Theory of Change

Transition from the informal to the formal economy - Theory of change

This umbrella theory of change provides the main pathways for the transition to formality of workers and enterprises. It is a general framework that can inform the development of theories of change focused on a specific sector, occupational groups, forms of informality or policy areas.

Briefing note | 29 January 2021
For enterprises, formalization means bringing them under the regulation with the advantages and obligations that this entails. It includes the extension of the scope of fiscal, labour and social security regulation to all enterprises without exception regarding the size, sector or other criteria, the legal recognition and registration of enterprises and compliance with legal requirements.

For independent workers, the fact that their enterprises belong to the formal economy or not determines if they are also in the informal economy or not. For employees, transition to formality means providing them with adequate labour and social protection. Depending on the situation, this means realizing one or several of the following actions:
(1) extending legal coverage to those excluded or insufficiently covered;
(2) providing an adequate level of legal protection (e.g. no exclusion from social insurance because of a threshold regarding working time)
(3) ensuring an effective compliance with laws and regulations.

Bringing activities from the informal to the formal economy means that they should be fully declared, covered by legislation and give rise to effective protection.