European Economic and Social Committee
Directorate B - Consultative Work
Section for External Relations
Brussels, 16 February 2015
BC No 26-2015
Briefing memo on the informal economy in Europe and Latin America
__________________________________________________________________________________
To:
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EESC members attending the 8th Meeting of EU, Latin American and Caribbean civil society
organisations
Mr Zufiaur
Mr Hick
Mrs Porres
Definition and main challenges of the informal economy
According to the ILO (2002), "The term 'informal economy' refers to all economic activities by
workers and economic units that are – in law or on practice – not covered or insufficiently covered by
formal arrangements1". This definition includes two kinds of activities: illegal activities not included
in the law and activities operating within the formal reach of the law, but where the law is not applied
or enforced.
One important component of the informal economy is undeclared work, defined by the European
Commission as "any paid activities that are lawful as regards their nature but not declared to public
authorities"2. Criminal activities are thus excluded from the definition of undeclared work.
Due to its informal nature, it is difficult to measure the size of the informal economy. The informal
economy is a multifaceted phenomenon. However, it has common features in all States, developed
countries as well as developing countries.
Several factors explain the existence of the informal economy and undeclared work:
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1
2
Domestic workers, belonging by nature to the informal economy
Irregular immigrants having no possibility of working formally.
Migrants arriving legally in a country also have a higher probability of working in the informal
economy.
http://www.ilo.org/public/english/standards/relm/ilc/ilc90/pdf/pr-25res.pdf
http://ec.europa.eu/europe2020/pdf/themes/07_shadow_economy.pdf
EESC-2015-00672-00-00-TCD-TRA (EN) 1/7
EN
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In the case of an economic crisis, people might try to compensate their income losses through
additional shadow economy activities.
Financial issues: firms want to avoid taxation and social contributions.
Regulatory issues: firms want to avoid meeting labour standards and administrative
requirements.
Illegality of the activities (drug, contraband…).
However, most analysis from international organisations and academics focus on informal activities
involving legal goods and services. Indeed, illegal activities are different in their drivers, their nature
and their consequences.
According to the World Bank3, the informal sector is a "persistent economic feature" of developing
countries. It contributes to job creation and production of goods and services in these countries. Part
of informal economic activities cannot be replaced by legal activities.
Nevertheless, the informal economy has mainly negative consequences:
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Macroeconomic implications: decreases tax revenue (impacting public policies and provision of
services), distorted competition with firms of the formal sector, impact on growth and
productivity (production in the informal sector leads to inefficiencies: firms of small size, use of
older technologies, difficult access to finance…)
Social consequences: lack of social protection and insurance for informal workers as regular
social security systems are generally organised around labour-based insurance; poor working
conditions (safety issues, no training possibilities…)
Political consequences: undermining social cohesion, distrust in public institutions
Informal workers are mainly vulnerable parts of the population such as less qualified people, women,
young people, older people… However, not everyone in the informal economy is poor and some
workers and firms intentionally choose informality.
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The informal economy in Latin America
Latin America and the Caribbean (LAC) are characterised by a high level of informality and poverty.
Precarious jobs, limited social protection and high levels of unemployment force people to look to
other forms of activities like undeclared work.
The size of the informal economy across Latin America and the Caribbean is 34.7% of GDP4.
Criminal activities and the informal household economy are excluded from this analysis, as their
3
4
http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTSOCIALPROTECTION/EXTLM/
0contentMDK:20224904~menuPK:7366920~pagePK:148956~piPK:216618~theSitePK:390615,00.html
Guillermo Vuletin, "Measuring the Informal Economy in Latin America and the Caribbean", IMF Working Paper, 2008,
https://www.imf.org/external/pubs/ft/wp/2008/wp08102.pdf
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measurement is different. According to the OECD, informality in the LAC region is not only a matter
of tax evasion. It is a much more complex phenomenon described as a "pick and mix" approach,
meaning that firms and workers are rarely either entirely formal or informal.
The size of the informal economy in Latin America and Caribbean countries is really diverse.
Informal sectors in Argentina and Chile are relatively small in comparison to other Latin American
countries whereas they are huge in Brazil and Peru (extreme case with 56.1% of its workforce
involved in the informal sector). There is the same diversity in the Caribbean region: St Vincent &
Grenadines has the largest informal sector (50.6% of GDP) and the Bahamas the smallest (15.9% of
GDP).
Traditionally, the informal economy played an important role in the Caribbean, especially for the
agricultural sector. Nowadays, the Caribbean economy is more services oriented but the informal
economy is still one of its important features.
The informal economy in Latin America is characterised by a high level of informal urban
employment. This phenomenon grew in the 1970s due to the significant number of internal migrants
to urban areas. Between 1970 and 2008, urban informal employment increased at a rate of 4.4% per
year in average.
The share of the informal economy was also impacted by structural adjustment programmes during
the 1980s. Possibilities of public employment diminished, low demand restricted formal job offers
and the low presence of the State limited its capacity to make the law respected.
According to the ILO, 47.7% of urban workers in Latin America and the Caribbean are currently
working in the informal economy.
Informal workers in the LAC region share some common features:
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High proportion of individuals who did not finish secondary school.
High proportion of women. Moreover, inequalities between men and women are deeper in the
informal sector. For example, in Central American countries, there is a 25% earnings gap
between women and men working in the informal sector whereas this gap is 10% in the formal
sector.
High proportion of young and older people. For young people, an informal job can be part of a
transitional period before having opportunities in the formal sector.
High proportion of Indigenous people who generally have less access to secondary education.
Most informal jobs are precarious, linked to low productivity and non-respect of labour rules. For
instance, in Brazil and in Argentina, 1/3 of informal workers are poor.
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The informal economy in the European Union
In 2012, the size of the underground economy in the EU27 is estimated to be around 18.4% of
GDP5. The share of the informal economy varies among EU Member States from Austria (7.6% of
GDP) to Bulgaria (31.9% of GDP). Again, these numbers only take into account undeclared legal
activities. Measuring illegal activities in the EU is indeed difficult as some activities are authorised in
some countries and forbidden in other ones (ex: diversity of status of prostitution in Europe, from
legal and regulated to the illegal sector).
Not only the size but also the structure of the informal economy is different among EU Member
States. In Europe, tax evasion and social fraud are the main undeclared activities. Catering and
construction sectors are the most affected by the informal economy in the EU. Fiscal revenue losses in
the EU due to the informal economy is estimated at around EUR 860 billion, the equivalent of 17.6%
of public expenses in the EU6.
The consequences of the economic crisis on the informal economy in Europe are still unclear. The
economic crisis could contribute to the increase of the size of the undeclared economy (less formal
job offers available and the determination of firms to save costs by replacing formal work by
undeclared work). On the other hand, the economic crisis reduced demand and impacted more
traditional sectors where undeclared work is concentrated (construction, catering…). It seems
however that there is a correlation between austerity measures and the growth of the size of the
informal economy.
One of the main difficulties for the EU is the lack of a coherent approach to tackle the informal
economy in Europe. Several initiatives to fight the informal economy were thus developed recently.
In 2010, the Europe 2020 Strategy for Smart, Inclusive and Sustainable Growth was launched.
Within this framework, moving from the informal economy to regular employment is presented as a
way to create jobs. Informal economy and undeclared work issues are specifically addressed in the
April 2012 Employment Package which includes some of the initiatives presented in the Europe
2020 strategy. Other EU initiatives have an impact on the informal economy and more specifically on
undeclared work, like anti-fraud or immigration policy.
In April 2014, the European Commission proposed a decision on setting up a European Platform on
the prevention and deterrence of undeclared work (COM(2014)221)7. Its main objective is to
improve cooperation between Member States. This platform would bring together various national
enforcement bodies involved in the fight against undeclared work and would provide a forum for
5
Friedrich Schneider and Colin C. Williams, The Shadow Economy, The Institute of Economic Affairs, 2013
http://www.iea.org.uk/sites/default/files/publications/files/IEA%20Shadow%20Economy%20web%20rev%207.6.13.pdf
6
Gilbert Koenig, Economie souterraine et finances publiques dans l'Union européenne, 2014
http://opee.unistra.fr/IMG/pdf/article-4.pdf
7
http://www.europarl.europa.eu/oeil/popups/ficheprocedure.do?reference=2014/0124%28COD%29&l=en#tab-0
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discussions between experts on the subject. It would explore national and EU tools to deal with shared
problems. The EESC delivered an opinion on that topic: opinion SOC/511 on the Proposal of the
European Parliament and of the Council on establishing a European Platform to enhance
cooperation in the prevention and deterrence of undeclared work. The proposal for a decision is now
awaiting committee decision in the European Parliament and the 1st reading in EP plenary should be
in May 2015.
The EU is also fighting the informal economy in its partner countries. For instance, in its
Communication on the role of the private sector in achieving inclusive and sustainable growth in
developing countries (May 2014), the European Commission says that EU programmes and
partnership with third countries "have to be designed in ways that contribute to poverty reduction, for
instance through decent job creation, better labour conditions and a progressive transition from the
informal to formal economy."
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Civil society input on the issue of the informal economy
The EESC wrote two opinions on the issue of the shadow economy and undeclared work. Mr Palmieri
was rapporteur for both of them.
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Opinion SOC/480, A strategy against the shadow economy and undeclared work, 21/01/2014.
In this opinion, negative consequences (distorted competition, poor working conditions, fall of tax and
social security incomes…) of the shadow economy are underlined and several measures to fight
undeclared work are proposed:
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Simplifying administrative measures
Tightening controls
Encouraging growth of SMEs
Regulating new forms of work
Monitoring compliance with social security requirements by appropriate indicators
Reducing social acceptability of the shadow economy
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Opinion SOC/511 on the Proposal of the European Parliament and of the Council on
establishing a European Platform to enhance cooperation in the prevention and deterrence of
undeclared work, 10/09/2014
The EESC welcomed the project of the European Platform of the European Commission and
underlined the importance of the mandatory involvement of all Member States in this mechanism. The
EESC would be in favour of making the Platform able to make recommendations on legislation.
The EESC also called for the social partners and civil society organisations with expertise in the
problem of undeclared work to take part as of right. The EESC believed it should also have observer
status on the platform.
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The EESC also addressed more specifically the issue of the informal economy in Latin America.
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Opinion REX/325, Social Economy in Latin America", 22/02/2012, Mr Cabra de Luna was
rapporteur for this opinion.
The informal economy is an immense issue in Latin America, leading to unemployment,
underemployment and poor working conditions. The informal economy is endemic amongst women,
young people, indigenous people, people of African origin and people with disabilities.
The social and solidarity economy is an effective tool to fight informality as it legalises the situation
of people and enterprises and provides them with social protection. Trade unions and social partners
can play a key role in developing institutional systems to combat legal irregularities and fraud
resulting from the informal economy.
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Conclusions and recommendations
Many international organisations prepared recommendations to support the transition from the
informal to the formal economy, with the objective of reaching sustainable and inclusive growth. The
ILO's document The informal economy and decent work: a policy resource guide supporting
transitions to formality8 is thus particularly useful.
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Upgrading undeclared workers' conditions and limiting workers' need to enter the
informal economy
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Raising salaries that are often too low/develop social transfers for low income households/
extend unemployment insurance in order to avoid people undertaking a second activity in the
informal sector.
Social protection mechanisms covering undeclared workers must be developed to fight poverty.
To develop social protection mechanisms, the implementation of several coordinated instruments
is needed.
Developing education and training to offer immediate upgrading of workers' situation in the
informal economy as well as the possibility of moving out of informality. Already existing
training programmes should be open to workers from the informal economy.
Fighting against inequalities between men and women. The informal economy is composed of
both men and women, but women are generally working in the most vulnerable segments of the
informal economy. To open up employment opportunities for women, education for girls and
women's access to resources must be improved.
Fighting discrimination against migrants.
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8
ILO, The informal economy and decent work: a policy resource guide supporting transitions to formality, 2013
http://www.ilo.org/wcmsp5/groups/public/---ed_emp/---emp_policy/documents/publication/wcms_212689.pdf
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Limiting the informal economy's benefits for firms
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Tightening controls and making existing penalties more efficient and effective.
Reinforcing labour inspection bodies to ensure the application of labour legislation.
Simplifying administrative and tax procedures, reducing costs of business registration.
Supporting SMEs which are a strong force for job creation around the world. It also includes
encouraging compliance with labour legislation in SMEs (facilitating registration, improving
access to credit, fair taxation…). SMEs should see formality as an opportunity for greater access
to markets and growth.
Microfinance is a way to support the transition to formality. It enables informal workers to access
resources in a flexible way while also being regulated.
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Key role of social dialogue and civil society organisations
The representation of informal workers in workers' organisations remains extremely limited. This
reinforces the lack of legal and social protection of these workers. Governments have a role to play in
creating an environment enabling social dialogue for all workers, without fear of reprisal (freedom of
association, collective bargaining of all workers and employers…). Employers' organisations can offer
policy guidance on how to address the informal economy and how to reach informal economy
employers.
Informal workers are often workers performing work on own-account or for really small enterprises.
It is consequently difficult to gather them in an organisation. However, trade unions can develop
initiatives directed to informal workers. For instance, Peru created a new federation of informal
economy workers in 2006 (FENTRIAAP).
All these measures need to be well balanced to avoid inverse effects. Regular monitoring and review
of existing programmes are important.
Bénédicte Charbonnel
B.1 – REX
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