Today, two billion people are in informal employment. This comes with risks and vulnerabilities that constitute an important policy challenge, particularly in the Global South, where most people depend, directly or indirectly, on the informal economy.

The vast majority of people in the Global South depend on the informal economy for their livelihoods. Informal workers and economic units contribute to economic and social development through market and non-market activities that are not protected, regulated, well recognised or valued. This leaves a majority of informal economy workers and their families outside the benefit of public policy, and raises the question for policy makers of how to improve the security and livelihoods of workers and their dependents who rely on the informal economy.

People have different perceptions of the informal economy. Some focus on the survivalist aspects – and there are many – believing informal workers have no choice but to run unproductive small businesses or work in jobs characterised by lack of social benefits, poor working conditions and lower rates of remuneration and productivity. Others consider informality a drag on economic and social development associated with tax evasion, disrespect for the rule of law and unfair competition between formal and informal enterprises. Others recognise its potential to support the livelihoods of workers willing to trade formalisation for informal employment. The reality of informality is often less obvious than it seems. Two things are certain: informality is part of the daily lives of most workers in the world, and it often comes with risks and vulnerabilities that constitute a formidable policy challenge.

Many of us may think we know what informality really is. Yet, the reality it captures is often less obvious than it seems. This chapter presents the informality profile of individuals and households across countries and regions. It relies on International Labour Organization (ILO) individual-based data on informal employment for 119 developing and developed countries, and the new Organisation for Economic Co‑operation and Development (OECD) Key Indicators of Informality based on Individuals and their Household (KIIbIH) database, available for 27 developing and emerging countries. Both refer to the ILO definition of informal employment, which includes employment in the informal sector, informal employment in the formal sector and informal employment in households. The resulting comprehensive portrait of informally employed individuals and their dependents shows distinct patterns that policy makers must take into account to effectively tackle the challenge of vulnerability in the informal economy.

The informal economy is a dominant feature of developing economies and encompasses a diverse group of workers and enterprises (Chapter 1). This heterogeneity prompts various perceptions of and stereotypes about the informal economy and has fuelled debate about its role in the development process. To inform policy debate and decision makers, this chapter reviews links between informality and the development process and, more importantly, provides new evidence on the less-studied drivers of informality. It shows that the long-standing negative connotation of informality is not always grounded in evidence and often masks the subtler reality. Fighting stereotypes and promoting an accurate picture of the informal economy’s contribution to development is key to making the case for investing in the protection of workers.

Risks and vulnerabilities are part of everyday life for many people in the world of work and their families, Often, these risks and vulnerabilities appear in proportion to the scale of informal employment and the breadth of public and private risk management systems. Despite representing the majority of the workforce and supporting a disproportionately large number of dependents (Chapter 1), the contribution of informal workers to society is not well recognised or understood, making their inclusion as beneficiaries of tax-financed government programmes difficult to argue in many places (Chapter 2). This chapter assesses the risks and vulnerabilities in the informal economy. It shows that informal workers face larger poverty and occupational risks that, combined with lack of access to appropriate risk management instruments, push many into income insecurity or make them vulnerable to poverty. Without effective policies to manage the risks – especially occupational safety and health (OSH) and social protection policies – informal economy workers will remain particularly vulnerable and continue to pass vulnerability on to others, particularly children and the elderly, who disproportionately live in informal households in developing countries.

A majority of people in the Global South depend on informal employment for subsistence (Chapter 1). They contribute to the economy and society through market and non-market activities that are not well recognised or valued (Chapter 2), which leaves a majority of informal workers and their families outside the realm of public policy. Lack of access to appropriate risk management instruments, combined with large poverty and occupational risks, push many informal economy workers into income insecurity or make them vulnerable to income poverty (Chapter 3). This chapter examines lessons learnt from recent country experiences and information from new indicators of informality to identify policy solutions. Social protection systems, occupational safety and health (OSH), together with measures to raise productivity and wages and support the representation and voice of workers, can be directed to tackle the vulnerability of informal economy workers and their families, facilitate transition to formality and become a real pillar of inclusive development. The extension of social protection to informal economy workers should pay more attention to how formal and informal social protection can complement each other, to more equitable and sustainable financing, and to ensuring the portability of social protection rights and benefits across different types of employment, during life and work transitions. Tackling the vulnerability challenge requires an integrated approach that combines the extension of social protection with other measures to improve working conditions, raise productivity and wages, and support the representation and voice of informal workers. The chapter further illustrates why indicators of informality based on individuals and their households are needed and how they can help develop policy solutions to extend coverage and facilitate the transition from the informal to the formal economy.

Globally, men are more exposed to informality than women, but the share of women in informal employment exceeds that of men in a majority of countries (Chapter 1). Across countries, however, risks and vulnerabilities associated with the informal economy (Chapter 3) disproportionately affect women. This chapter provides updated evidence on gender disparities in key informal employment outcomes, such as employment status and wage levels. It then examines the role of gender-based constraints in employment outcomes and access to social protection. Last, it reviews gender-sensitive approaches that have been instrumental in empowering women in the informal economy in a number of countries, with a view to identify priority areas for policy makers. It is evident that the vulnerability challenge in the informal economy needs to be addressed through a gender lens. In particular, gender-sensitive risk management instruments are critically needed to ensure that current attempts to extend social protection to informal economy workers do not leave women behind.