Chapter 4: Who should be getting minimum wages

4.5 Informal economy workers

Distinguishing the concepts: the informal sector, informal employment and the informal economy

Developing countries are frequently characterised by the co-existence of formal and informal employment.

In 1993, the 15th International Conference of Labour Statisticians at the ILO (15th ICLS) defined the informal sector as a group of production units comprised of unincorporated enterprises owned by households, including informal own-account enterprises and enterprises of informal employers (typically small and non-registered enterprises). This definition limited the definition of informality to enterprises.

In 2003, the 17th International Conference of Labour Statisticians at the ILO (17th ICLS) guidelines which examined informality from a different perspective, that of jobs. By doing so, they defined the concept of informal employment as "all remunerative work (i.e. both self-employment and wage employment) that is not registered, regulated or protected by existing legal or regulatory frameworks, as well as non-remunerative work undertaken in an income-producing enterprise. Informal workers do not have secure employment contracts, workers' benefits, social protection or workers' representation.1

In this way, while the informal sector and informal employment are distinct concepts, they are also complementary. The informal economy encompasses both perspectives and is defined as all economic activities by workers and economic units that are - in law or in practice - not covered or insufficiently covered by formal arrangements.

A new ILO Recommendation

With respect to minimum wages, according to recently adopted Transition from the Informal to the Formal Economy Recommendation, 2015 (No. 204), countries should progressively extend minimum wage protections, in law and in practice, to workers in the informal economy through the process of formalization.

In some countries, legal provisions on minimum wages do not apply to some workers in informal employment, for example when enterprises employing fewer than ten wage earners are excluded from the relevant legislation. In most countries, however, the main challenge is compliance rather legal coverage.    

In other countries, the situation is more ambiguous. In Pakistan, for example, although workers in informal sector enterprises or holding informal jobs are not expressly excluded from minimum wage or industrial relations legislation, stakeholders have historically and almost universally interpreted legal protections as applicable to only employees in formal sector enterprises. As a matter of statutory construction, however, it is possible to interpret the existing legislation as including workers in informal employment or holding informal jobs.

More work is currently under way at the ILO on transition from the informal to the formal economy.

1 ILO Thesaurus