation and taxation, and to reduce labor costs. This puts pressure on labor–capital agreements, benefits available from the welfare state, and the general availability of employment that pays a living wage, has social benefits, and observes rules and regulations. The result is increased self-employment, subcontracting, and, presumably, informal employment as employers seek to cut the costs of doing business and employees are forced to find any means of subsistence. Yet here, too, there is little empirical confirmation of what are largely untested hypotheses. For example, it is not yet established whether informal activity is more prevalent among different class and income groups, whether it is in fact a substitute for formal work, or whether it serves as a supplement to increase or stretch income. Instead, there is a rich tradition of case studies of different regions, communities, and industries that are informative but case-specific, lacking both comparability or comprehensiveness. Thus, it is premature to conclude that informality is increasing or that it is especially prevalent in some groups or places compared to others.

RELATIONSHIP TO THE ETHNIC ECONOMY

While informal economic activity is not limited to a particular market segment or group, researchers have shown particular interest in those forms of informal activity that occur in ethnic economies. Part of the reason for this is that the extensive literature on the ethnic economy offers a unique view of informal work given by researchers whose main purpose is not to examine the informal economy per se but to study ethnic exchange relationships (rather than class relationships) in the secondary labor market. This research shows that ethnic economies provide opportunities for unique forms of informal activity not commonly found in other sectors. However, the importance that is placed on informalization in the ethnic economy literature should in no way imply that the two economies are always congruent, although some enclave economies are almost entirely informal (Stepick 1989).

Ethnic economies are labor markets characterized by sectoral specialization of industries owned and operated by entrepreneurs from the same ethnic or immigrant group and their co-ethnic workers. While ethnic and informal economies are not synonymous, the prevalence of work outside the formal sector within ethnic economies suggests that conditions in these labor-market areas necessitate, or at least are particularly well suited for, informal economic activity.

The reasons for this vary. Since most workers in the ethnic economy are immigrants from developing countries or ethnic minorities that face discrimination in the formal labor market, they often provide a pool of available cheap labor for the informal market. That is, the labor supply is cheap as long as the work remains part of the informal economy, since the cost of labor rises when wages are regulated. Enterprising businessmen and women can make use of this inexpensive labor, keeping their costs low by hiring "off the books" or paying piece rates for contracted work that may or may not be reported by the worker as income.

Since ethnic economies are also marked by subcultural norms and preferences, informal activity may also allow for cultural variation in working conditions. In the case of Latin American immigrant women, for example, the myriad home working opportunities within the ethnic economy allow mothers to earn needed income while still tending to their children and other domestic tasks. In fact, there is evidence that some home-based industries emerged in response to the demands of experienced female laborers who wanted to earn extra income but expressed a cultural preference to stay at home (Fernandez-Kelly and Garcia 1989).

While the magnitude of informal economic activities within ethnic economies is not known, studies of the garment industry in New York and Los Angeles, a sector that is almost exclusively part of the informal economy, suggest that many of the workers in the industry are unregistered and working out of their homes (Fernandez-Kelly and Garcia 1989; Sassen-Koob 1989; Stepick 1989). This is also true of the home-based electronics production industry (Lozano 1989). Latin American immigrant women comprise the largest portion of this work force that engages in the unreported assembling of electronic components at home on a piece-rate basis. The informal economy may also be responsible for the viability of these industries. While the garment industry faltered in the 1980s, textile businesses owned by immigrants who subcontracted homeworkers thrived.

Ethnic enclaves are a special condition of the ethnic economy that arises when an ethnic economy is located in a geographically concentrated area. This geographic concentration can also give rise to unique opportunities within the informal sector. In enclaves such as Washington Heights in New York City, Chinatown in Los Angeles, and Little Havana in Miami, the demand for capital for entrepreneurial ventures has created possibilities for informal money-lending operations. These tend to take the form of either rotating credit associations, whereby residents contribute small sums of money that are pooled and then loaned at low interest rates to other residents, or personal loans from one wealthy entrepreneur to a potential small-business owner. These lending transactions occur outside of state and federal lending laws and are often made without any written agreement by the participants. Social pressure alone seems sufficient to guarantee repayment. This is consistent with Roberts's (1994) contention that interpersonal networks regulate the informal economy.

Ethnic enclaves also generate a heightened demand for goods typical of those widely available in an immigrant's home country. This demand for ethnically defined goods creates unique opportunities for informal work. Enterprising men and women often produce foodstuffs and other products for sale out of their homes. Some also find customers among other immigrants who agree to resell their products in their retail shops and bodegas. The informal production of goods insures that costs to both the retailer and the customer remain low, insuring future demand.


WAYS OF MEASURING AND STUDYING

This brief discussion of informal activity in ethnic economies illustrates only one variation in the form and scope of this phenomenon and underscores the importance of further research to gain a greater understanding of how informal economic processes impact individuals, households, and labor markets. As previously noted, recognition that informal economic activity is widespread in developed as well as developing, urban as well as rural, contexts is just beginning to emerge. Consequently, what is known about the size of the informal economy, its participants, its determinants, and its relationship to the formal sector remains limited.

Most of what we currently know about informal work comes from ethnographic and field studies using in-depth interviews and other qualitative data-collection techniques. These provide a rich and varied collection of information about the nature and meaning of informal work in different regions. These regions include remote rural areas such as the Ozarks (Campbell et al. 1993), rural Pennsylvania (Jensen et al. 1995), and the Southwest (Roberts 1994). Other researchers have also looked at urban subpopulations, including Latin American immigrants in New York City (Sassen-Koob 1989) and in Miami (Stepick 1989). These studies offer a intensive look at the kinds of informal activities that occur, who does them and why, and when people engage in informal economic activities.

Case studies and other qualitative methodologies have provided a rich source of data on specific groups and locales, but their limited geographic scope means that there is little information on informal economic activity in larger populations and subpopulations, thus limiting our understanding of the prevalence of such activities across rural and urban places. Furthermore, there appear to be inconsistencies about the nature of informal work across areas, and case studies can only begin to explore these seeming differences. For example, studies of informalization in rural areas suggest that bartering and self-provisioning are both a means of supplementing a meager income and a normative way of life. On the other hand, urban studies depict informal work as an activity engaged in when the avenues to work in the formal labor market are blocked.

Attempts to quantify informal activity for use in policy making have been made by several national and international agencies, although the methods employed are often crude. Portes (1994) separates these strategies into categories based on the following approaches: (1) the labor market, (2) the very small enterprise, (3) macroeconomic discrepancies, and (4) household consumption.

The first three approaches rely on data taken from industry reports and measures of national economic activity such as the gross domestic product. The labor-market approach entails assigning all labor as informal if it is reported as self-employment in areas not typically assumed to be high status or high paying. The very small enterprise (VSE) approach, like the labor-market approach, is also based on industry data. Instead of focusing on self-employment, however, VSE-based estimates are predicated on the notion that all businesses employing fewer than ten workers are engaging in informal activity. In the third approach, discrepancies in different measures of similar economic activity are attributed to the informal economy.

The household consumption approach was developed in 1987 in an effort to surpass the limitations involved in estimating informal activity based on reported, presumably formal, production activities. Estimates of informal economic activity, using this approach, are based on consumer reports of "the amounts spent . . . on goods and services acquired off the books or on the side" (Smith 1987). This method is unique in that it focuses on consumption; however, it is also limited in that it assumes that all products are consumed by individuals rather than firms.

In recognition of the inability to generalize to larger geographic areas based on ethnographic data, in acknowledgment of the limitation of the assumptions entailed in current estimation strategies, and in order to limit the costs entailed in labor-intensive qualitative methodologies, some researchers are turning to more direct survey methodology to examine informal economic processes. Recent studies using survey methodology include work by Jensen and colleagues (1995), Tickamyer and Wood (1998), and Tolbert and colleagues (1996). They note that in order to provide systematic, representative, and comparable data across different locales on who participates and how extensively, where and when participation occurs, and under what circumstances, different data are needed. The goal of these researchers is to provide the baseline data that will enable future researchers to determine if informal activity is increasing or decreasing over time and with changing economic conditions. They are also interested in exploring the relationship between informal work and other social processes, including the relationship to formal labor-market participation, to household, family, and community structures and processes, and to human and social capital formation.

These newer studies are significant because they demonstrate that collecting direct information on informal work using structured survey techniques is possible despite the elusive nature of such activities, their often semilegal status, and respondents' seeming lack of awareness of the extent of their participation in informal work. These studies also underscore the need for better, more extensive tests of survey methods both to determine optimal strategies for using survey methodology on this topic and to provide definitive answers to the many questions posed about informal labor.


CONCLUSIONS

While sociologists, economists, and other researchers continue to provide information on informal work, there are many issues that remain unaddressed. These issues include questions regarding the prevalence, importance, and nature of informal activities. Why do people participate in the informal economy? How important is it to their economic survival? Is it vital or is it more socially driven, carrying little expectation for immediate economic reward? What percent of households engage in informal work, and which members of the household are most likely to be the workers? What are the economic returns to participation? Do formal and informal work complement or substitute for each other? Do people turn to the informal economy as a last resort in times when formal work is curtailed, or are certain types of people likely to engage in both formal and informal labor? And, finally, how is the probability of informal work shaped by individual, household, and labor-market characteristics?

Future research will need to address these issues. Furthermore, more studies will be needed at the national and international level (including comparative research) in order fully to understand the importance of the informal economy in shaping the larger economy as a whole. In order to understand this, it is essential to understand where the informal economy fits vis-à-vis the formal economy and how it has evolved. Is the informal economy merely a pure market response to unwanted government interference in commerce, or is it merely a reflection of expected social relationships in a given place and time? Most likely, the informal economy arises from a combination of factors including poverty and normative pressures to help neighbors and for self-provision. A purely formal economic focus, however, limits our understanding of the range of possibilities entailed in informal work and the impact that such work has on shaping interpersonal processes. Furthermore, by limiting our measures of economic growth, household and individual well-being, inequality, and production to official statistics of formal economic activity, we see only a fraction of the entire picture. This is particularly problematic when policies that attempt to address these issues are shaped from these fragmented images.

Since modern economic policy has been shaped almost exclusively by focusing on the formal economy, conventional definitions of employment, unemployment, poverty, and economic growth may be insufficient to explain the myriad of issues that emerge when informal work is added to the picture. As it has become increasingly recognized that informal economic activity is vital to many individuals and households in both developed and developing countries, the need for more research has become more pressing. By addressing many of the unanswered questions that remain about the informal economy, policy makers can begin to address the labor-market problems that may force workers into informal economic activity, to regulate those activities that exploit certain segments of the work force, and to understand the importance of both formal and informal work as a means of improving living standards.


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Ann Tickamyer
Stephanie Bohon