Informal Economy Dynamics and Impacts
Summary
The informal economy comprises economic activities and enterprises that operate outside formal regulatory, legal and taxation frameworks. It ranges from street vending and home-based work to unregistered micro-firms and unreported wage labour. Globally, the informal economy sustains livelihoods for billions, contributes substantially to GDP in many low- and middle-income countries and acts as a buffer against unemployment and income shocks. Yet it also poses challenges: it limits tax revenues, perpetuates poor working conditions, hinders access to social protection and may exacerbate inequality. Drivers of informality include high compliance costs, burdensome regulation, limited access to credit and weak institutions. Measurement remains a technical challenge, with survey-based approaches, currency-demand analysis and latent-variable techniques such as MIMIC (Multiple Causes Multiple Indicators) model commonly used to estimate its size. Understanding the dynamic interplay between informality, formal sector growth and policy interventions is critical for designing measures that promote sustainable development, enhance social protection and support the transition from informal to formal economic activity.
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Informal Economy Dynamics and Impacts publication trend
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Technical terms
Informal economy: Economic activities and enterprises operating outside formal regulatory and taxation frameworks, often unregistered and untaxed.
Shadow economy: The subset of the informal economy characterised by deliberate concealment of transactions to evade taxes or regulations.
MIMIC model: An econometric method (Multiple Causes Multiple Indicators) that estimates a latent variable’s size—such as the shadow economy—using observed causal factors and indicators.
References
- Informality and Development. Journal of Economic Perspectives (2014).
- Currency demand and MIMIC models: towards a structured hybrid method of measuring the shadow economy. International Tax and Public Finance (2018).
- Informality in the time of COVID-19 in Latin America: Implications and policy options. PLOS ONE (2021).
- Assessing the Role of Digital Finance on Shadow Economy and Financial Instability: An Empirical Analysis of Selected South Asian Countries. Mathematics (2021).
- Researching the Main Causes of the Romanian Shadow Economy at the Micro and Macro Levels: Implications for Sustainable Development. Sustainability (2018).
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