Securing the Livelihoods of Informal Economy Workers in Times of Global Changes

Report

5 October 2026

2. Portraits of informality

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Abstract

The informal economy is not a monolithic entity: it varies substantially across regions and countries, and also across individual workers, households and jobs. Drawing upon new data from the OECD’s Key Indicators of Informality based on Individuals and their Household (KIIbIH), which covers 58 emerging markets and developing economies (EMDEs), the chapter presents updated and comprehensive portraits of informality. Notably, the KIIbIH refers to the International Conference of Labour Statisticians (ICLS) guidelines for measuring the informal economy, which includes employment in the informal sector, informal employment in the formal sector, and household-based employment. The resulting portraits of informal workers and their dependents show that the informal economy is highly heterogeneous and consists of multiple and largely unequal employment situations across regions and countries. The division between work in formal and informal economies is also increasingly blurred when adding a household perspective and recognising the reality of multiple job holding. Understanding the diverse and multi-faceted realities of informal work is crucial for policymaking, as one-size-fits-all approaches are unlikely to succeed. Major global trends – including demographic changes, automation and climate risks, as well as other structural transformations – are set to have profound implications for informal workers across the world, making strategic policy action all the more urgent.

In brief

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Portraits of informality: Facts and lessons from the KIIbIH database

Informality – referring 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 – remains the norm across most developing countries. It often creates vulnerabilities for workers. Large regional disparities exist, with informality being the highest in countries in Africa and Asia.
Although most informal workers operate in the informal sector, some work in the formal sector. Recent economic growth and its patterns were not sufficient to robustly curb informality.
Adding a household perspective and recognising the reality of multiple job holding further blurs the division between the formal and informal economies. While most informal workers live in completely informal households, one in three individuals live in households with at least one formal worker, who may provide some sort of social protection to the other members. A non-negligible share of formal and informal workers has a second job which is informal.
Compared with formal workers, informal workers are more likely to work either fewer or many more hours per week, to work part-time and to earn substantially less, with women and rural individuals particularly disadvantaged in multiple ways. Overall, a much larger share of informal employees (than formal ones) earn less than the statutory minimum wage.

Informality, poverty and inequality are deeply intertwined

Most of the working poor are informal, and most of the poor live in fully informal households. Yet not all of the working poor are informal and not all informal workers are poor.
The informal economy largely consists of three tiers. A relatively prosperous segment of high-paid workers may operate informally by choice; a large proportion of middle-paid workers are often overlooked by policymakers; and an impoverished segment of low-paid workers lack better alternatives. Informal workers in different tiers have different characteristics. Women, the self-employed, rural workers and less educated workers are disproportionately located in the lower tier of the earnings distribution.
Overall inequality in earnings primarily originates from differences among individual characteristics of informal workers and, to a lesser extent, among formal workers (within-group). Conversely, the contribution of the mean differences between formal and informal workers (between-group) is small. Thus, without addressing skill or productivity gaps, formalisation is unlikely to reduce substantially overall earnings inequality.

Tackling the diverse realities of the informal economy requires differentiated and targeted policies

Policy interventions must move beyond a monolithic view of the informal economy and adopt differentiated and targeted strategies across four areas: i) adapt formalisation strategies and extension of social protection to the diverse characteristics of different tiers of informal workers; ii) establish and implement minimum or decent wage regulations that carefully balance poverty reduction objectives with employment effects; iii) address structural and deeply ingrained gender discrimination that constrain women's formal labour supply and earning potential; and iv) reduce overall inequality by focusing on skill acquisition, stimulating productivity and reducing labour market segmentation within the informal economy itself.

Introduction

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Addressing the challenge of informality is central to achieving sustainable development. Indeed, there is growing recognition that leaving informal workers behind constitutes a major barrier to realising the UN Sustainable Development Goals (SDGs). The informal economy refers to working arrangements that are – in practice or by law – not subject to national labour legislation, income taxation, or entitlement to social protection or other employment guarantees (see Annex 2.B for more details on the definition and measurement of the informal economy). Such situations can exist even in the formal sector. The challenge informality poses is reflected in three specific goals of the 2030 Agenda for Sustainable Development: SDG1 related to poverty eradication; SDG8 related to decent work and economic growth; and SDG10 concerning the reduction of inequalities. With less than four years remaining to achieve these SDGs, it is essential to assess the current situation of informal workers and build a case outlining why understanding the diverse realities of informality is crucial for policymakers.

Despite recent tangible progress in the formalisation agenda, the pace of change and the benefits of formalisation remain insufficient, especially for women and rural and low-educated workers. Informality remains part of the daily lives of billions of workers globally. It comes with considerable risks and vulnerabilities, especially for those in the lower tier of the informal economy. This situation calls for policy solutions that go beyond the formalisation agenda and embrace the goals of social justice and decent job creation.

The broader context in which policymakers operate is also increasingly complex. Global trends such as demographic changes, automation and climate risks, as well as other broad structural changes of the economy and society are bound to have profound implications for informal workers across the planet. More than ever, it is vital to support policy design and implementation with updated portraits of informality that capture the heterogeneity of informal workers and account for the broader context of their households.

This chapter presents comprehensive portraits of informal workers and their dependents, drawing upon data from the Key Indicators of Informality based on Individuals and their Household (KIIbIH). Such data are available for a large sample of emerging markets and developing economies (EMDEs) at different stages of development (Box 2.1). The first section of the chapter examines the magnitude and the evolution of informal employment, at both individual and household levels. The second section identifies formal-informal employment gaps in terms of earnings, working hours, part-time work and multiple job holding. The poverty impacts of informality are explored in the third section. The fourth section analyses the distribution of earnings, the contribution of the informal economy to overall earnings inequality, and the diversity of situations in the informal economy. The chapter concludes by summarising the main findings and discussing the policy implications.

Overall, the analysis shows that informal labour markets are composed of multiple and largely unequal employment situations. The boundary between work in formal and informal economies is increasingly blurred, particularly when adding a household perspective and recognising the reality of multiple job holding. Understanding these diverse realities of informality is crucial for policymakers determined to tackle the vulnerability challenges in the informal economy, as “one-size-fits-all” policies will likely fail and may even be harmful.

Box 2.1. What is the KIIbIH?

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The Key Indicators of Informality based on Individuals and their Household (KIIbIH) is a database compiled by the OECD Development Centre since 2017. To compute harmonised and aggregated indicators, the KIIbIH relies on household surveys data – either household living conditions or household income surveys – as primary sources. While other publicly available harmonised statistics on informality largely draw upon labour force surveys to estimate the size of informal employment, the KIIbIH uses household socio-economic surveys. This unique approach provides more information on the socio-demographic, welfare, and economic status of workers and their households.

As of June 2026, the KIIbIH covers 81 countries, spanning Africa, Asia, Latin America and the Caribbean, and Europe. For several countries, the KIIbIH provides a time series dimension though harmonised indicators available for more than one year.

Across this report, unless specified otherwise, KIIbIH and regional averages are computed as simple unweighted averages across countries for which data are available. These estimates rely on available household surveys at the national level, and do not aim to be representative at the regional level.

For ease of readability, 2023 is used as the reference year for the KIIbIH data presented in the report, although the latest year of reference may differ for each country included. Annex 2.A provides detailed information on the latest year and survey available for each country. All harmonised indicators of the KIIbIH, including multiple years, can be accessed on OECD Data Explorer.

Informality remains the norm in developing countries

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Decent work is a critical objective of the development and human rights agendas. Both the quantity and quality of employment play key roles in reducing poverty and inequality, securing livelihoods and promoting inclusive growth. In most EMDEs for which data are available, informal employment is more common than formal employment; in fact, past economic growth performance has barely reduced the proportion of people working informally. It remains the case that most informal workers live in purely informal households – i.e. they do not cohabit with formal workers – and depend exclusively on informal labour for their livelihoods. As such, they are more vulnerable than formal workers in many socio-economic contexts. These realities bring urgency to the importance of tackling the vulnerability challenges of informal workers, creating more and better jobs, and improving incentives for formalisation.

While slightly declining, informality remains widespread for both men and women in developing economies

Across countries covered by the KIIbIH, on average, 68% of workers aged more than 15 years are informally employed (Figure 2.1). In reality, informal employment varies widely across countries and regions. In the sample of African countries in the KIIbIH, nearly nine out of ten workers (89%) are employed informally. In Asia countries, the figure declines to seven out of ten (70%). In sharp contrast, the figures are an average of more than five out of ten (54%) for all countries from the Americas and just slightly more than two out of ten (22%) in European countries covered by the KIIbIH.

Within regions, the situation is very diverse. In Africa, informality is extremely dominant with limited variations across countries. In 15 of the 22 African countries (68%) covered by the KIIbIH, informality rates stand above 90%; the informality rate drops below 80% in only 2 countries. The situation is much more heterogenous in other global regions but still with wide variations across countries. In Latin America and the Caribbean, informality rates range from less than 25% in the Bahamas, Chile and Uruguay, to more than 70% in Bolivia, Guatemala, Honduras and Nicaragua. In Asia, it ranges from less than 50% in Cyprus, the Maldives and Mongolia to more than 90% in Cambodia, India, Lao PDR and Myanmar.

Figure 2.1. Labour informality dominates in – but varies across – developing countries
Copy link to Figure 2.1. Labour informality dominates in – but varies across – developing countries

Share of workers aged above 15 years in informal employment, latest year available

Globally, informality affects both men and women but variations exist across countries and regions. On average in the 58 KIIbIH countries included in the analysis, 67% of both male and female workers are informal. However, women are more likely to hold an informal job in 34 of the 58 countries from different world regions, and in 21 of the 22 African countries, where informality is generally very pervasive in the labour market.

KIIbIH data for 26 countries for which data are available in years close to 2018 and 2023 show that informal employment has increased in some countries and declined in others (Figure 2.2). As the data cover the period of the COVID-19 outbreak, during which lockdown measures were sometimes introduced, these trends should be considered with some caution. In fact, restrictive measures put in place by governments in some countries during the pandemic disproportionately affected informal workers, leading to a drop in informal employment that was only temporary (OECD, 2023[2]; ILO, 2022[3]).

Figure 2.2. Changes in the prevalence of informal employment vary across countries
Copy link to Figure 2.2. Changes in the prevalence of informal employment vary across countries

Annualised change in informal employment rates of workers aged above 15 years, various periods

The ways in which informal employment interacts with economic growth and poverty vary across countries

Examination of the dynamics of informal employment, economic growth, educational outcomes and the evolution of poverty shows that the links between informality and development are complex. Earlier studies usually found that, across countries, a negative association exists between the level of informal employment and gross domestic product (GDP), the Human Development Index and labour productivity (OECD/ILO, 2019[4]; Loayza, 1997[5]; Johnson, Kaufmann and Shleifer, 1997[6]). In contrast, informality shows a positive correlation with poverty (OECD/ILO, 2019[4]). Within countries, these associations often disappear over time, indicating that reducing informality is not always associated with economic development; indeed, patterns of growth vary across countries and can sometimes drive informality (OECD/ILO, 2019[4]; Elgin and Birinci, 2016[7]).

Recent evidence confirms that the ways in which informality interacts with economic growth and poverty vary substantially across countries. For the period mostly covering 2018 to 2023, Figure 2.3 represents (respectively) the simple relationships between the change in informality rates and GDP growth (Panel A), the change in the poverty rate (Panel B) and the change in tertiary education attainment (Panel C). Panel A shows that in 15 of 26 countries for which data are available, economic growth aligns with reduced informality. In 7 of 26 countries, however, economic growth is associated with an increase of informality. This apparent growth-informality paradox is particularly visible in Burkina Faso, Honduras, Malawi, Niger and Togo. Remarkably, even in some countries that experienced economic stagnation in recent years, the change in informality rates may be either negative (e.g. Mexico and Mali) or positive (e.g. Argentina and Bolivia). Differences in some pillars of growth policies – including good governance, political will, an enabling environment for the transition to formality, inclusive social dialogue and gradual approaches leaving no one behind – obviously may play important roles in explaining such differences in outcomes (ILO, 2025[8]; ILO, 2025[9]).

Panel B of Figure 2.3 shows that, over time within countries, the relationship between informality and poverty is not always positive. Indeed, many countries in the KIIbIH database that experienced in recent years a reduction in poverty have seen a concomitant decrease in informality; in others, however, poverty has decreased along with an increase in informality (e.g. in Bolivia, Burkina Faso, Honduras and Niger). Improvement in educational outcomes, expressed as the increase in the share of people aged 25 or more with a tertiary degree, are also correlated with lower informality (Figure 2.3, Panel C). In 12 countries, tertiary attainment increased while informality rates declined; in 5 countries educational achievements declined slightly while informality increased. The relation is far from being deterministic, however: in four countries, better educational achievements came with an increase in informality. Three of these four countries are African (Malawi, Senegal and Togo), signalling the time persistence of informality in this region.

Figure 2.3. Interactions among informality, economic growth, poverty and education are complex
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Change in informal employment rates for workers aged above 15 years compared with changes in GDP (Panel A), poverty rates (Panel B), and tertiary education attainment (Panel C), various periods

Employment-growth elasticities (i.e. the percentage change in employment associated with one percentage change in GDP) for formal and informal employment show that the labour intensity of growth varies significantly across countries and between formal and informal economies. In most cases, these country elasticities are below 1, implying that employment grows less than GDP due to increasing productivity. For countries in Asia, GDP growth is associated with higher job creation in the informal economy, while the opposite is true for countries in Africa, Latin American and the Caribbean, and Europe (Figure 2.4). Yet, the aggregate elasticities hide very different sectoral patterns of job creation. Across KIIbIH countries, the sectoral distribution of informal workers differs substantially from that of formal workers. Informal workers are overrepresented in agriculture (36% versus 8% for formal workers) and underrepresented in services (46% versus 74% for formal workers).

Figure 2.4. Employment-to-GDP elasticities vary across regions and between informal and formal economies
Copy link to Figure 2.4. Employment-to-GDP elasticities vary across regions and between informal and formal economies

Percentage change in informal and formal employment associated with a 1% change in GDP

Although most informal workers operate in the informal sector, some work in the formal sector

By and large, most informal economy workers operate in the informal or household sectors (see Annex 2.B for more details on the definition and measurement of the economy’s three institutional sectors). Across the KIIbIH, on average, 74% of informal worker are employed in the informal sector and 17% work in the household sector, which includes forms of work other than employment (e.g. subsistence farming) (Figure 2.5). For comparison, according to the International Labour Organization (ILO), globally, 79% of informal workers are employed in the informal sector (ILO, 2023[10]).

The concentration of informal employment within the informal sector varies across regions. In Europe, nearly all informal workers operate in the informal sector (95% of informal workers), whereas this proportion is lower in Latin America and the Caribbean (74%), Africa (76%) and Asia (60%). The household sector employs a substantial share of informal workers in Asia (28%) and Africa (18%), with lower rates in Latin America and the Caribbean (12%) and in Europe (5%). These data underline that family businesses remain an important – although informal – source of jobs and income in developing countries (Ohnsorge and Yu, 2022[11]; Aberra et al., 2023[12])

Figure 2.5. Most informal workers are employed in the informal or household sectors
Copy link to Figure 2.5. Most informal workers are employed in the informal or household sectors

Distribution of workers in informal employment aged above 15 years by institutional sector, latest year available

A substantial proportion of informal workers also operate in the formal sector and are closer to the formal economy. Across the KIIbIH, on average, 9% of informal workers are employed in the formal sector. In some countries (e.g. Chile, the People’s Republic of China, Guatemala, the Maldives, Namibia, Paraguay and Suriname), more than 25% of informal workers are employed in the formal sector. These data not only show that informal employment spans the formal and informal sectors, but also that many workers – even when they operate in the formal sector – lack adequate social protection or labour rights. Generally, the potential for formalisation is higher for those informal workers working in the formal sector, as their contractual arrangements can more easily be modified, with the right incentives (OECD/ILO, 2019[4]; Kanbur, 2017[13]; Loayza, 2018[14]).

Few informal workers live in households with formal 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 sectors. 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. The household dimension of informal work is therefore critical; understanding its realities can help shape policies that can improve the well-being of people, including non-working individuals (OECD, 2024[15]; OECD, 2023[2]; OECD/ILO, 2019[4]).

Across the KIIbIH countries, on average, 55% of the population live in households in which all earners are informal workers. An estimated 15% live in mixed households in which at least one earner is informal and one is formal. Of the remainder, 21% live in households in which all earners are formal workers and 9% in households without any working member (Figure 2.6). In other words, only one of three individuals lives in mixed or formal households and may therefore benefit from the formal status of other household members. Indeed, the formal status of one household member often enhances income stability and/or social protection. This is the case, for instance, when health insurance of the formal worker covers other family members. In mixed households, women are more likely to hold the informal jobs: 51% of informal workers in mixed households are women, while they represent only 41% of formal jobs in this household typology.

Distribution of the population by level of household informality also tends to vary across countries and regions. Across the KIIbIH, the share of the population who lives in completely informal households is substantial in countries from Africa (78%) and Asia (55%), whereas it is lower in Latin America and the Caribbean (39%), and very low in European countries (12%). Overall, the share of individuals living in completely formal households tends to be larger in more advanced countries, suggesting that the development stage of economies matters and influences households’ material living conditions.

Figure 2.6. Labour informality affects many households
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Distribution of the population by level of household informality, latest year available

Informal employment often means working fewer hours and for a lower pay

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Workers from the informal economy often hold jobs that fail to meet one or more of the legal requirements usually associated with formal employment. This includes variations from lack of a regular employment contract to work outside normal working hours and jobs that are paid less than the legal minimum wage.

Informal workers work fewer hours per week in their main job and are more likely to hold part-time jobs compared with formal workers

Formal and formal employment differ in the level of protection they offer to workers and in terms of the number of hours worked (ILO, 2023[10]; Ohnsorge and Yu, 2022[11]; Gallo and Thinyane, 2021[16]). Informal workers generally work fewer hours per week compared with formal workers. Across the KIIbIH, on average, informal workers work 39 hours per week in their main job, which is 4 hours less than formal workers (Figure 2.7, Panel A), with negative effects on their income. They also generally have large gaps in working conditions and employment protection, including in the areas of occupational safety and health, job security and legal recognition, unionisation and collective bargaining coverage (Benavides, Silva-Peñaherrera and Vives, 2022[17]; Schmidt et al., 2023[18]).

Large disparities exist across countries and regions (Figure 2.7). Across countries, the number of weekly hours worked by informal workers can differ substantially, ranging from 29 in Uruguay to 48 in Lao PDR and Mongolia. Average working hours per week for informal workers range from 36 in Africa and 38 in Latin America and the Caribbean to 41 in Europe and 43 in Asia. Regional variations are also evident regarding the extent to which formal workers work more hours per week than informal workers: the difference is minimal in Asia and in Europe (less than 1 hour) but reaches 6 hours in Latin America and the Caribbean and 7 hours in Africa. This suggests that underemployment within the informal economy is a more pressing issue in KIIbIH countries in Africa and Latin America and the Caribbean than in Europe or Asia.

Figure 2.7. Informal workers work fewer hours and are more likely to hold part-time jobs than formal workers
Copy link to Figure 2.7. Informal workers work fewer hours and are more likely to hold part-time jobs than formal workers

Mean weekly hours worked in the main job (Panel A) and share of workers aged above 15 years working part time (Panel B), latest year available

Analysis of the distribution of working hours in the main job shows that, by and large, informal workers tend to work outside the range of normal hours arrangements, with some working either much less or much more (ILO, 2022[19]). In all KIIbIH countries, the share of informal workers working less than 15 hours is higher than for formal workers: 16% in Africa for informal versus 8% for formal, 13% versus 4% in Latin America and the Caribbean, 11% versus 4% in Asia, and 2% versus less than 1% in Europe (Figure 2.8). Conversely, some informal workers may work for very long hours, much more than formal workers: the share of informal workers working more than 50 hours per week is 23% versus 22% for formal in Latin America and the Caribbean, 36% versus 26% in Asia, and 17% versus 6% in Europe. Africa is the only exception, with informal workers being less likely to work for 50 hours or more (23% versus 30% of the total).

Figure 2.8. Informal workers tend to work outside the range of normal hours arrangements, either for few hours or for very long hours
Copy link to Figure 2.8. Informal workers tend to work outside the range of normal hours arrangements, either for few hours or for very long hours

Share of workers aged above 15 years working in their main job less than 15 hours per week (Panel A) and more than 50 hours per week (Panel B), latest year available

The prevalence of part-time jobs is also much higher among informal workers. On average, 33% of informal workers work part-time against just 15% of formal workers (Figure 2.7, Panel B). The incidence of part‑time work among informal workers varies across countries and is highest in African countries both in absolute terms (42%) and compared with formal workers (+21 percentage points). Data are similar for Latin America and the Caribbean countries (36%, +21 percentage points).

In most countries, women and rural workers in the informal economy work fewer hours

Globally, women’s labour force participation is drastically lower than for men, with a gender gap estimated by the ILO at 25 percentage points in 2026 (ILO, 2026[20]). Among the multiple factors that explain women’s unequal standing on the labour market, discriminatory social institutions play a crucial role; more precisely, this includes practices and beliefs that assign women the role of caregivers and make them responsible for all domestic chores (OECD, 2023[21]). Even when women are able to engage in paid work despite their disproportionate care responsibilities, many opt for informal jobs due to the flexibility these arrangements offer (ILO, 2023[10]; Rubiano-Matulevich and Viollaz, 2019[22]; ILO, 2018[23]).

Among informal workers in nearly all KIIbIH countries, women tend to work fewer hours than men and are more likely to hold part-time jobs, which may reflect their need for flexibility to accommodate the care responsibilities that society expects them to undertake. On average, women in informal employment work 35 hours per week in their main job compared with 42 hours for informal male workers (Figure 2.9, Panel A). The gender difference in working hours is slightly less pronounced for formal workers, where women work 41 hours and men 45. Africa and Latin America and the Caribbean stand out as regions in which informal female workers experience the shortest weeks in terms of hours of work. Women in informal employment are also more likely than men to work part-time. On average, across KIIbIH countries, 42% of women in informal employment work part-time compared with 27% for informal male workers (Figure 2.9, Panel B).

A large gap in working hours is also observed between rural and urban workers, especially among informal economy workers.1 In KIIbIH countries, informal workers living in rural areas work on average 37 hours per week and 36% of them hold part-time jobs while urban informal workers work 41 hours and 29% have part-time jobs (Figure 2.9, Panels C and D). For comparison, in the formal economy, workers living in rural areas work 43 hours and 18% hold a part-time job, while urban workers work 44 hours and 14% have a part-time job. The rural-urban gap in working hours and part-time job among informal workers is particularly marked in countries from Africa, followed by Asia, Latin America and the Caribbean, and Europe.

Figure 2.9. Female and rural informal workers work fewer hours than male and urban counterparts
Copy link to Figure 2.9. Female and rural informal workers work fewer hours than male and urban counterparts

Mean weekly hours worked in the main job and share of workers aged above 15 years working part-time by gender (Panels A and B) and location (Panels C and D), latest year available

Many workers hold multiple jobs, notably in countries where informality is high and hours of work are low, and these additional jobs are mostly informal

Multiple job holding can help formal and informal workers make ends meet when their main job does not provide adequate hours or income. Skills acquired when moonlighting can also influence subsequent occupational mobility. Yet a second job may be associated with greater physical and mental hardship as well as overall lower job quality.

Across KIIBIH countries, the likelihood of holding multiple jobs is quite significant and overall similar for informal and formal workers. On average 14% of informal workers and 12% of formal workers hold more than one job (Figure 2.10). In almost all cases (93% of total secondary jobs), the second job is informal, for the sample of KIIbIH countries in which the informality status of the second job could be measured. On average in KIIbIH countries for which data are available, the percentage of secondary job holders who are informal is 90% for formal main job holders and 95% for informal main job holders. This shows that, when recognising the reality of multiple job holding, the division between work in the formal and informal economies is increasingly blurred.

The reality of multiple job holding varies across regions and countries. In the sample of African countries, the share of informal workers holding multiple jobs ranges from less than 10% in Gambia, Ethiopia, Malawi, South Africa and Zambia to more than 25% in Cameroon, Madagascar, Niger and Sierra Leone. In Latin America and the Caribbean, the proportion varies from less than 5% in Brazil, Chile, Colombia, Costa Rica and Uruguay to more than 20% in Guatemala, Honduras and Peru. In Asia, the rate is as low as 3% or below in Armenia, Cambodia and Mongolia but as high as nearly 50% in Viet Nam. In European countries, the likelihood of holding more than one job is generally very low.

Figure 2.10. The proportion of informal workers with multiple jobs varies substantially across countries
Copy link to Figure 2.10. The proportion of informal workers with multiple jobs varies substantially across countries

Share of informal and formal workers aged above 15 years with more than one job, latest year available

Across KIIbIH countries, the likelihood of informal workers holding more than one job tends to be positively associated with the incidence of informality and negatively associated with the number of hours worked in the main job (Figure 2.11). The association of multiple job holding with informality rates is particularly strong across countries in Latin America and the Caribbean and is significantly high with hours of work for countries from Asia.

Figure 2.11. Informal workers with multiple jobs are associated with a larger prevalence of informality but fewer hours of work in the main job
Copy link to Figure 2.11. Informal workers with multiple jobs are associated with a larger prevalence of informality but fewer hours of work in the main job

Correlation between the share of workers aged above 15 years who hold multiple jobs and informal employment rates (Panel A) and weekly hours worked in the main job (Panel B), latest year available

The formal-informal earnings gap is extremely wide

A large earning gap is observed across the KIIbIH countries: on average, informal workers earn 54% less than formal workers. This gap, calculated in monthly earnings, varies substantially across region, ranging from nearly zero in Romania to more than 80% in Uruguay (Figure 2.12). These findings are consistent with many empirical results showing that informal work is generally associated with lower levels of income and larger income volatility (OECD, 2024[15]; ILO, 2023[10]; ILO, 2022[3]; Ohnsorge and Yu, 2022[11]; ILO, 2018[23]). Remarkably, the large earnings gap between formal and informal workers is robust even when controlling for the number of hours worked. Data on hourly earnings show that the informal-formal gap remains substantial. Across KIIbIH countries in terms of hourly earnings, on average, informal workers earn 44% less than formal workers (Figure 2.12). Large disparities also exist across countries: in 14 of 21 countries for which data are available, the formal-informal monthly wage gap exceeds 50%, while the hourly gap is more than 40% in 16. These findings suggest that the large informal-formal earnings gap cannot be attributed solely to the difference in working hours and part-time work between informal and formal workers.

Figure 2.12. Informal workers earn substantially less than formal workers
Copy link to Figure 2.12. Informal workers earn substantially less than formal workers

Gap in mean monthly and hourly earnings between informal and formal workers aged above 15 years, latest year available

In many countries, earnings gaps for women and rural workers are more pronounced in the informal economy, in which equal pay principles are not binding

The gender earnings gap, in terms of both monthly earnings and, to some extent, hourly earnings, tends to be larger among informal workers than among formal workers (ILO, 2023[10]; Gardner, Walsh and Frosch, 2022[24]). On average, on a monthly basis, women earn 31% less than men in the informal economy and 11% less than men in the formal economy (Figure 2.13, Panels A and B). By contrast, the gap on a monthly basis stands at just 13% across OECD countries for the overall workforce (OECD, 2026[25]).

Figure 2.13. Female, rural and less educated workers face large earnings gaps, notably in the informal economy
Copy link to Figure 2.13. Female, rural and less educated workers face large earnings gaps, notably in the informal economy

Gender (Panel A and B), urban-rural (Panel C and D) and educational (Panel E and F) gaps in mean monthly and hourly earnings by informality status, latest year available

The earnings gap is not monotonic across segments of the labour market: in effect, women are penalised twice. Although the gender pay gap narrows when considering the hourly rate, it remains important, especially for informal workers. Controlling for gender differences in number of hours worked, the gender hourly wage gap reaches 11% among informal workers – corresponding to about one-third of the gender earnings gap among informal workers on a monthly basis. By contrast, the hourly wage gap is just 3% among formal workers – nearly three times less than the monthly wage gender gap among formal workers (Figure 2.13, Panel A). In other words, in the informal sector, women’s earnings penalty comes from both fewer hours worked and from lower hourly compensation.

Gender gaps in monthly pay for informal workers are substantial in all regions, generally close to the average (30%) in Latin America and the Caribbean while significantly lower (19%) in Europe. Working fewer hours than men affects the monthly pay gaps for women particularly in Latin America and the Caribbean, for which the hourly gap shrinks to 3%. In Europe, it remains unchanged (19%).

The hourly gender pay gap is not fully explained by differences in observable demographic, socio-economic and job characteristics. Other factors are at play, such as productivity, labour market efficiency or pure discrimination. In nearly all the nine Latin American and Caribbean countries for which data are available, explained components of the hourly gender pay gap (related to workers’ socio-demographic and job characteristics) are in favour of women (Figure 2.14). In other words, in the absence of unexplained factors such as discrimination, women would earn more than men on an hourly basis. However, in all countries (except for formal workers in Suriname), the unexplained component of the gender gap is largely in favour of men for both informal and formal workers and accounts for much of the total difference. The effect of gender-based unexplained discrimination is particularly elevated for informal workers.

Figure 2.14. A substantial part of the gender hourly pay gap remains unexplained
Copy link to Figure 2.14. A substantial part of the gender hourly pay gap remains unexplained

Decomposition of gender hourly pay gap by informality status, latest year available

KIIbIH data also show that pay gaps between workers living in rural versus urban areas are substantial, but not significantly larger than in the informal versus formal economies. On a monthly basis, informal workers in rural areas are paid 28% less than those in urban areas. This penalty is nearly unchanged when controlling for the number of hours worked, with a pay gap of 30% on an hourly basis (Figure 2.13, Panel C). Findings are similar for formal workers, with a rural pay gap of 23% on both a monthly and hourly basis (Figure 2.13, Panel D). Together, these data underscore the role of productivity in explaining the rural pay gap of both informal and formal workers.

Interestingly, earnings gaps for workers holding at most a primary degree, compared with those having at least a secondary degree, are lower for informal than formal workers (Figure 2.13, Panels E and F). In KIIbIH countries, this gap is 30% for informal workers against 37% for formal – a figure that holds across all regions. This is an indication of how education is rewarded more for formal workers, or of how workers with similar, higher level of education tend to sort in the formal or informal sectors due to other reasons, such as their actual skills or the productivity levels of the firms for which they work. Generally, monthly education pay gaps are close to or slightly lower than hourly gaps for both informal and formal workers. This suggests that, in most countries, workers with different levels of educational attainment tend to work the same amount of hours and differences in earnings primarily reflect differences in productivity.

A large share of informal employees earn much less than the minimum wage and the shortfall can be substantial

Minimum wages can affect the earnings distribution of workers in different ways, including according to their informality status (Maloney and Mendez, 2004[26]). The economic literature has long hypothesised that minimum wages – when set at very high levels and effectively enforced – instead of causing lower employment may cause employees to be displaced or shifted from the formal to the informal economy. In turn, this leads to higher rates of non-compliance and downward pressure on wages in the informal economy (ILO, 2013[27]). Several studies document that more stringent labour regulations are associated with lower formal sector employment and higher informal sector employment (Nataraj et al., 2013[28]). Yet, many evidences point towards a small or insignificant effect of minimum wages on employment, although more vulnerable groups (youth and low-skilled workers) are somewhat more negatively affected (Kuddo, Robalino and Weber, 2015[29]; Broecke, Forti and Vandeweyer, 2017[30]; Fang and Ha, 2022[31]; Gindling and Ronconi, 2025[32]).

Contrary to their effects in the formal economy, statutory minimum wages are not binding for workers in the informal economy. Not surprisingly, enforcement of legal or regulatory frameworks is much more challenging when employees are not registered or are employed in unregistered enterprises. Thus, informal workers are more likely to be paid below the legal minimum wage.

Nevertheless, minimum wage can have direct and indirect impacts on the informal labour market. In Latin America and the Caribbean, where studies have been more frequent, a review of employment effects shows that minimum wages can positively influence informal workers’ wages in developing economies (Maloney and Mendez, 2004[26]). One explanation is the so-called “lighthouse effect”, i.e. the stated minimum wage gives a signal to workers and employers in the informal economy about socially acceptable minimum levels of pay. In effect, the minimum wage established for the formal economy can serve as a reference throughout the economy, including for sectors not legally bound by it (Derenoncourt et al., 2025[33]; Neri, Gonzaga and Camargo, 2000[34]; Amadeo, Gill and Neri, 2000[35]).

Minimum wage legislation – which usually only applies to workers with the specific labour status of employee – often exists in developing economies, although its effectiveness is generally weak. Evidence from the 25 KIIbIH countries for which data are available shows almost two-thirds (62%) of informal employees – for whom statutory minimum wages are not legally binding – earn less than the legal minimum wage. In contrast, only 20% of formal employees – who are covered by statutory minimum wages – are paid below it (which still indicates that legal regulations may not be enforced for some formal employees) (Figure 2.15, Panel A). The share of informal employees paid below the legal minimum standard is particularly high (69%) in Latin America and the Caribbean, probably reflecting high minimum wage thresholds set in several countries of the region. In Asia, the share is relatively lower but remains substantial, with 35% of informal employees earning less than the minimum wage.

Figure 2.15. A large majority of informal employees earn much less than the minimum wage
Copy link to Figure 2.15. A large majority of informal employees earn much less than the minimum wage

Share of informal and formal employees aged above 15 years earning less than the statutory minimum wage (Panel A) and average wage of informal and formal employees who earn less than the minimum wage as a share of the minimum wage (Panel B), latest year available

For both formal and informal employees who are paid below the minimum wage, the wage shortfall can be substantial. On average, across the KIIbIH countries, informal and formal employees who are paid below the minimum wage earn, respectively, only 53% and 69% of the legal minimum wage (Figure 2.15, Panel B). Looking beyond average reveals important differences across countries, with wages for employees being less than half of the minimum wage in Argentina, Brazil, Chile, Cyprus, Guatemala, Honduras, India, Mongolia, Suriname, Peru and Uruguay. In contrast, wages for employees are closer to 80% of the minimum wage in countries such as Albania, Armenia, Romania and Thailand. Such variations may reflect the different ability of countries to address much more complex problems of labour law enforcement, as well as different levels of statutory minimum wages.

Often, but not always, informality and poverty are experienced together

Copy link to Often, but not always, informality and poverty are experienced together

Most empirical studies indicate that, across countries, 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 (Devicienti, Groisman and Poggi, 2010[37]). Often, the poverty footprint of informality mirrors the earnings disadvantage of informal workers (Pham, 2022[38]; Amuedo-Dorantes, 2004[39]; Devicienti, Groisman and Poggi, 2010[37]; Tassot, Pellerano and La, 2018[40]). This is especially true for low-paid workers who belong to the lower tier of the informal economy (OECD, 2024[15]; OECD/ILO, 2019[4]; Kanbur, 2017[13]).

Poor people disproportionately live in completely informal households, where the incidence of poverty is the highest

Evidence from the KIIbIH confirms the links between poverty and the formality status of households. In all countries covered, the share of the poor population is systematically highest among completely informal households: 66% of poor people live in households in which all earners are informal workers. This compares with 9% in households in which earners are both formal and informal, 12% among households where all earners are formal, and 14% in households with no workers at all (Figure 2.16, Panel A). However, a significant proportion (50%) of non-poor people still live in completely informal households, compared with mixed (17%), formal (25%) and households with no workers (8%) (Figure 2.16, Panel B). If people are poor, they have a very high chance of living in a fully informal household. But living in households in which income comes from informal labour does not necessarily mean being poor.

KIIbIH data expose large country disparities as regards the distribution of poverty across informality status (Figure 2.16, Panel A). In Africa, the share of the poor living in informal households is exceptionally high (95% of the total) in Madagascar, Mali, Rwanda and Togo (95% of the total) and even higher (97%) in Benin, Niger and Tanzania. In Latin America and the Caribbean, this share is well above the regional average in Nicaragua (83%), Bolivia and Honduras (81%) and Paraguay (78%). In Asia, data are similar for Lao PDR and Viet Nam (96%), India (93%) and Cambodia and Thailand (close to 85%). In Europe, even in the countries with the highest shares, the rates are much lower, as shown by data for Albania (42%) and Romania (38%).

The distribution of non-poor people also varies substantially across regions (Figure 2.16, Panel B). In Africa, the shares of non-poor living in completely informal households are above 80% of the total in Benin, Burkina Faso, Mali, Niger, Rwanda, Tanzania, Togo and Uganda, while the share drops to less than 40% in Namibia and South Africa. In Latin America and the Caribbean, the share of non-poor people living in informal households is 50% or higher in Bolivia, Honduras and Nicaragua, but less than 15% in Bahamas, Chile and Uruguay. In Asia, it is higher than 80% in India and Lao PDR but 25% or less in Cyprus, the Maldives and Mongolia. In Europe, it is lower than 4% in all countries covered except Albania (38%).

Figure 2.16. Most of the poor live in completely informal households
Copy link to Figure 2.16. Most of the poor live in completely informal households

Distribution of the poor (Panel A) and non-poor (Panel B) by level of household informality, latest year available

Not only do a disproportionate share of the poor live in informal households, but individuals who live in informal households are also more at risk of poverty (Pham, 2022[38]; Amuedo-Dorantes, 2004[39]; Devicienti, Groisman and Poggi, 2010[37]; Tassot, Pellerano and La, 2018[40]; Kanbur, 2017[13]; OECD/ILO, 2019[4]). Across KIIbIH countries, the poverty rate among informal households stands at 38% and at 33% in households with no workers. In contrast, the poverty rate is much lower in mixed (17%) and formal (12%) households (Figure 2.17). This poverty footprint of household informality varies widely across countries and is particularly important in some places. Poverty rates among informal households are notably higher than the KIIbIH average in 17 African countries and in 12 Latin American and Caribbean countries.

Figure 2.17. Poverty rates significantly drop as households' formality status improves
Copy link to Figure 2.17. Poverty rates significantly drop as households' formality status improves

Poverty rates at national poverty line by household level of informality, latest year available

Most of the working poor operate in the informal economy

Not all informal workers are poor and not all working poor are engaged in the informal economy. Yet a significant overlap exists between informality and working poverty. The composition of workers living in poor households shows that most hold informal jobs. Across the KIIbIH, on average, more than eight out of ten working poor (81%) are employed informally, with the statistics being quite common across all countries (Figure 2.18). This means that, although informal workers have a paid work, it is seldom a living wage: their labour income is not sufficient to lift them and their families out of poverty or to ensure decent living conditions. Several factors drive the phenomenon of the working poor, including low wages, high costs of living, underemployment and high dependency ratios.

Figure 2.18. Most of the working poor are informal workers
Copy link to Figure 2.18. Most of the working poor are informal workers

Distribution of working poor aged above 15 years by informal employment status, latest year available

Formalisation does not systematically contribute to poverty reduction, nor does informal employment always correlate with poverty

Although poverty and informality are often experienced together, formalisation does not systematically translate into poverty reduction across countries, nor does informality always mean poverty (OECD/ILO, 2019[4]; Ohnsorge and Yu, 2022[11]). Historically, in many countries, the decline in informal employment aligns with a reduction in poverty, but not merely through a direct effect as many socio-economic and economic factors collectively affect the reduction of informality and poverty.

This pattern is not universal. For instance, during the 2010s, poverty levels increased even as informality declined in Honduras and South Africa. Conversely, over the same period, expansion of the informal sector in some countries coincided with stagnant poverty rates (e.g. in Costa Rica and Serbia) or with a reduction in poverty (e.g. in Egypt and Pakistan) (OECD/ILO, 2019[4]). The lack of a clear relationship between formalisation and poverty reduction suggests that the poverty-informality nexus is mediated by country-specific factors, notably the quality of formal job creation and the distribution of earnings in the informal economy. In particular, a shift towards formal employment may not alleviate poverty if it is underpinned by the creation of low-paid formal jobs offering reduced labour income. Conversely, an increase in informal employment may not necessarily associate with an increase in poverty if most of the informal jobs created are in the upper tier of the informal economy.

Similarly, the association between poverty and informality is not systematic at the household level. In many countries, a non-negligible share of the non-poor population live in informal households: 50% on average across KIIbIH countries. However, substantial regional differences exist: 73% across countries in Africa, 53% in Asia, 31% in Latin America and the Caribbean and 10% in Europe (Figure 2.16, Panel B). For certain households, the fact that informality does not correlate with poverty is linked to the structure of the informal economy, whereby several informal workers in a given household may benefit from relatively high labour incomes (OECD, 2024[15]).

Earnings inequality is high in the informal economy, reflecting the diverse realities of workers

Copy link to Earnings inequality is high in the informal economy, reflecting the diverse realities of workers

The informal economy has multiple drivers, many of which undeniably reflect the realities of different workers. Building on earlier insights and models of development economics (Harris and Todaro, 1970[41]), some studies argue that labour markets are segmented, and that workers are rationed out of the formal sector due to excessive regulations. As a result, informality is largely involuntary. Other studies challenge these findings, pointing to the fact that a majority of informal jobs reflect a voluntary choice, better fit workers’ preferences and skill endowments, and offer better earnings prospects (Maloney, 2004[42]; De Soto, 1989[43]). Both views may hold some validity: informal employment can be a choice for some individuals and a solution of last resort for others (Maloney et al., 2026[44]; Günther and Launov, 2012[45]; Fields, 1990[46]). Informality may also become the norm where weak or costly formal institutions exist, especially regarding contract enforcement, credit/insurance markets and legal sanctions. Burdensome requirements may lead firms and traders to rely on reputation, kinship, social networks and relational contracting as substitute “informal market institutions” (Fafchamps, 2020[47])

KIIbIH data clearly show that the informal economy consists of multiple and largely unequal employment situations. In most KIIbIH countries, the informal economy can be depicted as being three-tiered, with one prosperous segment in which agents may operate by choice, one large intermediary segment of middle-paid workers with some capacities to contribute to social insurance, and one impoverished segment which individuals end up in for lack of a better alternative.

The distribution of earnings is highly unequal within the informal economy

Globally, earnings inequality has declined since the early 2000s but gaps remain very wide. In 2024, the ILO estimated that the bottom 10% of wage earners received just 0.5% of total wages whereas the top 10% received nearly 38% (ILO, 2024[48]). Moreover, many wage workers, a relatively small fraction of informal workers, continue to be low paid. In 2024, in low-income countries, 22% of wage workers earned less than half of the median hourly wage of their country, compared with 17% in lower-middle-income and 11% in upper-middle-income countries (ILO, 2024[48])

Labour market institutions and regulations play key roles in reducing earnings inequality. Typically, labour law enforcement is considered as a crucial factor, as it empowers the State to force firms and workers to comply with labour regulations, including (among others) remuneration, unionisations and occupational safety and health.

However, these positive effects on inequality are often limited to the formal economy, with only limited spillovers for the informal economy. Not surprisingly, non-compliance is more common in the latter. Many informal workers remain out of the reach of the legislation and end up working with no work contracts, with flexible working hours and wages below the legal minimum standard. Some positive spillovers may exist, though. For instance, regulations such as minimum or decent wage provisions, which theoretically apply only to the formal economy, may nevertheless set a standard for the economy as a whole. By sending a positive signal, they can result in an upward pressure on wages across the informal economy.

The Gini coefficient (a standard measure of inequality) shows that earnings inequality is high across KIIbIH countries, in both the formal and informal economy, being highest in the latter (Figure 2.19). On average, the Gini coefficient is as high as 0.49 among informal workers and 0.40 for formal workers. Africa stands out as having the highest earnings inequality, the Gini index reaching 0.61 for informal workers and 0.56 for formal workers.

Figure 2.19. Inequality in earnings is wider among workers in informal employment
Copy link to Figure 2.19. Inequality in earnings is wider among workers in informal employment

Gini coefficients of monthly earnings for informal and formal workers aged above 15 years, latest year available

Overall inequality in earnings stems primarily from inequality within the informal economy

The prevalence of a large informal economy raises the question of its influence on overall earnings inequality. Using a Theil-L index allows to decompose inequality and to identify the proportion of it that can be attributed to the between-group (formal vs. informal sector) and the within-group components. For a given labour market, the Theil-L decomposition notably isolates: i) inequality in earnings that stem from structural differences between the formal and informal segments; and ii) the dispersion of income within the formal and informal segments, separately. The latter stems from the heterogeneity found in each of these groups and the unique characteristics of their members (see Box 2.2 for more details on the Theil-L index and its decomposition).

The decomposition analysis shows that, on average across countries, the overall earnings inequality is largely due to earnings inequality within the group of informal workers (Figure 2.20). Inequality within this group accounts for 55% of the total inequality in earnings. Earnings inequality within the group of formal workers accounts for 32%, while the contribution of earnings differences between the formal and informal segments of the labour market is relatively limited, accounting for only 13% of overall earnings inequality. Interestingly, the fact that earnings inequality within the informal economy contributes the most to overall earnings inequality is consistent across all KIIbIH countries. These significant earnings differences among informal economy workers is a key factor of its tiered structure and the main driver of a country’s overall level of earnings inequality.

Figure 2.20. Most of overall inequality in earnings stems from inequality within the informal economy
Copy link to Figure 2.20. Most of overall inequality in earnings stems from inequality within the informal economy

Theil-L inequality decomposition for informal and formal workers aged above 15 years, latest year available

These results carry several major implications. First, although, on average, informal workers earn less than formal workers, this mean difference explains overall earnings inequality in developing countries only at the margin. Second, large within-group earnings inequality, especially within the informal economy, plays a much more important role in explaining the observed inequality. This suggests a large heterogeneity across workers, notably in the informal economy, in terms of skill levels, difference in productivity or occupation. Third, the relatively lower level of earnings inequality within the formal economy, and the difference in overall earnings inequality across countries, likely reflect the role of labour market institutions such as the presence of collective bargaining and binding legal labour regulations (Machado Parente, 2024[49]; Eklou and Foster, 2023[50]; Dao et al., 2017[51]; Jaumotte and Osorio Buitron, 2015[52]; OECD, 2011[53]). In other words, formal workers generally benefit from a higher level of protection that tend to reduce the differences in earnings among themselves.

Box 2.2. Measuring inequality in earnings with the Theil-L index

Copy link to Box 2.2. Measuring inequality in earnings with the Theil-L index

The Theil-L index is a specialised measure of inequality. It is particularly valued by economists and policy analysts due to its statistical robustness, its foundation in information theory and its unique characteristic of exact additive decomposability.

To ensure that the resulting metrics are consistent and ethically relevant across different distributions and populations, measuring inequality necessitates adherence to defined criteria. The Theil-L index, along with its Theil-T counterpart, satisfies the fundamental ordinal axioms required for rigorous inequality analysis. These axioms are:

Scale invariant (or mean independent), meaning that multiplying all incomes by a positive constant does not affect the measure, making comparisons robust to changes in inflation or currency units.
Principle of transfers (Pigou-Dalton principle), which requires that any transfer of income from a wealthier individual to a poorer individual (provided the ranks are not reversed) must result in a decrease in the measured inequality.

The mathematical parameterisation of the Theil-L index gives disproportionate weight to income changes occurring at the lower end of the income scale (opposite to what happens for Theil-T). This aligns the index with analytical perspectives that prioritise welfare and inequality reduction among the poorest demographic segments. As such, the Theil-L index is highly suitable for analysis of inequality in the context of EMDEs, where the empirical distribution of earnings and income is highly skewed in the lower end segment.

The Theil-L index also satisfies the cardinal axiom of exact additive decomposability, which is crucial for structural economic analysis. This characteristic allows the total measured inequality to be perfectly partitioned into two distinct components among groups – a feature that is lacking in more intuitive measures (e.g. Atkinson indexes or Gini coefficients).

The between-group component isolates the portion of inequality attributable exclusively to differences in the average income of each group. It measures the inequality that would exist if every individual within a given group would receive precisely the mean income of that group, eliminating all internal dispersion.
The within-group component measures the residual inequality. It is calculated as the weighted sum (by each group shares in the overall population) of the inequality found within each subgroup. This component reflects the dispersion of income that persists even after accounting for the structural differences in group means. A high within-group contribution indicates that the underlying heterogeneity within groups (e.g. individual skills, sector and occupation, productivity levels and local market failures) is the dominant driver of overall inequality.

Source: (Neves Coasta and Pérez-Duarte, 2019[54]; Bellù and Liberati, 2006[55]; Akita, Lukman and Yamada, 1999[56]).

High- and low-paid workers coexist in the informal economy, together with a large missing middle

The informal economy is often referred to as being two-tiered, comprising a prosperous segment of high-paid workers, who may operate within it by choice, and an impoverished segment of low-paid workers, who lack better alternatives (Maloney et al., 2026[44]; Günther and Launov, 2012[45]; Fields, 1990[46]). Compared with both formal and informal workers who belong to the upper tier, informal workers in the lower tier face a greater probability of falling into poverty and of facing greater health-related and old-age adversities (OECD, 2024[15]). These conditions are also experienced by members of their households. Data from the KIIbIH support the co-existence of high- and low-paid workers in the informal economy. Data also confirm the presence of a large proportion of middle-paid informal workers – the so-called “missing middle” – who are often overlooked by policymakers. These workers tend to not qualify for social assistance while also being largely excluded from social insurance schemes.

Based on a three-tier classification of workers relative to median earnings, data reveal that formal workers are predominantly clustered in the high- and medium-earners categories whereas informal workers are predominantly found in the medium- and low-earners categories (Figure 2.21). Across KIIbIH countries, on average within the earnings distribution, informal workers are split quite evenly between the lower tier (42% are “low-paid individuals”) and middle tier (41% are “medium-paid individuals”). Only 17% belong to the upper tier (“high-paid individuals”). For formal workers, these averages are reversed with only 9% being low-paid individuals while the shares are more even for medium-paid individuals (44%) and high-paid individuals (47%). From a social policy point of view, analysis of the earnings distribution of informal workers is crucial to understanding the capacity of different types of informal workers to contribute to social insurance schemes and the extent to which affordability is potentially an issue.

Figure 2.21. Informal workers are less likely to belong to the upper tier of the earnings distribution
Copy link to Figure 2.21. Informal workers are less likely to belong to the upper tier of the earnings distribution

Distribution of informal (Panel A) and formal (Panel B) workers aged above 15 years by earnings categories, latest year available

Workers’ profiles vary substantially across the different tiers of the earnings distribution

The informal economy is a vast and complex swathe of society. The understanding of this sector is still incomplete and continues to evolve as more detailed information is obtained on the diverse profiles of informal workers across developing countries (Box 2.3). KIIbIH data show that informal economy workers constitute a highly heterogeneous group, displaying large differences in workers’ characteristics across the different tiers of the earnings distribution.

Box 2.3. Portraits of informality: Qualitative insights

Copy link to Box 2.3. Portraits of informality: Qualitative insights

Most earnings inequality originates within the informal economy, in which a sizeable middle tier coexists with a lower-tier segment that faces acute vulnerability. It is also clear that household composition shapes exposure to poverty risks. These findings resonate with the integrated approach set out in ILO Recommendation No. 204 concerning the transition from the informal to the formal economy (ILO, 2015[57]). Critically, the ILO approach recognises that informality is not only a labour market status, but the result of institutional, economic and social arrangements that leave workers insufficiently covered by formal frameworks.

The use of stylised worker trajectories, of which three examples are given, helps to illuminate these structural dimensions.

Consider a street vendor in a growing African city. She may work long hours and generate earnings above the poverty line. Yet her productivity depends on three key factors: i) whether urban regulations recognise her activity; ii) whether she has secure access to trading space, and iii) whether basic services (e.g. storage, water and sanitation and electricity) are available. In contexts where informal traders operate in conditions of legal ambiguity or periodic displacement, investment is risky and building the business is difficult. Increasingly, climate-related risks – including extreme heat, flooding or more frequent storms – constrain working hours, damage stock and raise health risks. Where urban planning and climate adaptation strategies do not explicitly include informal workers, these shocks directly reduce earnings and deepen vulnerability.

Consider a home-based worker in Asia, producing within a subcontracted garment value chain. She may fall into the middle tier of earners identified in this chapter. However, prices and orders are typically determined upstream. Irregular demand, delayed payments and rising input costs shape her income stability. Here, inequality within informality reflects asymmetrical market power and limited agency in the value chain. Formal registration alone would not necessarily alter these dynamics without addressing bargaining power and collective representation, both central elements of Recommendation No. 204’s framework.

Consider a waste picker providing environmental services within an urban waste system. Where municipalities integrate informal recyclers into public systems, income stability and occupational safety may improve. Where they are excluded, earnings volatility and health risks deepen. For women waste pickers in particular, income generation is closely linked with care responsibilities. In the absence of accessible and affordable childcare, women may have no option other than to bring young children to sorting areas, exposing them to health and safety risks, or women may reduce working hours in order to manage unpaid care. Access to childcare infrastructure can improve productivity, occupational safety and children’s long-term outcomes.

Across these examples, recurring structural constraints are evident:

Regulatory and spatial exclusion from urban and economic systems.
Unequal access to infrastructure and public services.
Asymmetric market power within supply chains.
Gendered care burdens that shape working time and income.
Heightened exposure to climate and health risks without adequate protection.

These examples illustrate that productivity, income stability and vulnerability in the informal economy are shaped not only by workers’ individual characteristics, but by the design of urban systems, market structures and social infrastructure. As such, strengthening transitions to formality requires attention not only to regulatory status, but to the broader economic systems that structure opportunity, risk and bargaining power. Effective transitions require an integrated policy approach combining rights at work, social protection, support to sustainable enterprises, and inclusive governance approaches that prioritise social dialogue.

Employment status is an important characteristic that influences workers’ legal rights, protections and obligations. In reality, such status varies considerably across the earnings distribution and the formal‑informal economy nexus. On average across KIIbIH countries, own-account workers are disproportionately concentrated in the informal economy, particularly in its lower tier, where they account for 56% of all lower tier informal workers, compared with 33% for employees and 11% for employers. In contrast, employees dominate in the formal economy and are also a larger share (40%) in the upper tier of the informal economy, compared with 45% for own-account workers and 15% for employers. The over-representation of own-account workers in low-paid informal jobs is particularly evident in Latin America and the Caribbean and in Europe (Figure 2.22).

Figure 2.22. Own-account workers are over-represented in the lower tier of the informal economy
Copy link to Figure 2.22. Own-account workers are over-represented in the lower tier of the informal economy

Distribution of informal (Panel A) and formal (Panel B) workers aged above 15 years by earnings categories and employment status

A large rural-urban divide is another reality that differentiates the profile of workers across the diverse segments of the formal and informal economies. Past evidence shows that rurality is a key component of vulnerability among informal workers. Workers living in rural areas are particularly likely of being in informal employment. They also have a lower probability of moving out of informal and into formal employment (Aleksynska, La and Manfredi, 2023[58]; OECD, 2023[2]). Informal workers in rural areas have scarce access to education and training, and a higher probability of dropping out of school. They are therefore more vulnerable to at risk of falling into poverty – or remaining trapped in it. Notably, informal urban workers tend to have better access to social insurance, whereas informal rural workers are better covered by social assistance programmes (OECD, 2024[15]).

In addition to being more likely to be in the informal economy, rural workers tend to be over-represented in the lower tier of the earnings distribution. Across KIIbIH countries, 40% of informal workers in the lower tier of the earnings distribution live in rural areas, whereas only 21% of informal workers in the upper tier do so (Figure 2.23). In contrast, urban workers dominate in the formal economy, as well as in the middle and upper tiers of the informal economy.

Figure 2.23. Informal workers in the lower tier of the earnings distribution are more likely to live in rural areas
Copy link to Figure 2.23. Informal workers in the lower tier of the earnings distribution are more likely to live in rural areas

Distribution of informal (Panel A) and formal (Panel B) workers aged above 15 years by earnings categories and location

Education level also influences the distribution of workers in formal and informal economies and across the different earnings categories. Across most regions and employment categories, low educational attainment (primary education or below) is markedly higher among informal workers, whereas those with secondary and tertiary qualifications are disproportionately represented among formal workers (OECD, 2024[15]; ILO, 2023[10]). Generally, informality is more common for people attaining lower educational levels. In KIIbIH countries, 82% of workers holding no formal degree are informal, compared with 79% for those who completed primary education, 63% for those with complete secondary education, and 37% for those with complete tertiary education. Across all regions, achieving higher education brings better opportunities of having a formal job: in Africa, the informality rate for workers with primary (93%) and secondary (80%) education is far greater than for those with tertiary (48%). Similar trends are evident in Latin America and the Caribbean (respectively 70%, 52% and 28%), in Asia (83%, 69% and 42%), and in Europe (42%, 23% and 9%). In parallel, most informal workers attain lower educational levels. In KIIbIH countries on average, 32% of informal workers have no education and 25% have completed primary education. These shares are higher in Africa (52% and 24%, respectively), than in Latin America and the Caribbean (20% and 27%), in Asia (23% and 26%), and in Europe (2% and 13%). The difference in educational attainment is striking compared with that of formal workers in KIIbIH countries: just 10% have no schooling and 12% hold a primary degree, with little regional variation.

Educational attainment also varies strikingly across formality status and earnings categories. Among informal workers belonging to the lower tier of the earning distribution, 30% have no formal education, 25% have a primary education, 33% have secondary but only 8% have completed a tertiary grade (Figure 2.24). In contrast, in the upper tier of the informal sector, only 16% of workers have no schooling, 20% have a primary grade, 39% have secondary and 24% have attained a tertiary level. Workers with higher levels of education are more likely to work in the formal economy and, within it, in the upper tiers of the earnings categories.

Figure 2.24. In the lower tier of the earnings distribution, informal workers have lower educational attainment than formal ones
Copy link to Figure 2.24. In the lower tier of the earnings distribution, informal workers have lower educational attainment than formal ones

Distribution of informal (Panel A) and formal (Panel B) workers aged above 15 years by earnings categories and educational attainment

Finally, female workers – both informal and formal – tend to be underrepresented in the middle and upper tiers of the earnings distribution. Across KIIbIH countries, women represent on average about half of both informal and formal workers within the lower tier of the earnings distribution. The share drops to 39% of all formal workers in the middle tier, and reaches 27% of informal workers and 37% of formal workers in the upper tier (Figure 2.25). These figures point to a relative disadvantage of women in the middle and upper tiers of the earnings distribution, which is more pronounced in the informal economy.

Figure 2.25. Informal female workers are under-represented in the middle and upper tiers of the earnings distribution
Copy link to Figure 2.25. Informal female workers are under-represented in the middle and upper tiers of the earnings distribution

Distribution of informal (Panel A) and formal (Panel B) workers aged above 15 years by earnings categories and gender

Conclusion and policy discussion

Copy link to Conclusion and policy discussion

Informality remains the norm in developing countries, yet it is far from a monolithic block. Patterns and correlations observed at the aggregate level may not represent associations that exist within the informal economy at the individual level. KIIbIH data reveal that workers who operate in the informal economy face an overall disadvantage vis-à-vis formal workers. However, informal workers are also very diverse and face rather different challenges and risks, depending on their socio-economic characteristics and the structure of their household. The boundary between work in formal and informal economies becomes increasingly blurred when adding a household perspective and recognising the reality of multiple job holding. Three main findings warrant policy attention and action.

First, at the aggregate level, KIIbIH data show that, beyond the lack of access to employment-based social protection, informal workers face four distinct disadvantages in relation for formal workers in that they: i) tend to work fewer hours; ii) receive lower labour income; iii) are more likely to earn less than the statutory minimum wage; and iv) are more prone to hold multiple jobs. Across all these dimensions, socio-demographic characteristics play key roles in exacerbating vulnerabilities. Women as well as rural and less-educated workers in the informal economy are particularly disadvantaged. Ultimately, informal workers’ shortcomings in earnings and hours have far-reaching consequences for poverty and inequality. Although the association between poverty and informality is not systematic, KIIbIH data confirm a cumulative impact in that informal workers are more at risk of falling into poverty, that poverty is greater in households that are fully informal, and that most of the working poor are informal workers.

Second, KIIbIH data point to heightened earnings inequality among informal workers, reflecting broad heterogeneity in the informal economy. While informal workers earn less, on average, than formal workers, the dual structure of the labour market explains overall earnings inequality only at the margin. In reality, most of overall earnings inequality stems from earning inequality within the informal economy and can be explained by the heterogeneity across informal workers in terms of skill levels, productivity, occupations, location, and exposure to potential discriminatory practices. Digging deeper confirms that the informal economy consists of multiple and largely unequal employment situations. In all KIIbIH countries, the informal economy exhibits a three-tiered structure – including one prosperous segment of high-paid workers who may operate by choice, one large intermediary segment of middle-paid workers and one impoverished segment of low-paid workers who lack better alternatives. The profile of informal workers belonging to the upper tier of the earnings distribution differ significantly from those in the lower tier. Compared with the middle and upper tiers, informal workers in the lower tier are more likely to be self-employed and less educated, to live in rural areas, and to be female workers.

Third, the divide between work in formal and informal economies is increasingly blurred when adding a household perspective and recognising the reality of multiple job holding. While the majority of informal workers live in households with no formal workers, some informal workers do live in households with formal workers, which lowers the levels of risks and vulnerabilities. At the same time, a significant share of workers in both formal and informal economies hold multiple jobs, most of which are informal. In such cases, informality and formality partially overlap.

The diverse, plural and segmented structure of the informal economy has several policy implications. It constitutes a call for interventions that recognise heterogeneity in the informal economy while also acknowledging that informality is not merely a labour-market condition. As regards the latter, policymakers should view informality as a structural outcome produced by the complex interactions of the design and enforcement of regulations, taxes and social protection systems (Bobba, Flabbi and Levy, 2022[59]; Levy, 2021[60]; Levy, 2008[61]). Clearly, policy interventions should address these complex interactions and respond to the specific needs of workers with different characteristics and in diverse employment situations and household contexts.

Such interventions should aim to both reduce the inequality and poverty that impact disproportionately the informal economy and create the conditions for small and medium enterprises (SMEs) to grow and drive decent work. These objectives could be articulated around four policy interventions: i) investment in human capital development; ii) expansion of social protection coverage; iii) implementation of efficient minimum wage policies; and iv) support job creation and address the specific disadvantages of female and rural informal workers.

Invest in human capital development

Inclusive growth and access to quality jobs must remain at the heart of any formalisation strategies, for all workers of the informal economy. For policymakers, it is crucial to expand access to employer-financed training and provide skills development programmes that are explicitly designed to accommodate the constraints and needs of informal workers.

Mechanisms that recognise prior learning should be institutionalised to validate skills acquired through informal work experience. To enhance the long-term skill endowments of future labour market entrants, governments should continue to prioritise investment in universal, high-quality education, implement measures to reduce school dropouts, and facilitate efficient school-to-work transitions.

Expand social protection coverage

The uneven capacities across informal economy workers to contribute to social protection schemes clearly calls for differentiated strategies based on the level of earnings of workers and their distance towards formalisation.

For informal workers in the upper- and upper-middle tiers of the earnings distribution, who are typically more responsive to conventional formalisation incentives, policy design should emphasise regulatory inclusion policies. This includes: ensuring effective coverage by labour legislation systems and tax frameworks; encouraging voluntary contributions to social insurance systems; providing appropriate contribution subsidies; simplifying registration and payment procedures, notably for the self-employed who run micro-enterprises; and strengthening enforcement of regulations for both employers and the self-employed.

For informal workers in the lower and lower-middle tiers of the earnings distribution, policies should acknowledge that a subset of workers may remain in low-productivity, informal occupations over the long term. In this regard, priorities should shift towards mitigating the dual disadvantage of informality and low earnings. This notably includes enhancing collective bargaining capacities for low-paid informal workers and extending social protection via non-contributory benefits (e.g. social pensions). In addition to enhancing individual welfare, such investments serve as instruments for poverty mitigation and labour market stabilisation.

Implement efficient minimum wage policies

By establishing minimum or decent wage regulations, policymakers can trigger a “lighthouse effect” – whereby a statutory minimum wage signals socially acceptable income levels to the informal economy. This can have strong spillover effects on the informal economy and, more specifically, on low-paid informal workers. To reduce non-compliance and potential adverse employment effects, minimum wage policies should carefully balance employer and worker perspectives and take into account economic factors to fix the effective level and rate structure of minimum wages.

Support job creation and address the specific disadvantage of female and rural informal workers

Creating decent jobs remains core to any development strategies. It requires measures to support job-rich sectors and help high-potential SMEs and entrepreneurs grow their businesses and create more formal wage jobs. Important levers include access to financial services, technology transfers, training and a conducive business environment. Dialogue with the private sector and local SMEs is essential to better understand labour market needs.

The stark disadvantages faced by certain sub-groups of the informal economy, such as women or rural workers, should also be addressed through specific measures. In particular, labour market and formalisation policies must address the disproportionate care burden of women and the reduced access to decent job opportunities and basic services experienced by people living in rural areas. Both situations often prevent these sub-groups from joining the labour market and/or from holding a formal job.

Annex 2.A. Country and time coverage of KIIbIH primary sources

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Country	ISO	Year	Income level	Survey
Africa
Benin	BEN	2021	Lower-middle	Enquête Harmonisée sur le Conditions de Vie des Ménages (EHCVM 2021/22)
Burkina Faso	BFA	2021	Low	Enquête Harmonisée sur le Conditions de Vie des Ménages (EHCVM 2021/22)
Cameroon	CMR	2007	Lower-middle	Enquête Camerounaise Auprès des Ménages (ECAM III)
Ethiopia	ETH	2018	Low	Ethiopian Socioeconomic Survey (ESS 2018/19)
Gambia	GMB	2015	Low	Integrated Household Survey (HIS 2015)
Ghana	GHA	2013	Lower-middle	Ghana Living Standard Survey (GLSS 2013)
Kenya	KEN	2015	Lower-middle	Kenya Integrated Household Budget Survey (KIHBS 2015/16)
Liberia	LBR	2016	Low	Household Income and Expenditure Survey (HIES 2016)
Madagascar	MDG	2012	Low	Enquêtes Périodiques auprès des Ménages (EPM 2012)
Malawi	MWI	2019	Low	Integrated Household Panel Survey (IHPS 2019)
Mali	MLI	2021	Low	Enquête Harmonisée sur le Conditions de Vie des Ménages (EHCVM 2021/22)
Namibia	NAM	2015	Upper-middle	Namibia Household Income and Expenditure Survey (NHIES 2015/16)
Niger	NER	2018	Low	Enquête Harmonisée sur le Conditions de Vie des Ménages (EHCVM 2018-2019)
Nigeria	NGA	2015	Lower-middle	Nigeria General Household Survey (GHS 2015)
Rwanda	RWA	2016	Low	Enquête Intégrale sur les Conditions de Vie des Ménages (EICV 5)
Senegal	SEN	2021	Lower-middle	Enquête Harmonisée sur le Conditions de Vie des Ménages (EHCVM 2021/22)
Sierra Leone	SLE	2018	Low	Sierra Leone Integrated Household Survey (SLIHS 2018)
South Africa	ZAF	2016	Upper-middle	National Income Dynamics Study (NIDS 2016)
Tanzania	TZA	2019	Lower-middle	National Panel Survey (NPS 2018/19)
Togo	TGO	2021	Low	Enquête Harmonisée sur le Conditions de Vie des Ménages (EHCVM 2021/22)
Uganda	UGA	2019	Low	Uganda National Panel Survey (UNPS 2019/20)
Zambia	ZMB	2015	Lower-middle	Living Conditions Monitoring Survey (LCMS 2015)
Americas
Argentina	ARG	2023	Upper-middle	Encuesta Permanente de Hogares (EPH 2023)
Bahamas	BHS	2013	High	Bahamas Household Expenditure Survey (HES 2013)
Barbados	BRB	2016	High	Barbados Survey of Living Conditions 2016
Bolivia	BOL	2022	Lower-middle	Encuesta de Hogares (2022)
Brazil	BRA	2023	Upper-middle	Pesquisa Nacional por Amostra de Domicílios Contínua (PNAD 2023)
Chile	CHL	2022	High	Encuesta de Caracterización Socioeconómica Nacional (CASEN 2022)
Colombia	COL	2023	Upper-middle	Encuesta Nacional de Calidad de Vida (ECV) 2023
Costa Rica	CRI	2023	Upper-middle	Encuesta Nacional De Hogares (ENAHO) 2023
Dominican Republic	DOM	2018	Upper-middle	Encuesta Nacional de Gastos e Ingresos de los Hogares (ENGIH 2018)
El Salvador	SLV	2023	Upper-middle	Encuesta de Hogares de Propósitos Múltiples (EHPM 2023)
Guatemala	GTM	2022	Upper-middle	Encuesta Nacional de Ingresos y Gastos de los Hogares (ENIGH 2022)
Honduras	HND	2019	Lower-middle	Encuesta de Hogares de Propósitos Múltiples (EHPM 2019)
Jamaica	JAM	2019	Upper-middle	Jamaica Survey of Living Conditions (JSLC 2019)
Mexico	MEX	2022	Upper-middle	Encuesta Nacional de Ingresos y Gastos de los Hogares (ENIGH 2022)
Nicaragua	NIC	2014	Lower-middle	Encuesta de Medición de Nivel de Vida (EMNV 2014)
Paraguay	PRY	2024	Upper-middle	Encuesta Permanente de Hogares (EPH 2024)
Peru	PER	2023	Upper-middle	Encuesta Nacional de Hogares (ENAHO 2023)
Suriname	SUR	2022	Upper-middle	Suriname Survey of Living Conditions (SSLC 2022)
Uruguay	URY	2023	High	Encuesta Continua de Hogares (ECH 2023)
Asia
Armenia	ARM	2023	Upper-middle	Integrated Living Condition Survey (ILCS 2023)
Cambodia	KHM	2019	Lower-middle	Cambodia Living Standards Measurement Study – Plus 2019/20
China	CHN	2020	Upper-middle	China Family Panel Studies (CFPS 2020)
Cyprus	CYP	2023	High	EU Statistics on Income and Living Conditions (EU-SILC 2023)
India	IND	2012	Lower-middle	India Human Development Survey-II (IHDS-II 2011/12)
Indonesia	IDN	2014	Lower-middle	Indonesia Family Life Survey (IFLS 2014)
Lao PDR	LAO	2012	Lower-middle	STEP Skills Measurement Household Survey 2012
Maldives	MDV	2019	Upper-middle	Household Income and Expenditure Survey (HIES 2019/20)
Mongolia	MNG	2021	Lower-middle	Household Socio Economic Survey (HSES 2021)
Myanmar	MMR	2015	Lower-middle	Myanmar Poverty and Living Conditions Survey (MPLCS 2014-15)
Thailand	THA	2017	Upper-middle	Survey of the Economic and Social Situation of the Household (SES 2017)
Viet Nam	VNM	2016	Lower-middle	Vietnam Household Living Standard Survey (VHLSS 2016)
Europe
Albania	ALB	2012	Upper-middle	Living Standards Measurement Study (LSMS 2012)
Bulgaria	BGR	2023	High	EU Statistics on Income and Living Conditions (EU-SILC 2023)
Croatia	HRV	2023	High	EU Statistics on Income and Living Conditions (EU-SILC 2023)
Malta	MLT	2023	High	EU Statistics on Income and Living Conditions (EU-SILC 2023)
Romania	ROU	2023	High	EU Statistics on Income and Living Conditions (EU-SILC 2023)

Note: Income levels refer to the income classification developed by the World Bank. Regional classification of countries follows the geographical grouping of the United Nations’ M49 standard.

Source: (OECD, 2026[1]), “Key Indicators of Informality based on Individuals and their Households (KIIbIH)”, https://data-explorer.oecd.org.

Annex 2.B. How to define and measure informality?

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The definition of the informal economy

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The International Labour Organization (ILO) employs a precise and comprehensive conceptual framework to delineate and analyse the informal economy. This framework is essential for understanding the structure of labour markets, identifying key challenges, and developing effective policy interventions aimed at poverty reduction and the promotion of decent work. Recognising that a simple binary view of the economy is insufficient, the ILO approach highlights the complexity of informality and the need for context-specific policy responses. Policymakers must therefore tailor interventions to address the underlying drivers of formality and the barriers to formalisation.

Over time, the definition of the informal economy has evolved. The first international standard addressing the measurement of informality (adopted in 1993 during the 15th International Conference of Labour Statisticians [ICLS]) focused on employment in the informal sector (ILO, 1993[62]). Subsequent revisions have progressively transformed the definition. In 2023, the 21st ICLS adopted a resolution concerning relevant statistics that introduced major changes to the definition and measurement of the informal economy (ILO, 2024[63]).

At present, the ILO defines the informal economy as all informal productive activities carried out by persons or economic units, whether or not these activities are undertaken for pay or profit. Informal productive activities are those that are, in law or in practice, not covered by formal arrangements. Within this broad framework, the 21st ICLS resolution introduces the concept of the informal market economy, defined as “all production for pay or profit in the informal sector and all productive activities of workers in employment that are not covered by formal arrangements” (ILO, 2024[63]). This concept is particularly useful as it identifies the 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. The ILO 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.

The three sectors: Operational definitions

Based on their characteristics, all economic units can be categorised into one of three sectors: formal, informal, and household own-use production and community.

The formal sector comprises economic units that are formally recognised as producers of goods and services and are covered by formal arrangements. Such units possess a formal status, for example by being owned or controlled by the government, being legally separated from their owners, being registered in a government-established system keeping complete accounts for tax purposes, or producing mainly for the market while employing one or more persons in formal jobs.

The informal sector comprises household unincorporated market enterprises – i.e. economic units producing goods or services mainly for the market with the purpose of generating income or profit. Because there is no separate legal entity for these enterprises, they are treated as part of the household. These enterprises are not formally recognised by government authorities as distinct market producers. These units are not government-owned, are not legally separated from their owners, do not keep complete accounts for tax purposes, and are not registered in a relevant government system. Additionally, they do not employ any employee with a formal job. Importantly, production mainly intended for own final use is excluded from the informal sector.

The household own-use production and community sector covers households and non-formal, non-profit organisations producing goods or services mainly for own final use or for the use of others without the purpose of generating income or profit. This includes own-use production by households, direct volunteer work, and work carried out for non-formal, non-profit organisations.

Informal and formal employment

Employment classification focuses on the formal or informal status of the job or work activity itself (in contrast to the sector classification, which focuses on the type of economic unit in which production takes place).

Formal employment is characterised by legal protection, regulatory compliance, and access to employment and social security benefits. Depending on local guidelines, workers in formal employment are subject to national labour legislation and have social protection rights, such as contributions to pension funds or retirement schemes, paid annual leave, paid sick leave, and other employment benefits.

Conversely, informal employment refers to activities undertaken to produce goods or services for pay or profit that are, in law or in practice, not covered by such formal arrangements. As a result, workers in informal employment may lack legal protection, social security coverage, and access to employment-related benefits.

Informal employment can occur across different types of workers. For independent workers, it concerns those who own or operate an informal and unincorporated household market enterprise. For dependent contractors, it refers to workers who lack formal status in relation to legal and administrative frameworks, or whose activities are not effectively covered by formal arrangements. For employees, informal employment applies when the employment relationship is not formally recognised by the employer or when it does not provide effective access to formal arrangements. Contributing family workers are considered informally employed when their work relationship is not formally recognised or protected.

The overlap between sectors and informal employment

The definition of informal employment means that such work is not limited to the informal sector. Depending on the type of economic unit for which work is carried out, individuals holding informal jobs may work in the informal, formal, or the household own-use production and community sector. The distinction is important: the sector classification identifies the status of the production unit, while the employment classification identifies whether the worker’s specific job is formally recognised and effectively protected.

The complexity of the informal economy goes beyond the sector-employment dichotomy and can stem from different regulatory frameworks that do not necessarily mandate social security contributions. In countries where such contributions are not mandatory, workers may comply with all labour laws while remaining outside social insurance systems – therefore being counted as informally employed. This challenge regarding the link between formality and social protection requires to examine informality as a complex, multidimensional and diverse phenomenon and to analyse it from different angles. For instance, Fietz et al. (2025[64]) use a distinct and specific approach regarding social protection (SP) coverage, which goes beyond being informally employed. They recognise four sub-categories: SP mandated and complying; SP exempted and participating; SP mandated and noncomplying; and SP exempted and nonparticipating (Fietz et al., 2025[64]).

How does the KIIbIH measure the informal sector and the informal employment?

Copy link to How does the KIIbIH measure the informal sector and the informal employment?

A practical limitation to studying informality is that not all countries have fully implemented the statistical standards on which the ILO builds the latest framework for measuring informality. In particular, some labour-force surveys may not yet fully reflect the 19th ICLS distinction between employment and other forms of work, with consequences for the treatment of own-use production of goods. Similarly, the lack of full implementation of the International Classification of Status in Employment (ICSE-18) may limit the identification of new categories of the status in employment, especially that of dependent contractors. However, many of the core criteria used to identify informal employment among employees, independent workers and contributing family workers are already collected in labour-force surveys, including information on enterprise registration, social security contributions, paid leave, contracts, taxation, and/or formal recognition of the work relationship.

As of 2026, the KIIbIH follows the ILO guidelines and statistical concepts defined by the 20th ICLS, which provide the basis for classifying workers according to both their status in employment and the work relationship. This allows the KIIbIH to distinguish between employees, independent workers, dependent workers and contributing family workers in a way that is broadly comparable across countries, while using available survey variables to identify informal employment and the informal sector. The resulting measures should therefore be understood as a harmonised operational approximation of informality, sectors and employment, based on the 20th ICLS framework and the statistical concepts defined therein (ILO, 2018[65]). Indicators are built by combining data from different variables of the underlying household surveys.

To identify whether workers operate in the informal sector, the KIIbIH uses the following information:

Unit of production: What is the institutional sector in which the employed individual works – public, private, household or other?
Destination of the production: Is the production of the economic unit mainly destined to the market, or is it for own final use or consumption?
Bookkeeping of the business: Does the economic unit (owned by the self-employed or in which the worker is employed) keep regular books?
Registration of the business: Is the economic unit (owned by the self-employed or in which the worker is employed) registered in the tax authority registry?
Contribution to social security (for employees only): Is the employed individual an employee and does the economic unit in which he/she is employed pay social security contributions?
Place of work: Does the employed individual work in a fixed place of work?
Firm size: Does the economic unit (owned by the self-employed or in which the worker is employed) have five employees or less, or six employees and more?

This information feeds into a decision tree that defines the institutional sectors, in line with the functional statistical rules employed by the ILO (ILO, 2018[65]; ILO, 2013[27]). Annex Figure 2.B.1 presents the decision tree to compute the institutional sectors.

Annex Figure 2.B.1. Decision tree to compute indicators on formal, informal and household sectors
Copy link to Annex Figure 2.B.1. Decision tree to compute indicators on formal, informal and household sectors

To identify whether workers are in informal employment the KIIbIH uses the following information:

Status in employment: Does the employed individual work as an employee, an employer, an own-account worker or a contributing family worker?
For an employer or an own-account worker:
- Status of the economic unit: Does the economic unit belong to the formal, informal or household sector?
For an employee (and missing information on status in employment):
- Social security: Is the worker covered by a social insurance scheme?
- Paid leave: Does the worker benefit from paid annual and sick leave?

This information feeds into a decision tree that defines the employment status, in line with the functional statistical rules employed by the ILO (ILO, 2018[65]; ILO, 2013[27]). Annex Figure 2.B.2 presents the decision tree to compute formal and informal employment.

Annex Figure 2.B.2. Decision tree to compute indicators on formal and informal employment
Copy link to Annex Figure 2.B.2. Decision tree to compute indicators on formal and informal employment

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← 1. It must be stressed that some of these gaps are partly explained by the higher difficulty to adequately capture working time in agriculture (ILO, 2022[19]).

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