The informal economy generates unreported income.
Informal economy is a concept that refers to the set of companies, workers and economic activities that are not regulated by the State . Therefore, they do not have legal protection and do not fall within the current regulatory framework.
It is important to note that actors in the informal economy produce legal goods and services that they offer on the market. The notion, therefore, does not refer to illicit activities per se (such as smuggling or money laundering) or to non-formalized care services (such as the work performed by housewives).
Characteristics of the informal economy
The informal economy is often defined as one that is not visible to the State or that the competent authorities are unable to control . Initially, the idea was used to refer to unregulated self-employment, but it was later broadened.
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 therefore contemplates 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 labour obligations, does not have the licenses or permits for its sector, and does not respect environmental protection laws. To be more specific, it is not “obliged” to do so because it is invisible to the State, so its faults and non-compliance are not noticed or sanctioned.
Unofficial transport is part of the informal economy.
Its consequences
Tax evasion has a considerable impact on a country's GDP. That is why governments often take measures against the informal economy and encourage the formalization of companies.
Labour exploitation is also a consequence of the informal economy. This is associated with the violation of labour rights, which causes risks to workers' health and the impossibility of social mobility due to the lack of protections and guarantees. Labour market regulation is also necessary at the tax level.
It should be noted that the informal economy not only affects the State through uncollected taxes. It also affects the State through the payment of subsidies and aid to individuals who, in theory, are unemployed, but who in reality have unregistered jobs.
It should also be noted that the informal economy generates unfair competition . A businessman who pays all the taxes and social security contributions of his employees has higher costs than one who does not comply with his obligations and avoids the inspection and control actions of the competent bodies.
In short, the informal economy reduces state revenues , leads to job insecurity and undermines 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 home-made production sold in informal markets, to mention two cases, contribute to the generation of wealth in communities that suffer from various social problems. Likewise, street vendors and other agents of the popular economy strive every day to earn a living.
The informal economy can foster child labour.
Examples of informal economy
Let's suppose that a family of farmers develops a vegetable garden at home . The initiative is part of an informal subsistence farming enterprise: these people produce their own food, but also sell the surplus at an improvised stand that they set up next to a road. These workers lack information about production, 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. Faced with this situation, the authorities have two possibilities: 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 to sustainable community development.
Another example is informal construction . The lack of controls undermines job security: workers are exposed to great risk due to the lack of supervision and safety equipment. In addition, flexible working conditions lead to workers being dismissed by the owner of the construction site without compensation. In this context, the boss pays them in cash and does not give them any kind of receipt or proof of salary.
Informal e-commerce is another example of this type. A craftsman who sells his products through Facebook does not pay taxes on his activity, as does a clothing manufacturer who offers his creations through Instagram .