Skip to main content

Informal economies around the world: measures, determinants and consequences

Abstract

This paper aims to present a comprehensive survey of the literature on the economics of informality. First, we focus on studies that aim to provide measures of informality using different methodologies. Next, we review empirical and theoretical studies focusing on the determinants as well as effects of informality. Finally, we conclude by summarizing the main findings of the literature, evaluate several policy recommendations based on our review as well as suggest some future research directions. Even though the literature on informality is growing at an increasing rate, future research efforts are very much needed, both on the theoretical and empirical side. Efforts have to be made to improve measurement of informal sector size as well as developing theoretical mechanisms for determinants and effects of informality that can be supported by empirical analysis.

This is a preview of subscription content, access via your institution.

References

  1. Aigner, D. J., Schneider, F., & Ghosh, D. (1988). Me and my shadow: Estimating the size of the hidden economy from time series data. In W. A. Barnett, et al. (Eds.), Dynamic econometric modeling: Proceedings of the third international symposium in economic theory and econometrics (pp. 297–334). Cambridge: Cambridge University Press.

    Chapter  Google Scholar 

  2. Almeida, R., & Carneiro, P. (2012). Enforcement of labor regulation and informality. American Economic Journal: Applied Economics, 4(3), 64–89.

    Google Scholar 

  3. Araujo, R. A., & de Souza, N. A. (2010). An evolutionary game theory approach to the dynamics of the labour market: A formal and informal perspective. Structural Change and Economic Dynamics, 21(2), 101–110.

    Article  Google Scholar 

  4. Asfuroglu, D., & Elgin, C. (2016). Growth effects of inflation under the presence of informality. Bulletin of Economic Research, 68(4), 311–328.

    Article  Google Scholar 

  5. Atesagaoglu, O. E., & Elgin, C. (2015). Cyclicality of labor wedge and informal sector. Economics Letters, 136, 141–146.

    Article  Google Scholar 

  6. Atesagaoglu, O. E., Elgin, C., & Oztunali, O. (2017). TFP growth in Turkey revisited: The effect of informal sector. Central Bank Review, 17(1), 11–17.

    Article  Google Scholar 

  7. Bennett, J. (2011). Informal production and labour market segmentation. Journal of Institutional and Theoretical Economics, 167(4), 686–707.

    Article  Google Scholar 

  8. Bhattacharya, P. C. (2011). Informal sector, income inequality and economic development. Economic Modelling, 28(3), 820–830.

    Article  Google Scholar 

  9. Blackburn, K., Bose, N., & Capasso, S. (2012). Tax evasion, the underground economy and financial development. Journal of Economic Behavior and Organization, 83(2), 243–253.

    Article  Google Scholar 

  10. Bosch, M., & Esteban-Pretel, J. (2012). Job creation and job destruction in the presence of informal markets. Journal of Development Economics, 98(2), 270–286.

    Article  Google Scholar 

  11. Bosch, M., Goni-Pacchioni, E., & Maloney, W. (2012). Trade liberalization, labor reforms and formal? Informal employment dynamics. Labour Economics, 19(5), 653–667.

    Article  Google Scholar 

  12. Breusch, T. (2005) Estimating the underground economy using MIMIC models. Econometrics 0507003, Econ WPA.

  13. Buehn, A., & Schneider, F. (2012). Shadow economies around the world: Novel insights, accepted knowledge and new estimates. International Tax and Public Finance, 19(1), 139–171.

    Article  Google Scholar 

  14. Busato, F., & Chiarini, B. (2004). Market and underground activities in a two-sector dynamic equilibrium model. Economic Theory, 234, 863–861.

    Google Scholar 

  15. Cantekin, K., & Elgin, C. (2015). Extent and growth effects of informality in Turkey: Evidence from a firm-level survey. Forthcoming in Singapore Economic Review.

  16. Capasso, S., & Jappelli, T. (2013). Financial development and the underground economy. Journal of Development Economics, 101, 167–178.

    Article  Google Scholar 

  17. Cerda, R. A., & Saravia, D. (2013). Optimal taxation with heterogeneous firms and informal sector. Journal of Macroeconomics, 35, 39–61.

    Article  Google Scholar 

  18. Charlot, O., Malherbet, F., & Terra, C. (2015). Informality in developing economies: Regulation and fiscal policies. Journal of Economic Dynamics and Control, 51, 1–27.

    Article  Google Scholar 

  19. Chong, A., & Gradstein, M. (2007). Inequality and informality. Journal of Public Economics, 91(1), 159–179.

    Article  Google Scholar 

  20. Cicek, D., & Elgin, C. (2011). Cyclicality of fiscal policy and the shadow economy. Empirical Economics, 413, 725–737.

    Article  Google Scholar 

  21. Colombo, E., Onnis, L., & Tirelli, P. (2016) Shadow economies at times of banking crises: Empirics and theory. Journal of Banking and Finance, 62, 180–190.

    Article  Google Scholar 

  22. Cuff, K., Marceau, N., Mongrain, S., & Roberts, J. (2011). Optimal policies with an informal sector. Journal of Public Economics, 95(11), 1280–1291.

    Article  Google Scholar 

  23. Dell’Anno, R., & Schneider, F. (2003). The shadow economy of Italy and other OECD countries: What do we know? Journal of Public Finance and Public Choice, 21(2–3), 97–120.

    Google Scholar 

  24. Dessy, S., & Pallage, S. (2003). Taxes, inequality and the size of the informal sector. Journal of Development Economics, 70(1), 225–233.

    Article  Google Scholar 

  25. D’Hernoncourt, J., & Meon, P. G. (2012). The not so dark side of trust: Does trust increase the size of the shadow economy? Journal of Economic Behavior and Organization, 81(1), 97–121.

    Article  Google Scholar 

  26. Dimova, R. D., Gang, I. N., & Landon-Lane, J. S. (2011). Revealed informal activity. IZA Discussion Paper, No. 5607.

  27. Dreher, A., & Schneider, F. (2010). Corruption and the shadow economy: An empirical analysis. Public Choice, 144, 215–238.

    Article  Google Scholar 

  28. Elgin, C., & Oztunali, O. (2012). Shadow economies around the world: Model based estimates. Bogazici University Department of Economics Working Papers, 5.

  29. Elgin, C. (2012). Cyclicality of shadow economy. Economic Papers: A Journal of Applied Economics and Policy, 31(4), 478–490.

    Article  Google Scholar 

  30. Elgin, C. (2015). Informal economy in a dynamic political framework. Macroeconomic Dynamics, 19(3), 578–617.

    Article  Google Scholar 

  31. Elgin, C., & Erturk, N. F. (2016). Is informality a barrier for convergence? Economics Bulletin, 36(4), 2556–2568.

    Google Scholar 

  32. Elgin, C., & Oyvat, C. (2013). Lurking in the cities: Urbanization and the informal economy. Structural Change and Economic Dynamics, 27, 36–47.

    Article  Google Scholar 

  33. Elgin, C., & Oztunali, O. (2014). Institutions, informal economy, and economic development. Emerging Markets Finance and Trade, 50(4), 145–162.

    Article  Google Scholar 

  34. Elgin, C., & Oztunali, O. (2014). Pollution and informal economy. Economic Systems, 38(3), 333–349.

    Article  Google Scholar 

  35. Elgin, C., & Schneider, F. G. (2016). Shadow economies in OECD countries: DGE vs. MIMIC approaches. Bogazici Journal, 30(1), 51–75.

    Article  Google Scholar 

  36. Elgin, C., & Sezgin, M. B. (2017). Sectoral estimates of informality: A new method and an application to Turkish economy. The Developing Economies, 55(4), 261–289.

    Article  Google Scholar 

  37. Elgin, C., & Solis-Garcia, M. (2012). Public trust, taxes and the informal sector. Bogazici Journal of Economics and Administrative Sciences, 26(1), 27–44.

    Google Scholar 

  38. Elgin, C., & Tosun, H. K. (2017). A note on informality and public trust. Economics Bulletin, 37(4), 2595–2601.

    Google Scholar 

  39. Elgin, C., & Uras, B. R. (2013). Is informality a barrier to financial development? SERIEs: Journal of the Spanish Economic Association, 4(3), 309–331.

    Article  Google Scholar 

  40. Elgin, C., & Uras, B. R. (2013). Public debt, sovereign default risk and shadow economy. Journal of Financial Stability, 9(4), 628–640.

    Article  Google Scholar 

  41. Feige, E. L. (1979). How big is the irregular economy? Challenge, 22(1), 5–13.

    Google Scholar 

  42. Feige, E. L., & Urban, I. (2008). Measuring underground (unobserved, non-observed, unrecorded)economies in transition countries: Can we trust GDP? Journal of Comparative Economics, 36(2), 287–306.

    Article  Google Scholar 

  43. Fernandez, A., & Meza, F. (2014). Informal employment and business cycles in emerging economies: The case of Mexico. Review of Economic Dynamics, 18(2), 381–405.

    Article  Google Scholar 

  44. Ferreira Tiryaki, G. (2008). The informal economy and business cycles. Journal of Applied Economics, 11(1), 91–117.

    Article  Google Scholar 

  45. Fleming, M. H., Roman, J., & Farrel, G. (2000). The shadow economy. Journal of International Affairs, 532, 64–89.

    Google Scholar 

  46. Florez, L. A. (2014). The search and matching equilibrium in an economy with an informal sector: A positive analysis of labor market policies. Banco de la Republica de Colombia, No. 011953.

  47. Frey, B. S., & Pommerehne, W. W. (1984). The hidden economy: State and prospect for measurement. Review of Income and Wealth, 30(3), 1–23.

    Article  Google Scholar 

  48. Frey, B. S., & Weck-Hannemann, H. (1983). Estimating the shadow economy: A naive approach. Oxford Economic Papers, 35, 23–44.

    Article  Google Scholar 

  49. Friedman, B. A. (2014). The relationship between effective governance and the informal economy. International Journal of Business and Social Science, 5(9), 51–58.

    Google Scholar 

  50. Goldberg, P. K., & Pavcnik, N. (2003). The response of the informal sector to trade liberalization. Journal of Development Economics, 72(2), 463–496.

    Article  Google Scholar 

  51. Gomis-Porqueras, P., Peralta-Alva, A., & Waller, C. (2014). The shadow economy as an equilibrium outcome. Journal of Economic Dynamics and Control, 41, 1–19.

    Article  Google Scholar 

  52. Granda-Carvajal, C. (2012). Macroeconomic implications of the underground sector: Challenging the double business cycle approach. Economic Analysis and Policy, 42(2), 221–236.

    Article  Google Scholar 

  53. Hart, K. (2008). Informal economy. In S. N. Durlauf & L. E. Blume (Eds.), The new Palgrave dictionary of economics (2nd ed.). Basingstoke: Palgrave Macmillan.

    Google Scholar 

  54. Henley, A., Arabsheibani, G. R., & Carneiro, F. G. (2009). On defining and measuring the informal sector: Evidence from Brazil. World Development, 37(5), 992–1003.

    Article  Google Scholar 

  55. Ihrig, J., & Moe, K. (2004). Lurking in the shadows: The informal sector and government policy. Journal of Development Economics, 73(2), 541–557.

    Article  Google Scholar 

  56. Ingram, B. F., Kocherlakota, N. R., & Savin, N. E. (1997). Using theory for measurement: An analysis of the cycle behavior of home production. Journal of Monetary Economics, 40(3), 435–456.

    Article  Google Scholar 

  57. Johnson, S., Kaufmann, D., & Shleifer, A. (1997). The unofficial economy in transition. Brookings Papers on Economic Activity, 2, 159–240.

    Article  Google Scholar 

  58. Johnson, S., Kaufmann, D., & Zoido-Lobaton, P. (1998). Regulatory discretion and the unofficial economy. American Economic Review, 88(2), 387–392.

    Google Scholar 

  59. Kar, S., & Marjit, S. (2009). Urban informal sector and poverty. International Review of Economics and Finance, 18(4), 631–642.

    Article  Google Scholar 

  60. Kaufman, D., & Kaliberda, A. (1996). Integrating the unofficial economy into the dynamics of post-socialist economies: A framework of analysis and evidence. World Bank Policy Research Working Paper No. 1691.

  61. Kuznets, S. (1955). Economic growth and income inequality. American Economic Review, 45, 1–28.

    Google Scholar 

  62. Lassen, D. D. (2007). Ethnic divisions, trust, and the size of the informal sector. Journal of Economic Behavior and Organization, 63(3), 423–438.

    Article  Google Scholar 

  63. Ligthelm, A. (2011). Survival analysis of small informal businesses in South Africa, 2007–2010. Eurasian Economic Review, 1(1), 160–179.

    Google Scholar 

  64. Loayza, N. (1997). The economics of the informal sector: A simple model and some empirical evidence from Latin America. World Bank Policy Research Working Paper, (1727). http://elibrary.worldbank.org/doi/abs/10.1596/1813-9450-1727.

  65. Loayza, N. V., & Rigolini, J. (2011). Informal employment: Safety net or growth engine? World Development, 39(9), 1503–1515.

    Article  Google Scholar 

  66. Lucas, R. Jr. (1976). Econometric policy evaluation: A critique. In Carnegie-Rochester conference series on public policy (vol. 1, no. 1, pp. 19–46). Elsevier.

  67. Macias, J. B., & Cazzavillan, G. (2009). The dynamics of parallel economies. Measuring the informal sector in Mexico. Research in Economics, 63(3), 189–199.

    Article  Google Scholar 

  68. Mapp, T., & Moore, W. (2014). The informal economy and economic volatility. Macroeconomics and Finance in Emerging Market Economies, 8(1–2), 185–200.

    Google Scholar 

  69. Marjit, S., & Kar, S. (2008). Labor productivity growth, informal wage and capital mobility – a general equilibrium analysis. In R. Kanbur & J. Svejnar (Eds.), Labour markets and economic development. NY: Routledge.

    Google Scholar 

  70. Markandya, A., González-Eguino, M., & Escapa, M. (2013). From shadow to green: Linking environmental fiscal reforms and the informal economy. Energy Economics, 40, S108–S118.

    Article  Google Scholar 

  71. Medvedev, D., & Oviedo, A. M. (2016). Informality and profitability: Evidence from a new firm survey in Ecuador. Journal of Development Studies, 52(3), 412–427.

    Article  Google Scholar 

  72. Meghir, C., Narita, R., & Robin, J.-M. (2015). Wages and informality in developing countries. American Economic Review, 105(4), 1509–46.

    Article  Google Scholar 

  73. Mitra, S. (2013). Informality, financial development and macroeconomic volatility. Economics Letters, 120(3), 454–457.

    Article  Google Scholar 

  74. Ordonez, J. C. L. (2014). Tax collection, the informal sector, and productivity. Review of Economic Dynamics, 17(2), 262–286.

    Article  Google Scholar 

  75. Orsi, R., Raggi, D., & Turino, F. (2014). Size, trend, and policy implications of the underground economy. Review of Economic Dynamics, 17(3), 417–436.

    Article  Google Scholar 

  76. Paz, L. S. (2014). The impacts of trade liberalization on informal labor markets: A theoretical and empirical evaluation of the Brazilian case. Journal of International Economics, 92(2), 330–348.

    Article  Google Scholar 

  77. Prado, M. (2011). Government policy in the formal and informal sectors. European Economic Review, 55(8), 1120–1136.

    Article  Google Scholar 

  78. Restrepo-Echavarria, P. (2014). Macroeconomic volatility: The role of the informal economy. European Economic Review, 70, 454–469.

    Article  Google Scholar 

  79. Roca, J. C. C., Moreno, C. D., & Sanchez, J. E. G. (2001). Underground economy and aggregate fluctuations. Spanish Economic Review, 31, 41–53.

    Article  Google Scholar 

  80. Rybina, L. (2011). Music piracy in transitional post-soviet economies: Ethics, legislation, and expertise. Eurasian Economic Review, 1(1), 3–17.

    Google Scholar 

  81. Sarte, P. D. G. (2000). Informality and rent-seeking bureaucracies in a model of long-run growth. Journal of Monetary Economics, 46(1), 173–197.

    Article  Google Scholar 

  82. Schneider, F., & Klinglmair, R. (2004). Shadow economies around the world: What do we know? IZA Discussion Papers, No. 1043.

  83. Schneider, F. (2005). Shadow economies around the world: What do we really know? European Journal of Political Economy, 21, 598–642.

    Article  Google Scholar 

  84. Schneider, F., Buehn, A., & Montenegro, C. E. (2010). Shadow economies all over the world. International Economic Journal, 24(4), 443–461.

    Article  Google Scholar 

  85. Schneider, F., & Enste, D. H. (2000). Shadow economies: Sizes, causes and consequences. Journal of Economic Perspectives, 38, 77–114.

    Google Scholar 

  86. Schneider, F., & Enste, D. H. (2002). The shadow economy: An international survey. Cambridge: Cambridge University Press.

    Google Scholar 

  87. Smith, P. (1994). Assessing the size of the underground economy: The Canadian statistical perspectives. Canadian Economics Observer, 11–010(3), 16–33.

    Google Scholar 

  88. Tanzi, V. (1983). The underground economy in the United States: Annual estimates, 1930–80. IMF Staff Papers, 30(2), 283–305.

    Article  Google Scholar 

  89. Thomas, J. J. (1999). Quantifying the black economy: Measurement without theory yet again? The Economic Journal, 109(456), 381–389.

    Article  Google Scholar 

  90. Torgler, B., & Schneider, F. (2007). Shadow economy, tax morale, governance and institutional quality: A panel analysis. IZA Discussion Papers, No. 2563.

  91. Tuesta, D. (2014). The informal economy and the constraints that it imposes on pension contributions in Latin America. Review of Business and Economics Studies, 2(4), 18.

    Google Scholar 

  92. Turnovsky, S. J., & Basher, M. A. (2009). Fiscal policy and the structure of production in a two-sector developing economy. Journal of Development Economics, 88(2), 205–216.

    Article  Google Scholar 

  93. Ulyssea, G. (2010). Regulation of entry, labor market institutions and the informal sector. Journal of Development Economics, 91(1), 87–99.

    Article  Google Scholar 

  94. Xue, J., Gao, W., & Guo, L. (2014). Informal employment and its effect on the income distribution in urban China. China Economic Review, 31, 84–93.

    Article  Google Scholar 

Download references

Author information

Affiliations

Authors

Corresponding author

Correspondence to Ceyhun Elgin.

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Elgin, C., Erturk, F. Informal economies around the world: measures, determinants and consequences. Eurasian Econ Rev 9, 221–237 (2019). https://doi.org/10.1007/s40822-018-0105-5

Download citation

Keywords

  • Informal sector
  • Shadow economy