Defining informality

Informality is defined as “the collection of firms, workers and activities that operate outside the legal and regulatory framework”.219 At the firm level, informality includes enterprises and entrepreneurs who produce legal goods and services but are not compliant with the country’s labour, fiscal and other administrative laws and regulations.220 The majority of small businesses operate in undocumented and unofficial formats. This leaves them devoid of essential services provided by both government and private sector institutions, including the financial sector and outside the formal reach of the law. The recent OECD report on Tackling Vulnerability in the Informal Economy221 suggests that most workers are employed informally. They contribute to economic and social development through the market and non-market activities that are not protected, regulated, well recognised or valued. These informal job opportunities might be supporting them in the short run to make a living. Still, the lack of social protection pushes them further into vulnerability and poverty in the long run.

Enterprises are in the informal sector due to excessive formal registration and taxation requirements and a lack of compliance with official standards. Most informal MSMEs are driven by poverty and survival considerations rather than profit and growth based on an entrepreneurial spirit. Further, labour informality consists of non-compliance with labour regulations, the non-payment or partial payment of social security and pension contributions, and the exclusion from labour rights. This is a symptom and a cause of inequality and social injustice, as it disproportionally affects weaker workers.

Therefore, governments should take adequate measures to break the vicious circle of exploitation and informality. Governments can achieve this feat by providing strong incentives to these micro-enterprises to register formally and then gradually extend the security systems of social protection and labour laws to encompass all workers. Evidence points to the high cost of doing business in the formal sector, pushing MSMEs into the informal sector. However, as informal enterprises are not part of standard statistics, it is difficult for governments to formulate essential policies for MSMEs as a whole.

Resources

219 Loayza, N. V., Serven, L., & Sugawara, N. (2009). Informality in Latin America and the 
Caribbean. World Bank

220 Feige, E. L. (2016). Reflections on the meaning and measurement of Unobserved Economies: 
What do we really know about the “Shadow Economy"? Journal of Tax Administration.

221 OECD/ILO. (2019). Tackling Vulnerability in the Informal Economy, Development Centre 
Studies. Paris: OECD Publishing.