As a professional bookkeeper working with small business owners across Canada, I often talk about the importance of staying compliant with regulations, taxes, and payroll. But increasingly, a global trend is raising questions — not just about compliance, but about survival: the rapid growth of the informal economy.
From street vendors to freelance workers paid in cash, millions of people around the world are operating outside of formal business systems. And it’s not just happening in faraway places — it’s a growing concern in countries like ours too.
So, what’s going on? And more importantly, what can we learn from it here in Canada?
Let’s unpack the rise of the informal sector — and what it signals about the broader economy.
What Is the Informal Sector?
The informal sector (also called the informal economy or “grey economy”) includes any work or business activity that isn’t regulated by the government. This includes businesses that aren’t registered, people who don’t pay taxes, and workers who don’t receive employment benefits or legal protections.
Think of ride-share drivers working under the table, artisans selling handmade items without a business license, or individuals offering services like childcare, landscaping, or cleaning — all in cash. These aren’t “black market” or illegal activities — but they are outside formal systems.
In many cases, these workers aren’t trying to dodge rules. They’re simply doing what they need to do to earn a living — often because navigating the formal system feels too expensive, too complicated, or out of reach.
Why the Informal Economy Is Growing
According to the International Labour Organization (ILO), over 60% of workers globally earn their income through the informal sector. In some developing countries, that number climbs past 80%. But even in developed countries, the sector is expanding.
So why are more people choosing — or being forced — to operate informally, especially when so many governments are investing in post-pandemic recovery plans?
The answer is complex, but much of it comes down to one core issue: poor economic policy. Let’s look at some of the driving forces.
1. Too Much Red Tape
In many parts of the world, starting a legal business involves navigating an overwhelming number of forms, permits, inspections, and fees. For someone simply trying to run a market stall or freelance from home, the hurdles are too high. So, they operate off the books.
Here in Canada, we’re lucky to have relatively streamlined systems for registering a business. But even so, for newcomers or self-employed individuals unfamiliar with tax laws, the process can still feel intimidating.
2. Heavy Tax Burdens Without Visible Benefits
When people feel they’re paying taxes but getting little in return — whether it’s in the form of healthcare, infrastructure, or public services — they’re less inclined to participate in the formal system.
This isn’t just a problem in developing economies. Even in high-income countries, if small business owners feel overtaxed and underserved, they may be tempted to cut corners — skipping registration, underreporting income, or avoiding payroll deductions.
3. Inflation and Currency Instability
In countries with high inflation or unstable currencies, formal financial systems lose credibility. People may avoid banks and prefer cash, barter, or cryptocurrency. While Canada doesn’t have these issues to the same degree, inflation has hit Canadians hard in recent years — particularly small business owners and gig workers.
In tough times, the informal economy can act like a pressure release valve — helping people stay economically active, even if it’s outside the official system.
4. Rigid Labour Laws and Hiring Costs
Ironically, laws meant to protect workers can sometimes create barriers. When it becomes too costly or complex to hire someone legally — due to mandatory benefits, severance rules, or contract restrictions — businesses may opt for informal arrangements instead.
Of course, this puts workers at risk. No EI, no sick days, no job security. But for many small businesses barely breaking even, the informal route can seem like the only affordable option.
The Hidden Costs of Informality
At first glance, informal work might seem harmless. After all, it helps people earn income, supports families, and even encourages entrepreneurship. But long-term, the costs can be significant — for individuals and the broader economy.
Reduced Tax Revenue
When a large share of economic activity happens off the books, governments lose valuable tax revenue. That reduces funding for schools, healthcare, and infrastructure — services we all rely on.
Limited Business Growth
Informal businesses often struggle to scale. They lack access to credit, insurance, legal protections, and support programs. A small cash-based business might survive — but it likely won’t thrive.
Worker Vulnerability
Informal workers have no safety net. If they’re injured, underpaid, or unfairly treated, they have few options. This especially affects women, newcomers, and marginalized workers.
Increased Inequality
As some people enjoy the benefits of formal employment while others are stuck on the margins, economic inequality deepens. That can lead to social unrest and political instability over time.
What Can Be Done?
The rise of the informal sector is a wake-up call. It reflects not just individual choices but deeper problems in how our systems function. To support healthier economies, we need to make it easier — and more worthwhile — to be part of the formal system.
Here are some ways governments and communities can help:
1. Simplify Business Registration
Creating a business should be as easy as opening a bank account. Online registration, one-stop licensing, and support for newcomers and low-income entrepreneurs can make a big difference.
2. Make Tax Systems Fair and Transparent
Rather than penalizing non-compliance, governments should build trust by showing how taxes are used. Tax breaks or credits for small businesses that formalize can help bring more people into the system.
3. Promote Digital Financial Tools
Access to affordable accounting software, e-commerce platforms, and mobile payment solutions helps small businesses grow — and stay compliant.
4. Create Flexible Work Options
Developing legal categories for gig workers or part-time freelancers — with some level of protection and benefits — can bridge the gap between informal and formal employment.
Final Thoughts: A Mirror of the Economy
As a professional bookkeeper, I often see the numbers behind the scenes — the quiet realities of what small business owners go through just to stay afloat. The informal sector isn’t just a loophole or a problem to fix. It’s a mirror reflecting the ways our systems fall short.
We can’t simply crack down on informality and expect it to go away. Instead, we need to create economic conditions were doing things “by the book” is actually possible — and worthwhile.
That means better policy, simpler systems, and a little more empathy for the challenges people face every day.
Because when we support small businesses and self-employed Canadians properly, we don’t just grow the formal economy — we build a stronger, fairer future for everyone.
