Social Impacts in the Informal Economy

14th December 2023

What is the reason for the informal economy?
What are the social impacts of informality?
Social justice issues in the informal economy
How can businesses improve standards in the informal economy?

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More than 60 per cent of the world’s employed population, that is two billion women, men, and youth, earn their livelihoods in the informal economy.

The informal or grey economy refers to all economic activities undertaken by workers that are – in law or in practice – not or insufficiently covered by formal arrangements. It is an unregulated part of the economy that is neither taxed nor monitored by governments. The informal jobs sector can include day labourers, domestic workers, undeclared workers and part-time or temporary workers.

The United Nations states that the transition towards a more formal economy is necessary to reduce poverty and inequalities, advance fair working conditions, and increase productivity and sustainability of enterprises. According to the International Labour Organisation’s guidance on the Transition from the Informal to the Formal Economy, understanding the individual drivers and challenges of the informal economy on a national level and the implementation of coherent and integrated strategies that tackle multiple drivers of informality are crucial for success.

Several Sustainable Development Goals (SDGs) are relevant to achieving social justice, including tackling issues associated with informal economic activity, including No Poverty (SDG 1), Gender Equality (SDG 5), Reduced Inequalities (SDG 10), Peace, Justice and Strong Institutions (SDG 16) and Partnerships for the Goals (SDG 17). This highlights the important and overlapping areas that are impacted through the informal economy and the importance of progress in this space.

What is the reason for the informal economy?

The informal economy provides employment opportunities, especially within developing countries, to those who do not have employment security, work security and social security. It is an easily accessible economy and provides an opportunity to acquire skills and knowledge to transition to the formal economy. The key drivers of informality are:

Economic context and legal, regulatory and policy frameworks: Informality can present itself differently depending on the economic context of a country. The informal economy embraces professions as diverse as minibus drivers in developing economies to construction workers in advanced economies.
Sector and economic factors: Informal workers are more likely to earn lower wages compared to their peers in the formal sector, as they lack social protection and access to credit.
Lack of education: Informal firms tend to remain small, with low productivity and limited access to finance.
Discrimination: Globally, 58 per cent of employed women work in the informal sector and are more likely to be in the most precarious and low-paid categories of informal employment.
Climate Change: Informal settlements which have been built out of the ‘formal’ system elevate risk from most climate change impacts such as increasing temperatures and sea-level rise. A high proportion of the population in informal settlements work within the informal economy, as these workers are often excluded from services such as obtaining a legal address.

Self-employed work can lead to unsafe working conditions with no benefits and long working hours with irregular incomes
Lack of training and technology can lead to low levels of skills, lack of access to information and productivity
Without formal contracts of employment, workers are not protected under labour legislation and have no social protection
Many countries and regions with high levels of informal work also have high levels of poverty
Lack of access to worker representation or unions under the fundamental principles of ETI base code 2: Freedom of Association

Social justice issues in the informal economy

Due Diligence: Businesses undertake risk assessments that measure a company’s social and environmental performance; however, visibility is minimal due to unaccounted workers in the grey economy and fails to penetrate lower tiers of the supply chain, including outsourced and subcontracted work.
Visibility of Supply chains: In some cases, homeworkers at the very bottom of supply chains are the most vulnerable workers and may not be visible at a high level due to subcontracting and lack of written contracts.
Purchasing Practices: Poor purchasing practices, such as last-minute changes, lead to reduced lead times for suppliers. This pressure on suppliers has resulted in the intensification of work which leads to a lack of visibility and unauthorised subcontracting in the informal sector. This may result in forced and unpaid overtime.
Climate Migration: Migration in response to climate impacts can lead to increased mobility and forced displacement in the face of life-threatening risks. This may happen within or across international borders. Without clear strategies to support these individuals, they often rely on informal work as a means to provide some income.
COVID-19: The pandemic has exacerbated the situation for parts of the workforce in global supply chains, as highlighted in the recent ILO COVID-19 and informal economy assessment. Many roles within the informal sector have been severely impacted due to COVID-19, and a lack of formal protection has left people without any income. Women, children and migrant workers are particularly affected as they struggle to access rights, including access to vaccines.

How can businesses improve standards in the informal economy?

Public Commitments: Make public commitments to improve working conditions, which should be included in Modern Slavery and Human Trafficking statements.
Governance: In corporate governance and specific policies, actions and programmes need to be designed to uncover and address what is really happening in complex supply chains, especially in the lowest tiers where visibility is low, and workers are most vulnerable.
Transparency: Map supply chains, understand tiers and the human impact of working in each tier, to understand characteristics such as gender split, employment types and the provision of fair employment legislation.
Legislation: Understand how legislation in different countries impacts formal employment. For example, in the UK, after 12 weeks of working, an agency worker has the right to be made permanent and qualify for the same rights as someone employed directly. This includes receiving the same pay as a permanent colleague doing the same job, automatic pension enrolment and paid annual leave.
Supply Chain Risk Assessments: Conduct risk assessments through Human Rights Due Diligence to understand how the informal sector affects the business and supply chains, including waste and recycling.
Responsible Procurement: Incorporate human rights into procurement and production practices, including gender equality, freedom of association and collective bargaining indicators for supplier selection.
Adapting to Climate Resilient Labour Markets: Governments and businesses should adapt to climate-resilient labour markets, including the provision of good health care, education, and public services. Businesses should invest in human capital which can increase the ability of communities, including indigenous populations, to cope with climate change impacts, particularly by empowering women and youth who are often the first to face high unemployment rates.