What is the informal economy?

When we talk about the workforce, we're often talking about workers who are formally or traditionally employed — receiving a paycheck, employer-provided benefits, and W-2s.

But for those outside of that system, work can look a bit different. We're talking about workers who engage in the informal economy, which is generally defined as economic activity that falls outside of official regulation. These gigs are untaxed, untracked, and largely invisible to official statistics.

For more on what we mean when we refer to informal work, “Marketplace Morning Report” host Sabri Ben-Achour spoke with Shelly Steward. She's chief research officer at The Workers Lab in Oakland, California. The following is an edited transcript of their conversation.

Sabri Ben-Achour: OK, so — informal economy. What are some examples you can give us of that?

Shelly Steward: There's a huge range of activities: people who are paid in cash, a lot of work that happens in people's homes — things like cleaning work, babysitting, dog walking, street vending. If you've bought or sold something on Facebook Marketplace, you're probably participating in the informal economy. There’s informal arrangements in landscaping, construction, agriculture — all of that are just some of the examples of informal work.

Ben-Achour: Now, I know, literally part of the definition is that we can't see it. But how big is that economy here in the U.S.?

Steward: There are a few different ways that folks measure it, that we try to estimate it. One of those is that the IRS estimates a a tax gap — a difference between what should be paid versus what is paid — and that's estimated to be about $600 billion. There's also measures that rely on surveys. The Federal Reserve does a survey of household economic decision-making that shows about 20% of people responding work outside of formal employment.

Ben-Achour: Who tends to participate in the informal economy?

Steward: Many, many people do. The makeup of the informal economy workforce is really diverse, and it includes folks from all backgrounds and all income levels. That said, women are more likely to participate than men. Black and Hispanic individuals and folks without immigration documentation are much more likely to do these types of work. It's also more common among younger workers. And increasingly we're seeing among retired workers, largely out of economic need.

Ben-Achour: All of this is very important work that has to be done in this economy. Does it matter that it's informal?

Steward: It's an important question. There are very real risks for people engaged in this work. There's a high risk of exploitation. These are folks not covered by any labor protections. There's no benefits, there's no access to health insurance or time off. People are not participating in social insurance programs. They're not accruing Social Security points, and so there's a lot of potential for people to be really taken advantage of.

Ben-Achour: What would it take to bring more workers into the formal economy? But also, do we want to do that?

Steward: To bring more people into the formal economy we need to make formal work more accessible. So that means having pathways for immigrants to get jobs. We need benefits available to workers, including those who need a lot of flexibility and agency over their time. And we need a system that is not so complicated, both for workers and for businesses, especially small businesses, to do things above the table, to file taxes. The question of if formalization is a goal is an important one. Right now, there are a lot of people who really need informal work, and if we just put all the efforts into formalizing work without really examining what barriers exist, we'd be leaving a lot of people behind.