The informal economy operates outside of regulated economies and is made up of non-taxable businesses, migrant workers, and extremely small businesses. Illegal immigrants and those with small jobs may find work in the informal economy, which is not accounted for in GDP calculations.
An informal economy can be defined as an economy that operates outside the regulated or controlled economy. The informal economy is characterized by several distinctive factors. For example, this type of economy is made up of different types of non-taxable businesses. Another distinguishing factor is the fact that the economy is somewhat underground in the sense that it is sometimes a help to those in the labor market who may not be able to qualify for employment in the formal labor sector due to of problems such as lack of formal residence. Something else that distinguishes the informal economy from the formal economy is the fact that the economy is made up of transient or migrant and extremely small workers who may not easily lend themselves and their businesses to any form of rigorous accountability.
A good example of an informal economy can be seen in the case of workers in a country who do not qualify to work in the recognized or formal employment sector due to the fact that they are illegal immigrants. Sometimes this category of workers are fully qualified by training, experience or education to work in the formal sector, but due to their illegal status they are forced to find work outside the regulated economy. Graduates with illegal papers often find themselves working menial jobs in other countries due to laws in those countries that prohibit people without proper paperwork from working. In such cases, they may have an understanding with whoever employs them, their payment will usually be in cash, and they will likely be underpaid in relation to their efforts. Such money earned by this category of people is not formally accounted for and will not be included in gross domestic product (GDP) calculations.
Some people may have fully legal status, but their jobs may be so tiny that they don’t register on the radar of the formal economy. One example is a shoe shiner whose instruments of exchange are the materials used to polish shoes. Such a person might go from street to street, or city to city, looking for customers. Since the person earns an insignificant amount of money, and his or her migratory status makes it difficult for any particular state’s tax laws to apply to such activities, the earnings from such efforts, while legal, are part of the informal economy.
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