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Informal Economy Topic(s): Poverty, Growth & Crises Linkages

Poverty & Growth Linkages

The relationship between informality, poverty, and growth are complex. This section of the website explores what is known about these relationships.

  Veronica Boakye trading at Kwame Nkrumah Circle Market in Accra, Ghana

Links with Growth

This section explores the two-way linkages between informality and growth: the impact of the informal economy on economic growth, and the impact of economic growth on the informal economy. How much and in what ways does the informal economy contribute to economic growth? Or does the informal economy account for low productivity and low growth? Does the size of the informal economy shrink during economic growth and expand during economic slumps or downturns? Is it, in other words, counter-cyclical or pro-cyclical?

Links with Economic Crises

Economic crises lead to increased unemployment through loss of jobs in the formal economy and to increased employment – through new entrants – in the informal economy. For example, recent estimates by the International Labour Organization (ILO) suggest informal employment in Colombia, Ecuador, Mexico, Panama, and Peru  increased from 52.9 per cent of total employment in 2007 to 53 per cent in 2008 and 53.6 per cent in 2009 (ILO 2009a).

Global Recession Impact: Personal Stories from Informal Workers

Uncertain Times

The global economic crisis that rocked the world in 2008 led to increased financial hardship for informal workers, most of whom already lived in precarious circumstances. Here is a sampling of their stories, told during  2009 and 2010. 

Links with Poverty

Not all informal workers are poor and not all working poor are engaged in the informal economy. Some informal operators – especially among those who hire others – are not poor and some formal wage workers are poor. But there is a significant overlap between working in the informal economy and being poor. This section details what is known about the relationship between working in the informal economy and being poor.

Support to Informal Workers During & After Economic Crises

During economic crises, the poor are seen as targets for social assistance or social safety nets. However, the working poor, especially those engaged in the informal economy, are not recognized as legitimate targets for economic rescue or recovery efforts because it is widely believed that the informal economy provides a “cushion” to those who lose their jobs in the formal economy. Therefore, it is assumed informal workers must be doing all right.

Hierarchies of Earnings & Poverty Risk

The statistical evidence summarized in the “Links with Poverty” section suggests a hierarchy of earnings and poverty risk across the various segments of the labour force, as illustrated in Figures 1-3 below. While average earnings are higher in formal employment than in informal, there is also a hierarchy of earnings within the informal economy. Employers have the highest average earnings, followed by their employees and other “regular” informal employees, then own account workers, followed by casual wage workers and domestic workers, and finally industrial outworkers.

Links with Poverty: Data Sources

The “Links with Poverty” section summarizes findings from several recent sets of country-level data analyses that considered the average earnings and/or the poverty risk of different segments of the labour force, both formal and informal.