Rethinking the Informal Economy: Linkages with the Formal Economy and the Formal Regulatory Environment

How to integrate the informal economy in the formal regulatory environment?
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This paper explores the relationship of the informal economy to the formal economy and to the formal regulatory environment. It compares the earlier concept of the 'informal sector' with the new expanded concept of the 'informal economy', which includes micro-entrepreneurs, own account operators, informal wage workers, and industrial outworkers.

The paper argues that:

  • Most informal enterprises and workers are intrinsically linked to formal firms;
  • Different segments of the informal economy are over-regulated, de-regulated, or under-regulated;
  • There are benefits and costs to both formality and informality.

It concludes by outlining government's role in the informal economy. This includes:

  • Ensuring that the formal regulatory environment is not biased in favor of formal firms and workers over informal enterprises and workers (or vice versa);
  • Regulating the commercial and employment relationships between formal firms, informal enterprises, and informal wage workers.