What is the informal economy and how does it generate billions?

THE informal economy It is a giant that walks beside us every day, often silently. It defines the reality of millions.

What exactly defines the informal economy?

When we mention informal economyWe're not just talking about street vendors. The concept is much broader and more complex.

Basically, it encompasses all economic activities that are not registered. They are not taxed or monitored by the government.

Think about workers without formal employment contracts (CLT). Or small businesses that operate without a CNPJ (National Registry of Legal Entities).

These activities do not contribute to social security (INSS). Their workers generally do not have rights such as vacation pay, a 13th-month salary, or unemployment insurance.

It is essential to differentiate the informal economy from the illegal economy. Informality generally involves legal activities, such as selling food or providing repair services.

The problem is not what They do, but as They do. The lack of registration is the central point that defines this productive sphere.

It is also known by other names. "Underground economy" or "parallel economy" are common terms to describe this phenomenon.

However, "informality" better captures the essence. It's not necessarily hidden, but rather devoid of legal formalities.

What is the true size of the informal economy in Brazil?

The numbers are impressive and reveal a true nation of workers. informal economy It is an economic powerhouse in its own right.

According to the most recent data from the PNAD Contínua (National Household Sample Survey), released by IBGE, Brazil has reached a significant milestone.

In the quarter ending in September 2025, the informality rate was 37.81% of the employed population. This represents 38.7 million people.

Imagine nearly 39 million Brazilians generating income without social protection. That's a number greater than the population of many entire countries.

But how much money does this represent? The impact on Gross Domestic Product (GDP) is equally gigantic.

Studies by the Brazilian Institute of Economics of the Getulio Vargas Foundation (FGV IBRE) attempt to measure this. They use the Underground Economy Index (IES).

Although the most recent data (referring to 2024) shows a slight decrease, the volume is staggering. informal economy It accounts for approximately 171% of GDP.

Considering Brazil's GDP is estimated at over R1.6 trillion in 2024, we are talking about a parallel economy that exceeds R1 trillion.

This colossal amount of money doesn't go through the tax collection system. It's money that circulates "under the table," fueling consumption but not the public coffers.

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Why do so many people join the informal economy?

No one chooses precariousness willingly. Informality is, more often than not, a direct consequence of structural barriers.

The main driving force is the need for survival. Faced with unemployment, odd jobs or small, unregistered businesses become the only way out.

Furthermore, Brazil faces a historical challenge: the so-called "Brazil Cost," which includes a high tax burden and bureaucratic complexity.

Opening and maintaining a formal business in the country is expensive and difficult. Many micro-entrepreneurs simply cannot afford the taxes and obligations.

THE informal economy It offers a very low barrier to entry. You can start selling cakes or doing repairs today, using only your skills.

Another factor that gained traction was flexibility. The growth of the "gig economy," or app economy, further blurred these boundaries.

Many drivers and delivery workers are classified as self-employed. They do not have formal employment contracts, operating in a gray area of the legislation.

Therefore, informality is a symptom. It reflects a labor market that cannot absorb everyone and a system that discourages formalization.

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Who are the faces behind these numbers?

The 38.7 million informal workers are not a homogeneous mass. They are present in all sectors and represent the diversity of the country.

The most visible profile is that of the self-employed worker. According to the IBGE (Brazilian Institute of Geography and Statistics), there are almost 26 million people in this category, many of them in the informal sector.

We're talking about the cleaning lady who cleans houses. The bricklayer who does renovations. The manicurist who provides services at clients' homes. The street vendor in the city center.

We also include here private sector employees without formal contracts. This is the type of employee in a small shop or restaurant who receives payment "under the table".

Even small rural producers are included in this count. Many sell their products at open-air markets without any formal registration of the activity.

THE informal economy It is predominantly urban. It is strongest in commerce, personal services, and construction.

This population is also the most vulnerable. They are the first to lose income during an economic crisis, as we saw drastically during the 2020 pandemic.

Without a safety net, any illness or unforeseen event can mean financial ruin. Informal work is a precarious survival strategy.

How does the informal economy impact the country?

The impact of this parallel economy is a paradox. It is, at the same time, a serious problem and an emergency solution.

The downside is evident for the state. Tax evasion is widespread, reducing the capacity for public investment.

Less revenue means less money for health, education, and infrastructure. informal economy It drains resources that should benefit everyone.

It also creates unfair competition. The company that pays all taxes and labor costs cannot compete on price with the informal business.

For the worker, the impact is job insecurity. There is a total absence of rights. There is no retirement, severance pay, unemployment insurance, or sick pay.

On the other hand, informality acts as a "social buffer." In a country with high unemployment rates, it guarantees the livelihood of millions.

If these 38.7 million people had no income at all, Brazil would face a social and economic collapse of unimaginable proportions.

THE informal economy It allows for a minimum level of consumption to be maintained. It makes money circulate quickly in local communities, supporting the base of the pyramid.

What are the biggest myths about informal work?

There are many stigmas associated with informality. It's common to hear that informal workers are "lazy" or that they "like to take advantage."

This is a dangerous myth. The vast majority of informal workers would trade their situation for the security of a formal employment contract, if the opportunity arose.

The reality is that the formal market doesn't generate enough jobs. Informality isn't a choice, but rather the lack of one.

Another myth is that informal economy It consists solely of criminal activities. As we have seen, this is incorrect.

While crime (trafficking, smuggling) is part of the economy illegalInformality refers to activities lawful (selling lunch boxes, repairs) done without registration.

It's also commonly thought that informal workers don't pay taxes. That's not entirely true.

They do not pay direct income taxes (IRPF) or social security contributions (INSS). However, they pay taxes embedded in everything they consume, such as ICMS and IPI.

Demystifying informal economy That's the first step. We need to see it as a complex structural problem, not as an individual moral failing.

What does the world tell us about this reality?

This phenomenon is not unique to Brazil. Informality is a prominent characteristic of developing and emerging countries.

The International Labour Organization (ILO) is monitoring this situation closely. The global data is even more striking than the Brazilian data.

According to the report "World Employment and Social Outlook: Trends 2024," informality remains a persistent challenge.

It is estimated that 57.8% of the global workforce be in the informal sector. This equates to approximately 2.03 billion people in 2024.

The ILO highlights that, globally, progress in reducing informality has stagnated. The pandemic reversed many of the gains made in the previous decade.

In regions like Sub-Saharan Africa, the informality rate exceeds 85%. In Latin America, the number is also high, hovering around 47.6% in 2024.

This shows that the informal economy It is directly linked to the economic structure. Countries with less industrial development and greater inequality suffer more.

For in-depth data and reports on informal work worldwide, please consult the official website of the International Labour Organization (ILO).

Below is a table comparing the situation of a formal worker (CLT or MEI) and an informal worker.

Comparative Table: Formal vs. Informal Social Protection

Benefit/Right	Formal Worker (CLT)	Formal Worker (MEI)	Informal worker
Retirement	Yes (INSS Contribution)	Yes (DAS Payment)	No (Only if contributing as an optional member)
Unemployment Insurance	Yes (After dismissal without just cause)	No	No
FGTS	Yes (Monthly deposit)	No	No
Paid Vacation	Yes (30 days + 1/3)	No (Organizes their own breaks)	No
Sickness Benefit	Yes (Via INSS)	Yes (Through INSS, after the waiting period)	No
Access to Credit	Simplified (Proof of income)	Simplified (CNPJ and invoicing)	Difficult (No proof of income required)

What paths exist for formalization?

Reduce to informal economy It's not a simple task. It's not enough to just increase enforcement and punish those who are breaking the rules.

The solution requires attacking the root causes of the problem. The main strategy is the radical simplification of the tax and bureaucratic system.

The Simples Nacional tax regime and, especially, the MEI (Individual Microentrepreneur) were important steps. The MEI brought millions out of total informality.

However, the MEI's revenue limit (currently R$81,000/year) is low. When the entrepreneur grows a little, they fall into the Simples Nacional tax regime, and costs increase drastically.

We need to create smoother transition "ramps." The entrepreneur needs to feel that it's worthwhile to grow formally.

Investing in financial and entrepreneurial education is vital. Many informal workers don't know this. as How to register or what are the benefits of contributing to the INSS (Brazilian National Social Security Institute).

THE informal economy It also decreases when the formal economy grows. Robust economic growth, which generates quality jobs with formal contracts, is the best policy.

Targeted microcredit policies also help. They allow small informal businesses to invest in equipment and inventory, gaining the breathing room to structure themselves.

Formalization should be seen as an invitation, not a threat. It needs to offer clear and immediate advantages, such as access to credit and social security.

Conclusion

THE informal economy It is a complex reflection of Brazilian society. It generates trillions of dollars and ensures the survival of 38.7 million people.

However, it operates on the fringes of protection. It is a system based on immediate need, which does not build security for the future.

Understanding this phenomenon requires us to abandon clichés. It's not about "trickery," but a structural problem of employment, bureaucracy, and inequality.

Brazil will only truly move forward when it manages to integrate this economy, offering fair pathways so that informal workers can have rights and dignity.

Ultimately, this workforce has already proven its resilience and ability to generate wealth. All that's missing is recognition and the structure necessary for it to fully flourish.

To access the latest data on the Brazilian labor market, including the informality rate, visit the [link/website/resource]. IBGE's official page about the Continuous PNAD (National Household Sample Survey).

Frequently Asked Questions (FAQ)

1. Are app-based workers (Uber, iFood) part of the informal economy?

Yes, in most cases. Although the companies are formal, the working relationship with drivers and delivery people is predominantly that of self-employed individuals without a CNPJ (Brazilian tax ID). They don't have a CLT (Brazilian labor law), they don't automatically contribute to INSS (Brazilian social security) (unless they do so as self-employed individuals or MEI - Individual Microentrepreneur), and they don't have labor rights. They fit the profile of... informal economy or, as some experts call it, in the "gray area" of work.

2. Is the informal economy considered a crime?

No. A informal economy This refers to legal activities (such as selling food, providing beauty services, or doing repairs) that do not have tax or labor registration. The economy illegalIn contrast, informal work involves activities that are crimes in themselves, such as smuggling, drug trafficking, or piracy. An informal worker is not a criminal, but rather an unregistered worker.

3. How has the MEI (Individual Microentrepreneur) helped combat informality?

The MEI (Individual Microentrepreneur) was the most successful public policy in reducing informality. It created an extremely simplified legal and tax category. With a low fixed monthly cost (the DAS), the informal worker obtains a CNPJ (Brazilian tax ID), can issue invoices and, most importantly, gains access to INSS (Brazilian Social Security Institute) benefits, such as retirement, sick pay and maternity leave.

4. What is the difference between an informal worker and an unemployed person?

According to the IBGE (Brazilian Institute of Geography and Statistics), an unemployed person is someone who is not working but has actively sought employment in the last 30 days. An informal worker... is working and generating income (doing odd jobs, selling products, etc.), but doing so without any formal registration. Therefore, the informal worker is part of the "employed population," not the "unemployed population."

Economy

Marcos Alves

November 3, 2025