S THE URBAN INSTITUTE E Brief 20, August 2011 I L I M A F Informal and Nonstandard Employment G in the United States N I Implications for Low-Income Working Families K Demetra Smith Nightingale and Stephen A. Wandner R O For many years, policy analysis on informal to a particular firm, not covered by employer- W employment primarily focused on less-developed sponsored benefits) to nonstandard or contingent economies. Informal workers are often concen- employment (such as temporary, intermittent, E trated in agricultural, domestic service, or manual part-time, day labor, and contract workers), which activities; they can include individuals who are may operate in the formal sector. In addition, M self-employed in the sense that they do not work individuals often mix formal, informal, and non- for any particular employer or firm. Whether standard work—for example, working a second O self-employed or working for others, individuals job or moonlighting, sometimes “off the books.” C (and their employers) who do not report earnings This brief describes informal and nonstandard or income for tax purposes are part of the informal employment and explores the policy implications 1 Of the 9.7 million N economy. for low-skilled workers in those arrangements. I As capitalist economies mature and develop, Individuals in both informal and nonstandard uninsured parents in employment have relatively high poverty rates - regulatory and worker protection policies become the United States, as established, and social assistance expands, infor- and low earnings, and women represent a dispro- mal work should decline. Yet, today, informal portionate share of the workers. The poor, who many as 3.5 millionW work remains a major part of the economies of work mainly in the informal sector, may find it even more difficult than low-wage formal workers living below the O developed as well as developing countries. Some analysts suggest that the rate of informal work to raise themselves and their families out of poverty federal poverty levelL may be increasing partly in response to expanding through work alone because informal wages are could readily be globalization. New businesses are expanding in lower and there is less chance for wage increases. N urban areas, but costs of starting up enterprises are made eligible for high, causing some entrepreneurs to operate in The Informal Market Medicaid under O the informal sector and pay lower wages to mini- and Public Policy mize expenses (Schneider 2002; Williams 2011). current law. S The literal definition for the informal sector Informal employment in the United States tends E is straightforward: economic activities that are to be overlooked in policy circles. When it is outside tax and regulatory policies. This definition considered, it is often viewed in terms of black V applies to both workers and the individuals or market (i.e., criminal and illegal) activities, I companies for which they work. In contrast, undocumented immigrants, or white-collar tax T formal, or standard, employment generally refers evasion. Aside from these stereotypes, though, to regular wage and work arrangements at an informal employment represents various economic C employer’s location or under the employer’s super- arrangements. The existence of the informal vision or policies, where the wages and income are market has implications for numerous policy E reported to the government as required by law. options related to workers and their families, and P In developed countries, including the United to businesses (particularly entrepreneurial activity S States, the distinction between formal and infor- and small businesses). mal economic activities is not always clear. For For their informative book about how poor R example, informal employment is similar in some mothers live, Making Ends Meet, Edin and Lein E ways (e.g., operating without a regular attachment (1997) interviewed 349 low-income mothers; all P An Urban Institute Program to Assess Changing Social Policies but one earned some income from informal work, provided in 2009 during the height of the reces- typically supplementing welfare payments or sion, also usually work through the formal system, earnings from formal low-wage jobs. Few of these providing special one-time payments to those who women were engaged in illegal activities such as file federal income tax returns. drug dealing or prostitution; the vast majority Welfare reform is also premised on formal indicated they “worked on the side,” regularly employment. Ideally, individuals move from pub- babysat, cleaned houses, did lawn and yard work, lic assistance to employment in the formal labor or collected cans and other recyclable items to market, and their wages are complemented by the earn money. In other words, the mothers per- EITC and tax credits to workers and employers. formed legitimate work outside the formal labor This expected pattern was confirmed during the market (that is, outside tax laws). economic boom of the 1990s, when the strong Public policies, though, strongly encourage demand for workers, along with changes in the formal employment. Workers benefit from par- nation’s welfare policies, contributed to substan- ticipating in the formal sector, as shown in the tial increases in employment among low-income left side of figure 1. American society, similar to parents, especially mothers. those of other developed economies, assumes that However, as Edin and Lein explain, informal, informal employment should be discouraged; it off-the-books work, which has always existed in also assumes that formal employment is at the the United States as in other countries, continued core of human capital development and is key to even during the booming 1990s. And informal achieving social welfare policy goals related to work has some positive aspects, as shown in the increasing individual economic self-sufficiency. right side of figure 1. The informal sector is a first Social insurance benefits are premised on work in entrée into work. Young people, for example, the formal sector, and the pathways to improved often babysit, mow lawns, and do other informal earnings and occupational upward mobility value work that provides them with income and intro- sustained formal work experience. Tax credits are duces them to the world of work and the respon- designed to encourage formal businesses and for- sibilities and expectations of that world. The mal work, and some key policy goals are achieved informal labor market has fewer barriers to entry through the income tax system. For example, than the formal market, and hours or work may the earned income tax credit (EITC) supple- be more flexible. Financially, workers who do not ments the income of workers who have earnings report their earnings avoid taxes, thus increasing from formal employment. Periodic economic their disposable income. And many adults who stimulus payments to individuals, such as those work more than one job at a time, either full FIGURE 1. Benefits of Formal and Informal Employment for Workers Formal Employment Informal Employment Ⅵ Recognized work experience. Acquiring Ⅵ Tax avoidance. Earnings and payments work experience recognized in the labor not reported to the government. market that could lead to occupational Ⅵ Detection avoidance. With no reported mobility. earnings, one might avoid being detected Ⅵ Health insurance. Access to employer- and being required to fulfill other financial sponsored health insurance. responsibilities (e.g., debt repayment, Ⅵ Retirement. Accumulation of Social child support obligations). Security and other pension credits, along Ⅵ Flexibility. Increased possibility of arrang- with employer contributions. ing flexible hours of work; seasonal Ⅵ Unemployment insurance. Accumulation options. of necessary work history to qualify for Ⅵ Independence. Increased possibility of unemployment insurance. self-directed individual work arrange- Ⅵ Worker protections. Minimum wages, ment; creative endeavors. safe work conditions, workers compen- Ⅵ Ease of entry. No background checks or sation, antidiscrimination laws. references required; fewer education Ⅵ Tax credits. Qualification for employment- credentials needed. related tax credits and transfers (e.g., EITC). 2 An Urban Institute Program to Assess Changing Social Policies time or part time, view the informal sector as a A few examples highlight the definitional viable supplement to formal work. Some may complexities. combine formal and informal work, comple- menting regular pay with work done on the side. Ⅵ Self-employed entrepreneurs. Many international Thus, formal employment reinforces some reports of the informal sector likely include important national policy goals, such as improving black-market and illegal activity as well as working conditions and compensation, creating jobs, small-scale personal service or production, and strengthening the formal economy. It also rein- which might also be referred to as self- forces the social value of work and self-sufficiency. employment. In the United States, entrepre- neurs who do not report their income are considered informal (or illegal) workers; How Is Informal Work Defined? those who do pay taxes may be considered There is no clear consensus across nations on nonstandard workers if they have an arrange- what constitutes informal employment. At the ment with an employer and both report their most basic level, informal employment means compensation, or they may be considered employment that occurs outside the tax and small businesses if they report