The informal economy generates unreported income.
Informal economy is a concept that refers to all companies, workers and economic activities that are not regulated by the State . Therefore, they do not have legal protection nor do they fall within the current regulatory framework.
It is important to indicate that the actors of the informal economy produce legal services and goods that they offer in the market. The notion, therefore, does not refer to illicit activities themselves (such as smuggling or money laundering) nor to non-formalized care services (such as the work performed by housewives).
Characteristics of the informal economy
The informal economy is usually defined as one that is not visible to the State or that the competent authorities cannot control . Initially, the idea was used to name unregulated self-employment but later it was expanded.
Today it goes beyond unregistered self-employed workers and includes all forms of undeclared work, street vending and black markets in general (with the exceptions mentioned regarding illegality). It contemplates, therefore, various forms of job insecurity and can be linked to poverty , survival strategies and economic inequality, among other issues.
A company or enterprise in the informal economy, therefore, does not comply with tax and labor obligations, does not have licenses or permits for its sector, or respects environmental protection laws. To be more specific, it is not "obliged" to do so since it is invisible to the State, so its faults and non-compliance are not noticed or punished.
Unofficial transportation is part of the informal economy.
Its consequences
Tax evasion has a considerable impact on a country's GDP. That is why governments usually take measures against the informal economy and promote the formalization of companies.
Labor exploitation is also a consequence of the informal economy. This is associated with the violation of labor rights , which causes everything from risk to the health of workers to the impossibility of social mobility due to the lack of protections and guarantees. Regulation of the labor market is also necessary at the tax level.
It must be considered that the informal economy not only affects the State due to those taxes that are not collected. It also has an impact through the payment of subsidies and aid to individuals who, in theory, are unemployed, but who in reality have an unregistered job.
We cannot fail to mention, on the other hand, that the informal economy generates unfair competition . An employer who pays all the taxes and social charges of his employees has higher costs than one who does not comply with his obligations and circumvents the inspection and control actions of the competent entities.
In short, the informal economy reduces State income , leads to job insecurity and threatens worker training and productivity. Hence the importance of formalization.
It should be noted, however, that various organizations recognize positive aspects of the informal economy. Microenterprises that are promoted within the framework of the subsistence economy and homemade production that is sold in informal markets, to mention two cases, contribute to the generation of wealth in communities that suffer from different social problems. Likewise, street vendors and other agents of the popular economy strive every day to obtain their livelihood.
The informal economy can encourage child labor.
Examples of informal economy
Suppose that a family of farmers develops a garden in their home . The initiative is part of an informal subsistence agriculture enterprise: these people produce their own food, but also sell the surplus in an improvised stand that they set up next to a route (road). These are workers who lack information about productive, labor and commercial regulations; On the other hand, their profit margin is so limited that they may not be able to pay the corresponding taxes. Given this situation, two possibilities open up for the authorities: punish the activity and leave this family without support or work on a regularization policy to promote their integration into the formal market. This second alternative is a path that can contribute to the economic empowerment of workers and sustainable community development.
Another example is an informal construction . The lack of controls threatens job security: workers are exposed to great risk due to the absence of supervision and safety elements. Likewise, labor flexibility means that they can be fired by the owner of the work without compensation . In this context, the boss pays them with cash and does not give them any type of receipt or proof of salary.
Informal electronic commerce is another example of this type. An artisan who sells his products through Facebook does not pay taxes on his activity, just like a clothing manufacturer who offers his creations through Instagram .