The Informal Economy: Between New Developments and Old Regulations

By Sassen, Saskia | The Yale Law Journal, June 1994 | Go to article overview

The Informal Economy: Between New Developments and Old Regulations


Sassen, Saskia, The Yale Law Journal


Saskia Sassen challenges the conventional wisdom that informal economies are caused by increased, often illegal, immigrant labor She argues that the informal economy is a result, primarily, of systemic factors characteristic of advanced capitalist urban societies. These factors include the decline of the middle class as the principal engine of economic growth and increased competition for land and other factors of production among businesses with widely varying profit making capabilities.

The growth of an informal economy in the large cities of highly developed countries prompts new questions about the relationship between economy and regulation today. As I shall employ the term, the "informal economy" refers to those income-generating activities occurring outside the state's regulatory framework that have analogs within that framework. The scope and character of the informal economy are defined by the very regulatory framework it evades. For this reason, the informal economy can only be understood in terms of its relationship to the formal economy--that is, regulated income-generating activity.

The main theories of economic development--whether proffered by the modernization or the Marxist schools of thought--do not foresee the inevitable emergence of an informal economy in highly developed countries. Such theories do allow for criminal activities and underreporting of income in advanced economies; these activities do not signal the presence of any novel or unexplained economic dynamic. Income underreporting, for instance, is acknowledged as an inevitable response to the state's implementation of a tax system. Nevertheless, the main theories of economic development have yet to adequately explain the phenomenon of the informal economy in advanced capitalist (usually urban) societies.

Until recently, theorization about the informal economy has focused on the shortcomings of less developed economies: their inability to attain full modernization, to stop excess migration to the cities, and to implement universal education and literacy programs.(1) The growth of an informal economy in highly developed countries has been explained as the result of immigration from the Third World and the replication here of survival strategies typical of the home countries of migrant workers. Related to this conception is the notion that "backward" sectors of the economy, such as the garment industry, remain backward (or even continue to exist) because a large supply of cheap immigrant labor is available. Both of these views imply that if there is an informal economy in highly developed countries, it is solely attributable to Third World immigration and the existence of backward sectors of the economy, not to the nature of the current phase of advanced economies.

Rather than simply assume the truth of such an argument, we must critically examine the role that Third World immigration might or might not play in the informalization process. Although immigrants, insofar as they tend to form communities, may be in a favorable position to seize the opportunities presented by informalization, immigrants do not necessarily create such opportunities. Instead, the opportunities may well be a structured outcome of the composition of advanced economies. The argument presented here is that informalization must be seen in the context of the economic restructuring that has contributed to the decline of the manufacturing-dominated industrial complex of the postwar era and the rise of a new, service-dominated economic complex.(2) The specific mediating processes that promote informalization of work are: (1) increased earnings inequality, and the concomitant restructuring of consumption in high-income and very-low-income strata; and (2) the inability of providers of many of the goods and services that are part of the new consumption to compete for necessary resources in urban contexts, where leading sectors have sharply bid up the prices of commercial space, labor, auxiliary services, and other factors of production. …

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