What is the Informal Economy, Anyway?

What do the following have in common?

Mary Jones is a single parent with a small daughter. In addition to her part-time job, she makes all her daughter's clothes.

• Manuel Hidalgo, age seven, lives in Mexico City and helps the family finances by washing car windows at the traffic lights near his home in a shantytown.

• John Smith, a plumber, is earning some extra money to pay for Christmas presents for his family by working in the evenings and accepting payment in cash, which he is not declaring on his income tax return.

• Adele James, a retired Florida office worker, makes some extra money by "smurfing," that is, going around Miami with a shopping bag full of dollar bills (provided by the nice young man who acts as her escort) and depositing them in different banks in amounts of less than $10,000.

  The answer is that they are examples of four different types of informal economic activity (IEA). ¹ This essay attempts to answer the following question: If we define IEA as the production and distribution of economic goods and services whose value is not included fully, if at all, in the National Income Accounts of a country, what characteristics do these activities have?

  Two features seem crucial: (1) whether market transactions are involved and (2) whether either the goods and services or the processes of production and distribution are legal or illegal. According to them, IEAs can be classified into four sectors. Based on these criteria, the Household Sector stands out from the other three sectors, as it does not involve market transactions; the goods and services produced are consumed within the household and do not go to a market. The other three sectors involve market transactions, but differ in their degree of legality. The Informal Sector, a striking feature of developing countries, produces legal goods and services, but in an unregulated way. However, most of the time the authorities do not try to regulate this sector, but let it get on with providing a means of survival for poor people. The Underground Sector, which is much more important in developed countries, also produces legal goods and services, but the processes of production and/or distribution involve illegality, usually in the form of tax evasion. Finally, the outputs of the Criminal Sector are illegal, so that by definition the processes of production and distribution are also illegal. These distinctions are illustrated in Table 1. ²

  The rest of this essay discusses each of the four sectors briefly and draws out some of the policy implications of attempting to measure and, in some cases, regulate these informal economic activities.

  The Household Sector

  Much of the focus of attention on this sector has been on housework and, in particular, its value. Quantifying the value of this output represented an important step for the feminist struggle for independence and recognition. As Ferber and Birnbaum noted:

  It may be that in the past some of the resistance to further work on [quantifying the value of housework] came from those who believed that the 'invaluable' contribution of the homemaker would somehow be demeaned by being assigned a monetary value. It is likely, however, that our failure to assign a price for the services of the homemaker has tended to convey the impression that they are valueless rather than priceless. ³

  The process of quantifying the value of housework may be approached in two stages. The first involves calculating how much time is involved in housework. Relevant data may be collected in a number of ways, such as getting homemakers to keep diaries of the times spent on a set of defined tasks or by direct observation. The second, and more difficult, stage is to attach a monetary value to the estimate of time. The problem is that in the absence of a market for housework as such, there is no market price to be used in the calculation. A number of alternatives have been...