Dashboard on Informality

Quality employment that provides fair wages, social protection and safe working conditions is central to reducing poverty and inequality, securing livelihoods and supporting inclusive growth.

Informality refers to work that takes place either in informal economic units or through informal employment relationships, including within formal firms, and is not adequately covered by labour regulation, taxation or social protection. In that sense, there are two core forms of labour-market informality: informality linked to the economic unit in which production takes place; and informality linked to the job or work activity itself. This analytical framework thus distinguishes between three sectors of production – formal, informal, and household own-use production and community sectors – before defining informal employment across different types of workers.

Labour informality affects people’s livelihood not only at the individual level but also at the household level, which blurs the division between work in the formal and informal economy. As a driver of low wages, as well as gaps in social insurance coverage and other forms of social protection, informality may have deep consequences on households’ welfare, especially if informal workers live in households with no formal workers. Understanding the realities of the household dimension of informality is essential to shape policies that can improve the well-being of people, including non-working individuals.

Most empirical studies indicate that the incidence of informality and monetary poverty are positively correlated. In fact, poverty and informal employment tend to reinforce each other. Past poverty can determine current informal employment; in turn, past informal employment can lead to higher chances of current poverty. Often, the poverty footprint of informality mirrors the earnings disadvantage of informal workers. This is especially true for low-paid workers who belong to the lower tier of the informal economy.