Out of the shadows: a classification of economies by the size and character of their informal sector

What is it about?

Given that 60 per cent of the global workforce is in the informal sector, this article develops a typology that classifies economies according to firstly where different countries sit on a continuum of informalization and secondly, the character of their informal sectors. This is then applied to the economies of the 27 member states of European Union (EU-27).

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Why is it important?

Finding a clear divide from East-to-West and South-to-North in the EU-27 with the more informalized and wage-based informal economies on the Eastern/Southern side and the less informalized and more own-account informal economies on the Western/Nordic side, it is then revealed that formalization and more own-account informal sectors are significantly correlated with wealthier and more equal (as measured by the gini-coefficient) countries in which there is greater labour market intervention, higher levels of social protection and more effective redistribution via social transfers.

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