Dashboard on Informality

Informality has deep implication of the economic well-being of individuals. It can trap people in low-productivity activities, leading to reduced earnings, low welfare and larger incidence of poverty. However, the informal economy is extremely diverse and inequality is high. In most countries, low-paid informal workers with few alternatives often coexist with higher-paid informal workers who may remain informal by choice.

Globally, high- and low-paid workers coexist in the informal economy, together with a large proportion of middle-paid informal workers who are often overlooked by policymakers.

The distribution of earnings is highly unequal within the informal economy. Most of the overall inequality stems from income inequality between informal workers rather than between informal and formal workers.

Understanding the earnings distribution of informal workers is crucial to assess the capacity of different types of informal workers to contribute to social insurance schemes and the extent to which affordability is potentially an issue.

Informal employment is most concentrated among workers in the lowest household welfare quintiles, but it also persists in the middle of the household welfare distribution. This may reflect different constrains and dis-incentives for formalisation across households with different income status.

Not all informal workers are poor, and not all working poor are in the informal economy. Yet informality and working poverty often overlap. In many countries, informal workers earn an income, but not always enough to lift themselves and their families out of poverty or secure decent living conditions.

Several factors explain why people, notably informal workers, may remain poor despite working. These include low earnings, unstable employment, high living costs, underemployment, high dependency ratios and limited access to social protection.

As a result, formalisation does not automatically reduce poverty. The quality of jobs matters. A shift towards formal employment may not alleviate poverty if it mainly creates low-paid jobs with reduced labour income. Conversely, a rise in informal employment may not necessarily increase poverty if many of the jobs created are in the upper tier of the informal economy.

For both informal and formal workers, the risk of falling into poverty varies by employment status, sector, skill level and education. In general, poverty tends to be more prevalent among workers in the primary sector, own-account workers, unpaid contributing family workers, workers in low- or medium-skilled jobs, and workers with low educational attainment.