The Informal Economy
Definition of the informal economy or cash-in-hand work
The ‘informal economy’ or cash-in-hand work or is known by several names: the hidden economy, shadow economy, grey markets, working off-the-books, ghosting or moonlighting. The most commonly agreed upon and used definition is by the EU (1998) and the Small Business Council (SBC, 2004), which states that:
‘Informal work involves the paid production and sale of goods or services which are unregistered by, or hidden from the state for tax, benefit and/ or labour law purposes, but which are legal in all other respects.’
Illegal or criminal activities such as drug dealing or prostitution have been excluded from this definition, as have exchanges of unpaid work.
Size & Scale of the Informal Economy in the UK
National Account figures estimate that about 1.5% of GDP is generated in the informal economy (ONS 2001). The EU estimates around 7-16% of GDP, and others argue that undeclared income represents around 12.3% of the UK’s GDP, approximately £120 billion (Schneider, 2000, Schneider, 2006).
Though the UK has one of the lowest levels of informal economic activity in the EU, the trend over the last decade, across all OECD countries, has been that informal economic activity is rising.
For every one percent of growth in the informal economy, the official GDP grows by 0.8%, illustrating the symbiotic nature of the relationship between the two types of employment market. (Schneider & Klinglmair 2004)
There is virtually no statistical evidence at a micro-level of local informal economies in the UK. To address this Community Links [http:/www.community-links.org] has developed a comprehensive research method to analyse informal economic activity at a borough-wide level; identifying numbers of people working informally, occupations, earnings and motivations. This is researched in partnership with a local organisation.
Identifying and evaluating the consequences of informal paid work
A world of contradictions
Informal economic activities tend to be characterised by contradictions, providing both benefits and costs with respect to economic development. Community Links evidence reveals a more nuanced picture than one in which informal employers routinely exploit their employees through low pay and poor working conditions. In many instances employees report greater moral and practical support, with some benefiting from greater flexibility in the case of childcare arrangements or medical considerations, and others providing references and advice to help workers enter the formal economy.
The focus has too often been on the negative aspects of informal paid work. Our research has shown that informal paid work can have a positive role in peoples’ lives, keeping them from poverty, and the development of confidence and skills, and building social capital (Travers 2000).
People working informally often benefit socially as well as economically, maintaining a positive self-identity along with getting bills paid. It operates as a means to access paid work where this might be difficult in the formal sphere, a situation that affects diverse groups such as people with poor educational or vocational qualifications, those who have been out of work for a period of time (for example, due to ill-health or long term unemployment), and people from abroad who are disadvantaged by less well-established social networks and qualifications that are not always recognised in the UK.
The positive consequences of the informal economy are that it:
- Increases income
- Increases self confidence
- Improves skills
- Widens work experience
- Develops the habit and routine of work
- Leads to delivery of a product at lower cost
- Maintains economic activity where it is need and otherwise would not exist
- Provides employment
- Offers greater flexibility in terms of working hours and conditions
- Has reduced barriers to entry, so provides employment for those who otherwise find it difficult to find formal paid work
- Fosters entrepreneurial spirit
- Supports the formal economy: a large percentage of earnings from informal paid work are spent in formal economy
Despite the fact that the informal economy supports the formal sector and plays a part in redistributing wealth, there are some problems associated with it, such as a flouting of workers’ rights, lack of redress for customers and a lack of training and sustainability.
The points listed below illustrate how the informal economy can add disadvantage to individuals, business and society as a whole.
Employees working informally:
- lack employment rights such as the minimum wage, sickness pay, tax credits, working hours directive
- risk injury, ill health or death due to compromises around health & safety
- cannot access contributory benefits such as the state pension
- lack bargaining rights
- lose employability due to lack of evidence of employment
- cannot acquire a reference from their employer
- cannot obtain financial credit
- risk detection and prosecution
Customers employing informal labour:
- possess no legal rights if work is substandard
- hold no guarantees as to process or product with regard to health & safety, ethical concerns or quality
Businesses operating informally:
- suffer a lack of legal protection
- endure restricted access to capital and business support
- lack opportunity to grow beyond a certain size: difficult to develop beyond a ‘glass
- risk detection and prosecution
- informal businesses create a culture whereby formalised businesses are tempted away from complying with employment law
- informal employment weakens collective bargaining, thereby worsening workers’ rights
- tax avoidance and benefit fraud results in a loss of state revenue, which in turn
hinders the ability of government to pursue socially beneficial initiatives
- loss of state revenue may cause a rise in taxes which can in turn encourage an expansion of the informal economy, leading to a descending spiral
- undeclared work skews statistics (such as employment figures), meaning that public policy is premised on inaccurate information. This may make policies less effective
- some believe that the greater the number of people flouting the law, the less respect there is for the law per se
It is important therefore to develop appropriate policies and strategies which take into account both the positives and negatives of the informal economy.
- Llanes M and Barbour A (2007) ‘Self-employed and Micro-entrepreneurs: Informal Trading and Journey towards Formalisation’ London: Community Links
- Community Links, Child Poverty Action Group and Low Incomes Tax Reform Group (2007) ‘Interact: benefits, tax credits and moving into work’, London: Community Links, cpag, litrg.
- Llanes M, Dr and Barbour A, (2007) ‘Measuring the size of the informal economy at a borough-wide level in the UK’, to be published by the Brookings Institute, based in the USA, in 2008
- Barbour A, (2007) ‘Need not Greed: Understanding and harnessing your local informal economy’, Benefits, Vol 15, no 2, 2007, pp179-183, The Policy Press
- Hatcher M, (2007) ‘Two sides of the same coin: rethinking the relationship between formal and informal economic activity’, Community Links Position Paper
- Neale, E. and Wickramage, A. (2006) ‘Counting shadows: harnessing informal economic activity in deprived areas’. A paper given at the 39th Social Policy Association Conference, University of Birmingham, 20th July 2006
- Barbour A, (2006) ‘Out of the moonlight’, New Start Magazine, 14 June 2006
- Katungi D, Neale E, Barbour A, (2006) ‘People in low-paid informal work: Need not greed’, Joseph Rowntree Foundation and The Policy Press
- Copisarow R and Barbour A, (2004) ‘Self employed people in the informal economy: Cheats or Contributors?’, London: Community Links
Danish Knowledgecentre for Ethnic Entrepreneurship (2007), "Moving out of the shadow economy", Copenhagen
- Smerdon M and Robinson D, (2004) ‘Enduring change: the experience of the Community Links Social Enterprise Zone. Lessons learnt and next steps’, The Policy Press and Community Links
- Travers A, (2001) ‘Prospects For Enterprise’, London: Community Links evidence paper series, number 2
linksUK's informal economy website: