Unpacking Informality: How Better Data Can Lead to Smarter Labour Policies

A new ILO study shows that informality is driven mainly by self-employed workers operating without registration, not just a general lack of formal jobs. By breaking informality into specific causes like missing pensions or business registration, it offers clearer, targeted solutions for policymakers.

Informal work is not a marginal issue. It defines the reality of nearly 60 percent of workers worldwide. Yet, despite its scale, policymaking has struggled to keep up. A new study by the International Labour Organization (ILO), led by researchers Juan Chacaltana and Mabelin Villarreal-Fuentes, argues that the problem is not just economic but also analytical. The way informality is measured has limited how it is addressed. For decades, governments have relied on a simple divide between formal and informal jobs. While useful for tracking trends, this binary view hides the real reasons why workers remain outside formal systems.

Why the Old Way of Measuring Falls Short

The traditional method treats all informal jobs as the same, even though they are not. A street vendor, a domestic worker without benefits, and a small business owner operating without registration all fall into the same category. This oversimplification makes it difficult for policymakers to know where to act. The ILO study highlights that informality is not one problem but many. It involves gaps in social protection, a lack of business registration, weak enforcement, and limited access to benefits. Without breaking down these elements, policies risk being too broad and ineffective.

A New Way to Break Down Informality

Instead of replacing the existing measure, the researchers propose a smarter approach. They keep the overall informality rate but "unpack" it into its main drivers. This means identifying why a job is informal. For employees, the key issue is often the absence of pension contributions or paid leave. For self-employed workers, it usually comes down to whether their business is registered or keeps proper accounts. By dividing informality into these clear components, the method connects data directly to policy action. It turns a single statistic into a practical tool for decision-making.

Colombia Shows Where the Real Problem Lies

To test this method, the study looks at Colombia. The findings are revealing. More than half of workers are still in informal jobs, but the problem is not evenly spread. The biggest share comes from own-account workers, people running small businesses or working independently without proper registration. This group alone accounts for over 60 percent of all informal employment. Employees, while still affected, are generally better off, especially when they have access to pensions. Other groups, like domestic workers or small employers, play a much smaller role.

This tells a clear story. Informality in Colombia is not widespread across all sectors equally. It is heavily concentrated in one segment of the labour market. That concentration is important because it shows exactly where policies should focus.

Small Changes, Big Impact

The study also tracks changes between 2022 and 2024, when informality in Colombia fell slightly. The decline may seem modest, but the reasons behind it are significant. The biggest improvement came from self-employed workers. Some moved into more formal arrangements, and others improved their business practices, such as registering their activities. At the same time, more employees gained access to pension systems.

What stands out is that progress did not come from sweeping reforms but from targeted improvements. Making it easier for small businesses to register and improving access to social protection had the biggest effect. Other factors, like paid leave, played only a minor role. This shows that even small, focused changes can lead to measurable results.

Rethinking Policy for the Future

The message for policymakers is clear. Reducing informality requires precision, not broad promises. Since most informal workers are self-employed, policies should focus on helping them formalise. This could mean simplifying registration processes, reducing costs, and offering clear benefits for joining the formal system. At the same time, improving pension coverage for employees remains essential.

More broadly, the study calls for a shift in how informality is understood. It is not just about counting informal jobs but about understanding the reasons behind them. By breaking the problem into smaller, manageable parts, governments can design smarter policies and track what actually works.

In a world where labour markets are rapidly changing, this approach offers a practical way forward. It moves the conversation beyond numbers and towards solutions, helping countries tackle one of the most persistent challenges in the world of work.