Most of the World Works Without a Contract—and Experts Struggle to Count Them

Global economic data reveals a workforce of two billion people operating entirely outside the reach of the state. As of 2023, the International Labour Organization (ILO) estimates that 58.2 percent of the world’s workers are informally employed. This includes any economic activity that is not covered by formal arrangements, meaning these workers lack official employment records, tax withholding, health insurance, and the legal protections inherent in formal labor contracts.

This sector is the dominant reality for the majority of the global labor force. It encompasses a wide range of activities, from subsistence farming and street vending to off-the-books construction and domestic work. Because these workers exist outside official government ledgers, they present a persistent challenge for economists and policymakers tasked with managing national growth and social welfare. Measuring this “shadow economy” requires complex estimation because the activity is intentionally or unintentionally hidden from regulatory authorities.

The Data Gap in the Shadow

The informal economy consists of workers and small-scale enterprises providing legitimate products and services without complying with full registration or regulatory requirements. This may involve operating without business permits, failing to report income for tax purposes, or working in roles that fall outside the scope of national labor laws.

In emerging markets and developing economies, the informal sector is a massive economic force, accounting for approximately 35 percent of total GDP according to a 2024 IMF report. In advanced economies, this footprint is smaller, representing about 15 percent of economic activity. This disparity creates a two-track global landscape: one where economic data is a precise tool for policy, and another where it is an estimate based on indirect evidence.

Historically, the lack of granular data has limited the ability of researchers to study how the informal sector interacts with formal institutions. Recent reports from the World Bank and the IMF indicate that while data gaps remain, new analytical methods are allowing for a more nuanced understanding of this interaction. To bridge these gaps, economists use indirect estimation methods that look for “footprints” of unrecorded activity. These include “Multiple Indicators Multiple Causes” models, which correlate causes of informality—such as high tax burdens or heavy regulation—with indicators like the demand for physical cash. Other methods analyze discrepancies between electricity consumption and reported industrial output to identify production happening off the books.

Survival vs. Choice in the United States

In the United States, the informal economy is often discussed in the context of the “gig economy” or “side hustles”—voluntary activities intended to supplement income. However, data from the Ludwig Institute for Shared Economic Prosperity (LISEP) suggests that for many Americans, informal work is a strategy for survival rather than a flexible choice.

Recent LISEP research found that 15.9 percent of informal workers in the U.S. were active job seekers, a rate nearly seven times higher than the 2.2 percent job-seeking rate found in the general population. This disparity indicates that most individuals engaging in off-the-books work do so because they cannot find adequate formal employment.

To understand the impact of this work, it is necessary to examine “functional unemployment.” Unlike the headline unemployment rate reported by the Bureau of Labor Statistics, which only counts those without any job who are actively looking, the functional unemployment rate includes those who are working part-time but want full-time hours, as well as those whose full-time wages remain below the poverty line. According to LISEP, when these factors are included, the rate of economic distress in the U.S. labor market is significantly higher than standard reporting suggests.

Even with the addition of informal earnings, the impact on overall economic security is minimal. Data shows that informal wages only reduce the functional unemployment rate by approximately 0.9 percentage points. This confirms that the shadow economy in the U.S. is not a robust engine of upward mobility, but a fragile safety net for those who are marginalized in the formal labor market.

The Global Scale: A Regional Divide

While the informal sector is a subset of the U.S. economy, in many other parts of the world, it is the primary employer. In Sub-Saharan Africa, informal employment accounted for 87.6 percent of total employment in 2023, according to the ILO. This represents only a minor decrease from levels observed a decade ago, signaling the structural nature of informality in the region.

In nations like Niger and Burundi, the formal economy is the exception. ILO data from the early 2020s indicates that informality rates in these countries often exceed 95 percent of the total workforce. In these contexts, the informal and formal sectors are deeply integrated, with informal workers often providing the essential supplies and services that sustain global supply chains.

Education remains the most significant factor in determining whether a worker enters the formal or informal sector. The ILO reported in 2023 that the rate of informality is 1.6 times higher for individuals with no formal education compared to those who have completed secondary education. This suggests that without structural investments in human capital, the cycle of informality is likely to persist across generations.

The Gender Paradox

The informal economy also has a distinct gender profile. Globally, the rate of informal employment is 60.2 percent for men and 55.2 percent for women, according to data from Women in Informal Employment: Globalizing and Organizing (WIEGO). However, these global averages can be misleading because they are influenced by large populations in countries where female participation in the informal labor force is often under-reported or restricted.

In more than half of the world’s countries—particularly in low and lower-middle-income nations—women are disproportionately represented in the informal economy. This leaves them especially vulnerable to economic shocks. During the COVID-19 pandemic, informal workers who lacked access to government stimulus or unemployment insurance saw their incomes drop by an estimated 60 percent in the first month of the crisis, according to 2021 ILO data.

Policy in the Dark

When governments cannot accurately measure a workforce, they struggle to develop policies that support it. This lack of visibility can lead to decisions with unintended negative consequences for local economies.

For example, research from the Brookings Institution has highlighted how visible community-based enforcement of immigration or labor regulations can create a “chilling effect.” This enforcement does not only affect the specific individuals targeted; it can lead to a general withdrawal from local economic life. When workers and consumers in these communities fear interaction with authorities, they may stop participating in local marketplaces, leading to a depression of informal labor participation and a decline in local economic activity.

The difficulty in addressing informality stems from the fact that it is often a rational response to structural barriers, such as the high costs of business registration or the absence of social safety nets for the self-employed. Without a clear data-driven picture of these workers, policy interventions often fail to address the root causes of why people remain in the shadows.

There is, however, a shift toward improving these metrics. In 2023, the 21st International Conference of Labour Statisticians adopted a resolution to update measurement standards. The new framework aims to move beyond simply counting “informal jobs” to capturing “informal productive activities.” This change is intended to provide a more comprehensive view of the economic contributions of two billion people.

The Long Road to Formalization

Transitioning such a vast number of people into the formal economy is a complex task that requires more than just regulatory changes. It necessitates addressing the underlying issues of education access, the cost of doing business, and the provision of social protections.

Recent findings from Brookings suggest that reducing the barriers to formalization requires a multi-pronged approach that includes simplifying tax systems for small enterprises and expanding access to formal credit. For workers in high-informality regions, formalization represents the possibility of moving from precarious, day-to-day survival to a position of stability backed by legal standing and social insurance.

As the global economy becomes increasingly interconnected, the lines between formal and informal work continue to blur. The challenge for the coming decade is whether governments can use improved data to recognize and integrate the two billion people who have historically operated outside the reach of official systems.