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What Is the Informal Labor Market?

Tuesday, April 18, 2017

informal labor markets
Thinkstock/Dragan Grkic

By Paulina Restrepo-Echavarria, Economist, and Maria A. Arias, Senior Research Associate

Although often associated with developing countries, illicit activities or undocumented workers, the informal labor market is much broader than many would imagine. In fact, people from all walks of life participate in a wide array of legitimate business ventures that are part of the informal economy. So, how big is the U.S.’s informal labor market, and who participates in it?

What Is the Informal Labor Market?

There is no unique definition for informal employment. However, a generally accepted way to define it is by considering individuals (and their employers) who engage in productive activities that are not taxed or registered by the government.1

Though this type of work has always existed—picture the fruit vendor at the farmers’ market who only accepts cash for payment—the expansion of online platforms that facilitate these arrangements has increased their visibility and fueled their popularity.

Measuring the Informal Labor Market

Numerous surveys have surfaced lately in an effort to better understand the fringes of the U.S. labor market. Though methodologies differ (as do the specific questions these surveys attempt to answer), comparing the results helps shine a light on the sometimes elusive nature of the informal labor market.

Survey of Informal Work Participation

For example, the Survey of Informal Work Participation within the Survey of Consumer Expectations revealed that about 20 percent of non-retired adults at least 21 years old in the U.S. generated income informally in 2015.2 The share jumped to 37 percent when including those who were exclusively involved in informal renting and selling activities.

When breaking down the results by the Bureau of Labor Statistics (BLS) employment categories, about 16 percent of workers employed full time participated in informal work. Not surprisingly, the highest incidence of informal work was among those who are employed part time for economic reasons, with at least 30 percent participating in informal work. Also, at least 15 percent of those who are considered not in the labor force by the BLS also participated in informal work.

Enterprising and Informal Work Activities Survey

Another example is the Enterprising and Informal Work Activities (EIWA) survey, which revealed that 36 percent of adults in the U.S. (18 and older) worked informally in the second half of 2015.3 Of these informal workers, 56 percent self-identified as also being formally employed, and 20 percent said they worked multiple jobs (including full-time and part-time positions).

Survey Differences

The difference in methodologies between these two surveys is clear simply from looking at the basic results. Despite pointing in similar directions, the results on the extent of the informal labor market cannot be directly compared to each other. But when we look at the demographic breakdown of contingent and informal workers, the results are quite consistent.

The EIWA survey showed that informal workers were distributed across all income categories. For example:

  • 30 percent of respondents reported having an annual income of $100,000 or greater.
  • 18 percent reported earning less than $25,000.

There were slightly more women than men among informal workers, though the share of women was much larger in lower income categories.

The majority of informal workers were white, non-Hispanic (64 percent), while the share of Hispanic workers tended to be slightly higher than that of African-Americans (16 and 12 percent, respectively). The racial breakdowns were consistent across most income categories, with a higher incidence of informal work among minorities in the lowest income categories.

Finally, most informal workers had at least a college degree (31 percent) or some college (30 percent), but high school graduates were also a sizeable share (26 percent).4

Impact on the Labor Market as a Whole

Capturing the extent of the informal labor market in the U.S. may help improve the measures of employment and labor market slack, as well as better measure the effects that informal employment activities have on the U.S. economy.

Moreover, it would help improve policies to incentivize workers in the informal sector to participate fully in the formal sector and by consequence take advantage of benefits that are in place for formal-sector jobs.

Notes and References

1 Demetra Smith Nightingale and Stephen Wandner provide other definitions of informal employment and associate different types of workers with the formality of their employment arrangements. See Smith Nightingale, Demetra and Wandner, Stephen A. “Informal and Nonstandard Employment in the United States: Implications for Low-Income Working Families.” The Urban Institute, Brief 20, August 2011.

2 See Bracha, Anat and Burke, Mary A. “Who Counts as Employed? Informal Work, Employment Status, and Labor Market Slack.” Federal Reserve Bank of Boston Working Paper No. 16-29, December 2016.

3 See Robles, Barbara and McGee, Marysol. “Exploring Online and Offline Informal Work: Findings from the Enterprising and Informal Work Activities (EIWA) Survey.” Finance and Economics Discussion Series 2016-089. Washington: Board of Governors of the Federal Reserve System, October 2016.

4 Appendix D in Robles and McGee (2016) shows these demographic characteristics are consistent across different surveys.

Additional Resources

Posted In Labor  |  Tagged paulina restrepo-echavarriamaria ariaslaborinformal labor marketinformal economy