The phrase “informal economy” sounds, to most Americans, like something that happens elsewhere — in developing-country market stalls or migrant agricultural labor. The data says otherwise. The International Labour Organization estimates that more than two billion people, roughly 60 percent of the global workforce, earn their living in the informal economy. In the United States, the BLS and Federal Reserve estimates put the share of workers with significant informal or gig-based income in any given year at roughly 16 percent of the prime-age workforce, with another large share doing informal cash work in cleaning, childcare, eldercare, home repair, and food preparation that never touches a W-2 or 1099. The informal economy is not a marginal phenomenon. It is a major share of the labor market, hiding in plain sight.
The defensible argument here is that the policy and advocacy conversation about workers has been built around the formal-employment model that captures, in the U.S., only about three-quarters of actual labor activity. The informal economy is not a problem to be solved by abolishing it — it serves real economic and social functions for both workers and consumers — but a population whose exclusion from the standard worker-protection infrastructure produces measurable harm. The fixes that actually work are structural ones: portable benefits, simplified formalization paths, microfinance, and recognition.
The scale and the data the standard narrative misses
The ILO’s 2023 update of Women and Men in the Informal Economy provides the most reliable global numbers. Informal employment as a share of total employment is 89 percent in sub-Saharan Africa, 86 percent in South Asia, and 53 percent in Latin America and the Caribbean. In high-income OECD countries, the headline informal-employment share is in the single digits to low teens, but those numbers significantly underestimate informal activity by excluding cash side-work, undeclared self-employment, and gig-platform work that escapes employment-relationship definitions.
U.S.-specific evidence has improved. The Federal Reserve’s Survey of Household Economics and Decisionmaking has tracked informal income since 2013 and consistently shown a meaningful share of adults earning at least some income outside formal employment. Brookings research and the Aspen Institute’s Future of Work Initiative have documented the financial-fragility implications: informal workers report dramatically lower rates of health insurance coverage, retirement savings, paid leave, and emergency-fund adequacy than formally-employed peers at similar income levels.
The gender and racial composition of informal work is not incidental. Women, immigrants, and workers of color are disproportionately represented in informal sectors in the U.S. and globally. The IWPR (Institute for Women’s Policy Research) has documented that women perform the majority of unpaid and informal care work, with measurable lifetime earnings consequences. The Caregiver Workforce → pillar develops the full case for why caregiving — one of the largest informal-economy sectors — deserves dedicated policy attention.
The protection gap is real and quantifiable
Informal workers in the U.S. and globally face three structural exclusions from standard worker protections. First, they typically lack access to social-insurance programs — unemployment insurance, workers’ compensation, retirement systems — that require formal employer payroll relationships. Second, they lack the labor-law protections (minimum wage enforcement, overtime, anti-discrimination remedies) that depend on identifiable employment relationships. Third, they lack the financial-system access — bank accounts, credit, insurance — that depends on documented income.
The IRS estimates of the tax gap, and the Treasury’s 2024 work on the informal economy, both indicate that informal activity reduces government revenue substantially — but the policy response of choice (more enforcement) tends to push informal workers further into the shadows rather than into formality. The countries with the most successful formalization records — Brazil’s MEI (microentrepreneur) program, India’s e-Shram registration system, Mexico’s simplified-tax regimes — have led with incentives (benefits access, simplified paperwork) rather than penalties.
What actually works
The empirical literature on formalization and informal-worker protection points to a small set of policy instruments with measurable impact.
Portable benefits. Benefits that follow the worker between jobs and across formal/informal employment boundaries are the most-supported policy intervention for the informal-economy worker population. Washington State’s 2024 portable-benefits law for app-based workers, the EU Platform Work Directive of 2024, and the broader portable-benefits literature from the Aspen Institute and the New America Foundation all converge on this design. The Gig Economy Settlement → pillar lays out which portable-benefits designs are actually working in practice.
Simplified formalization paths. Brazil’s MEI program, which allows microentrepreneurs to formalize with a simple registration and a small flat-rate monthly tax in exchange for social-security benefits, has formalized more than 15 million workers since its 2008 launch. The lesson is generalizable: when the cost of formalization (paperwork, tax burden, regulatory compliance) is high relative to the benefits, workers stay informal. Lower the cost, raise the benefits, and meaningful formalization happens.
Microfinance and financial-inclusion infrastructure. The Grameen Bank model, which Muhammad Yunus developed in Bangladesh and which earned him a Nobel Peace Prize in 2006, demonstrated that informal-economy workers can be creditworthy borrowers when the financial infrastructure is designed for their reality. The CGAP (Consultative Group to Assist the Poor) literature has documented dozens of successful microfinance institutions globally. The U.S. equivalent — Community Development Financial Institutions (CDFIs) — has been steadily growing but remains under-scaled relative to need.
Worker organizing in informal sectors. The Self-Employed Women’s Association (SEWA) in India, founded in 1972, demonstrates that informal-economy workers can collectively organize even outside the traditional employer-employee relationship. SEWA now has over two million members and has produced measurable wage and protection gains for its members. The U.S. equivalents — the National Domestic Workers Alliance, the Coalition of Immokalee Workers, the Independent Drivers Guild — have produced similar gains in their narrower sectors.
What organizations like NWLB can actually do
The advocacy and program agenda for informal-economy workers, drawn from the most-rigorous evaluation literature, is narrower than the inspirational version suggests. The interventions with measurable impact are: support for portable-benefits legislation at the state level; financial-inclusion partnerships with CDFIs and credit unions that serve informal-economy workers; recognition and policy advocacy for caregiving as economic work; legal-aid infrastructure for wage-theft, misclassification, and immigration-related enforcement; and structured pathways from informal to formal employment that do not penalize workers for the years they spent in the informal economy.
The interventions that consistently underperform their marketing are general-purpose entrepreneurship training programs, abstract financial-literacy curricula divorced from product access, and formalization-by-penalty enforcement campaigns. The literature is reasonably clear on which kind of intervention belongs in which category.
The informal economy is not a problem to be eradicated; it is a population whose exclusion from worker-protection infrastructure costs the workers and the public economy alike. Portable benefits, simplified formalization, and financial inclusion are the load-bearing fixes — everything else is rhetoric.
The informal economy is not going to be eliminated by formalization campaigns; it is going to persist because it serves real economic functions for workers and consumers that the formal economy does not. The question is whether the policy and advocacy infrastructure for workers catches up to that reality, or continues to design for a fictional labor market in which everyone has a W-2. The countries and organizations that have built workforce protections to span both economies are the ones whose workers actually have access to the safety net. The ones still pretending the informal economy is marginal will keep producing the financial-fragility data the surveys keep showing.
Updated May 21, 2026. This piece was substantively rewritten as part of NWLB's 2026 editorial refresh.
