Since the 1970s, researchers haveidentified the emergence and growth
of the informal economy in the UnitedStates. Once thought to be associatedonly with developing country economies –where job creation can’t keep pace with aburgeoning workforce – informalsubeconomies can now be found acrossthe United States, the result of a range offorces that include such new factors ascorporate outsourcing, an increasingtrend toward temporary employment inthe workforce, the changing demographicface of major cities, and some traditionalfactors like the reciprocity that supportsrural life. While not reaching thedramatic size of its counterparts indeveloping nations, the U.S. informaleconomy appears to be large andgrowing. It includes workers in“sweatshops” and home-based contractlabor. It includes street vendors andinformal child-care providers, as well asauto mechanics, home improvementcontractors, house cleaners and a host ofothers who make their living in whole orin part in that segment of the economywhere cash is king.
Microentrepreneurs are a strong andnatural presence in this economy.Invisible to many because of their size,they are also invisible to the tax collector,municipal authorities and state regulatorybodies. Operating in this fashion, theyare seen as a problem by many and as apositive economic force by others. Arethey a drain on the public because ofnonpayment of taxes? Are they a threat
because of their lack of compliance withhealth and safety regulations? Are they apositive force, creating income and jobsfor many low-income individuals, andcontributing goods and services tounderserved communities? How mighttheir positive contributions be supported,and the negative diminished? To whatextent might the right types of servicesand policy support unleash greatereconomic opportunity for the many whowork informally as a survival strategy?What role might microenterpriseprograms, in particular, play insupporting the aspirations of informalentrepreneurs for a better life?
Research Goals andComponents
With funding from the CharlesStewart Mott Foundation, FIELD
collaborated with the Institute for Socialand Economic Development (ISED) toilluminate the characteristics, needs andcircumstances of microentrepreneursoperating in the informal economy andto determine how they might be assistedto improve their livelihoods. In particular
MICROENTERPRISES IN THE U.S. INFORMALECONOMY: SUMMARY RESEARCH FINDINGS
the research sought to answer the followingquestions:• What is the nature and scale of the informal
economy within the United States?• How do microenterprises operate within
the informal economy?• What are the implications for practice?
Could informal entrepreneurs be potentialclients for microenterprise program services?And, if so, what would be required to helpthem grow their businesses?
• What are the implications for policy? Arethere specific governmental policies and/orregulations that might be changed tofacilitate informal entrepreneurs’ growthand ultimate movement toward the formaleconomy?The research components included a
literature review and three studies (Experiences ofAfrican Americans, Latino Enterprises at theMargins and Making it in Rural America)drawing on qualitative interviews with informalentrepreneurs in urban centers in Baltimore,Chicago, New Jersey, and New York and inrural Nebraska. These studies included bothfindings and a set of initial recommendationsfor program practitioners and policymakers.Additionally, a national convening of 27
microenterprise program practitioners,researchers, policy advocates and fundersprovided feedback on the findings andrecommendations for practice, policy andfundraising, and provided guidance for futurework that might be built upon this research.The purpose of this Forum is to summarize thekey research findings and present policy andpractice implications.
What is the Informal Economy?
To place the findings in this report in context,it is helpful to have at least an initial
understanding of the informal economy in theUnited States. And, the first thing that must beunderstood is that it is quite large. Theestimates of the size of this economy vary fromresearcher to researcher, but the impression thatall these estimates convey is that the informalcomponent of the U.S. economy, while notmatching that of developing nations, issurprisingly large and possibly growing.Economists have measured it as a percentage ofGNP, and estimated it to represent between 4.4percent and 27 percent of that sum, with mostestimates centering on 10 percent. The currentGNP figure equals $10,678 billion. Using the10 percent estimate, the value produced in the
ChicagoWesternRural Nebraska
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F I G U R E 1 : S I T E S O F I N F O R M A L E C O N O M Y R E S E A R C H
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informal economy was $1,067 billion in 2003.In other words, for every $10 produced in theU.S. economy, $1 comes from the informaleconomy.1 Other researchers have estimated itto include up to one-seventh of theeconomically active population of the country,using very-small enterprises (VSEs), thoseenterprises with fewer than eight or 10employees, as a proxy. Still others have notedthat it includes substantial numbers of workersin certain occupations (close to 84 percent of allchild-care workers and 20 percent of allseamstresses, for example), and in certainlocalities. Twenty-nine percent of the LosAngeles County population, which includeslarge numbers of immigrants, has beenestimated to work informally.2
But, what is the informal economy? For thepurposes of this research, it is that portion ofthe economy identified by the following fourcharacteristics:• It involves licit but unregulated work:
Enterprises, employers and self-employedindividuals do not comply with standardbusiness practices, taxation regulationsand/or other business reportingrequirements, but they are otherwise notengaged in overtly criminal activity. Aspresented here, the informal economyshould not be confused with theunderground economy, which may includetrade in drugs, prostitution and other illicitcommodities.
• It includes both employed and self-employedworkers with some engaged in both kinds ofwork. Individuals may hire themselves outirregularly or may be steadily employed atfactories operating “under the radar.” Or,they may be operating full or part-timebusinesses, which are either totally or partiallygenerating revenues without a paper trail.
• Cash is the most common medium ofexchange, although bartering also occurs.
This enables participants to hide incomefrom taxation. Workers andmicroentrepreneurs don’t claim it onincome tax forms and employers don’t fileemployment records.
• Work conditions for those who labor areinferior to those found in the formaleconomy. Earnings, security andenvironmental protections are less.Equipment may be out of code or unsafe,and there is no protection fromexploitation.3
Women and men, the poor and non-poor,immigrants, the educated and the less educatedall engage in the informal economy. Themajority of informal economy participants areemployees, working for others, in sweatshops orout of their homes in contract relationships toproducers. But, many are also self-employed.The very nature of being a micro – or verysmall – enterprise lends itself to operating in theinformal economy. These enterprises are largelyinvisible or operate at low levels of visibility.They may or may not have licenses, are oftenengaged in casual hiring, non-reporting ofincome and other informal labor practices. Theycan be easily moved, opened or closed at will,and thus, can hide from regulation.4
Finally, it is important to note that theformal and informal economies are connectedin many ways. Participants may combineearnings from informal self-employment withwages from formal employment, or transferpayments, such as public benefits, or investmentincome or savings. Or, they may be employedboth formally and informally at the same timesuch as a factory worker who also works forcash, part time, in a cleaning business. Informalwork arrangements may also be imposed onworkers as big firms restructure and outsourcefunctions to subcontractors both to minimizecosts and maximize flexibility. Under thesearrangements, they push workers out of the
1U.S. Department of Commerce Bureau of Economic Analysis, National Income and Product Account Tables (July 8, 2003); available fromhttp://www.bea.doc.gov/bea/dn/nipaweb/TableViewFixed.asp?SelectedTable=17&FirstYear=2002&LastYear=2003&Freq=Qtr; Internet.2Jan L. Losby and others, Informal Economy Literature Review (Washington, DC: The Aspen Institute, December 2002), 32-35; available fromhttp://fieldus.org/li/lit_review.htm; Internet.3Losby and others, 5-84Manuel Castells and Alejandro Portes, "World Underneath: The Origins, Dynamics, and Effects of the Informal Economy," in The InformalEconomy: Studies in Advanced and Less Developed Countries, eds. Alejandro Portes, Manuel Castells and Lauren A. Benton (Baltimore: JohnsHopkins Press, 1989), 11-37.
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formal economy into the informal economywhere they suffer without the protections of thelegal system. Workers are found who movefluidly back and forth between the two worlds,some by necessity, and others by choice.5
What do InformalMicroenterprises Look Like?
Under the qualitative research component ofthis study, FIELD and ISED interviewed
122 participants in the informal economy. Ofthese, 106 had informal businesses and 39were engaged in informal work only. Themicroentrepreneurs pursued businesses similarin type to those commonly found among allmicroentrepreneurs. They made and sold foodsand crafts; engaged in construction, child andelder care; cleaned homes; and ran small retailoperations. Interestingly, many of these sectorsare regulated ones given health and safetyissues associated with them. Businesses likethese face greater hurdles than others in lightlyregulated sectors in moving from informal toformal operations.
The most common businesses pursueddiffer somewhat by study group. While some ofthe difference may simply be due to the smallnumber of interviews conducted at each site,the different businesses may also reflect realdifferences in contexts and markets. Child care,for example, may be more common among
undocumented Latinos because of the strongneed for child care among others in the Latinocommunity who do shift work in local factories.The focus on food businesses may also reflectmarket demand for culturally desired foods inethnic communities where these might be scarcein formal supermarkets and other retail foodbusinesses. African American respondents inboth Chicago and Baltimore live in inner-cityneighborhoods in which residents look to localentrepreneurs for services that they feel are notgenerally available. In rural Nebraska, the mostcommon businesses are home-based, and can beeasily integrated with ranching and other workresponsibilities.
Most of the informal entrepreneurs focuson very local markets, not surprising forbusinesses that are cash based and operate ona word of mouth basis. There were a few,however, moving toward more mainstreammarkets. These were individuals with greaterskills, education, or experience who sawgreater economic reward among more affluentcustomers and felt confident marketing tothem. They included Alicia, for example, aLatina with a degree in early childhoodeducation from her home country, who offershigh-quality day care and early education toprofessional, documented Latinos. They alsoincluded Jody, a rural resident who placed her high-end, leather home goods in anupscale golf-pro shop, and was planning to
T A B L E 1 : I N F O R M A L B U S I N E S S T Y P E S
Top 5 Businesses by StudyLatino Study African American Study Rural Nebraska Study
target other wealthy customers through Web marketing.
Generally, informal entrepreneurs work attheir business part time although there wassome variation among the studies. AmongAfrican Americans, 38 percent of all businesseswere being operated full time, while in therural Nebraska study, only one business wasfull-time. The African American studyincluded many entrepreneurs who reportedthat they were in business for the long hauland intended to make it a significant generatorof income.
Patching as the Norm
Like other microentrepreneurs and informaleconomy workers, many of the respondents
in this study are patchers.6 Informalentrepreneurs patch businesses with formalwork, with informal work and with otherbusinesses. Figure 3 offers one example fromthe Nebraska study, of what patching lookslike. In this instance, the entrepreneur hadinformal bread baking and housecleaningbusinesses, and sold her labor to ranchoperators during busy seasons. She also hadtwo part-time jobs. Her husband had oneprincipal job, managing a ranch for an absentlandlord, and then engaged in part-time work seasonally.
Layering of Activities
The patching these entrepreneurs do mayinvolve a steady combination of income
sources, with a primary wage job generating aregular return. For some however, both thejob and enterprise are somewhat fluid witheach rising and falling, based on the season,and the availability of work and customers.Again, a case from Nebraska illustrates this.Figure 4 lays out the work schedule for Pete,an entrepreneur, and his wife, who live intown and engage in eight different activitiesacross the year to maintain their household offour. Eschewing a job that would leave himtied to one single-activity, Pete prefers toalternate between five different activities,several of which ebb and flow with theseasons. While a few of his activities are year-round they generally require a minimalamount of time every month. This frees himto spend more concerted time on seasonalactivities, as well as be with his family in theirfamily mowing business and participate in hischildren’s activities. His wife noted, “Pete isn’treally a nine to five kind of guy. He likes theflexibility of being able to mow a lawn one dayhere, go to a funeral the next day, and just[have] the ability to make your own schedule.”Whether he could find a single job that wouldgenerate the same amount of income as theseis also questionable.
6Patching is a term used to describe the multiple economic activities that one individual engages in to generate an income. In addition, a house-hold may have other income streams contributed by other household members.
0% 20% 40% 60% 80% 100%
Full-Time
Part-Time
Latino Study
African American Study
Rural Nebraska Study
97%
3%
62%
38%
73%
27%
Figure 2: Informal Business Employment Levels
Husband — ranch work
Basketball coach
Church secretary
Day work — informal
Cleaning houses — informal
Bread baking — informal
Husband — vet/assistant
Husband — sales barn work
Figure 3: Economic Activities of a Patcher
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Although this layering of activities happensfrequently in rural Nebraska, the Latino and AfricanAmerican studies yielded their own examples.Latinos increased their informal enterprise activitiesduring the “slow” winter months when there werefewer work opportunities available. One youngman, for example, repaired electrical applianceswhen he couldn’t get factory work. In the AfricanAmerican study, people who were doing yard work,landscaping and home repairs also had fluctuationsin their income. One said, “It all depends if I have ajob. Some weeks I can work up to 70 hours andthen a few weeks later I don’t have any hours.”Another said, “I pray for snow in the winter, or elseI won’t have any work.”
Low Business Returns and Assets
In most cases, the informal economic activitieswere very small-scale, low revenue-generating
operations. Although all three studies revealedmicroentrepreneurs struggling to make endsmeet, the Nebraska business earnings were thesmallest. This is likely due to the virtual lack offull-time businesses among that group comparedto the others. The amount of assets owned bythese entrepreneurs varied, but was also generallylow. As could be expected, many entrepreneursfound it difficult to name and value their assets.The most frequently mentioned assets includedvacuums, cooking equipment, construction andhome improvement tools, auto mechanic tools,and cars.
Motivations for Engaging in the Informal Economy
When asked what motivated them to engage inthese small, entrepreneurial activities, the
informal entrepreneurs cited a set of reasons thatare echoed by emerging entrepreneurs everywhere.They included:• Economic necessity: Across all three studies,
respondents cited this as their primary reasonfor operating informally.
• Risk mitigation: As one African Americanrespondent indicated: “People get tired ofworking so many years and then getting laidoff. You want to be your own boss because formy generation, it’s not likely you’re going toretire from one job. In fact, they’re going tofire you before you get to retirement age. Soit’s probably best to have something on theside so that when that time comes you can justput your full energy into the side job. It’s away to protect yourself from a scary economy.”In rural areas too, dependent as they are onranching and agricultural income, where manyfactors are outside one’s control, there is astrong need to have other income sourcesflowing into the household.
• Lack of, or dissatisfaction with, employmentopportunities: Formal employment limitationswere often cited by respondents in all threestudies. Respondents to the African Americanstudy expressed difficulty finding formal wageemployment because of low education orminimal skills, a criminal record or drugproblems. Some Latinos cited the difficulty in
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Trucking
Mowing
Carpentry
Grave Digging
Activity Bus
Golf Course-Laundry
Bank
Drive-In
Pete
Pete
’s Sp
ouse
40 hours+/month 20-40 hours/month <20 hours/month
Figure 4: Layering of Work Activities
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finding employment, made more difficultin some areas by the disappearance oftraditional factory jobs. “There are manypeople doing this. It is due tounemployment … even older people. Withtraditional jobs in factories disappearing,there are a lot of people in WashingtonHeights who do this type of work. They selljust about anything on the street … out ofneed. And many of them are not oldenough to retire yet. They lasted 15, 20years working in a factory. Then the factoryclosed and said goodbye to them.” Evenwhen factory work exists, it is stronglydisliked because of the irregularity ofavailable work, work assignments that aresubject to favoritism, disrespect paid tonon-English speakers, and a systemdesigned to prevent workers fromtransitioning to permanent employmentstatus. Women in particular, flee or avoidfactory work because it’s incompatible withtheir need to care for small children.
• Social capital: Both rural Nebraskans andAfrican American respondents believed theirinformal activities could strengthen townand neighborhood support networks. OneAfrican American respondent explained: “Ifeel it’s important to provide a neededservice. If you’re doing a service and helpingout in the neighborhood, everybody
benefits. For me that’s important. I’m nottalking about hustling or taking people’smoney. It’s a very valuable reward, becausethe work I do is important.”
• Independence and control: For some, the lureof independence and control is very strong.They wish to set their own work schedule,earn as much as they are willing to dedicatein work hours, and be free fromgovernmental regulations. For others, theirdesire for creativity and joy in their craft is astrong motivation in and of itself. Informalbusinesses are a first stage for a very fewrespondents who were testing an idea andthinking about converting it into a larger ormore formal operation. In these instances,the entrepreneur will increasingly move tofollowing more of the rules of the game asthe potential business becomes clearer. All of these reasons are voiced by
microentrepreneurs who approachmicroenterprise development programs forservices. The more important question is whydo these entrepreneurs remain informal?Informal entrepreneurs provided five basicanswers to this question. • Lack of documentation: It is particularly
challenging for undocumented individualsto formalize their businesses. While theLatino study documents some ways inwhich undocumented residents have taken
7The African American study did not focus on the features of the informal businesses; the focus was on understanding the reasons peopleentered the informal economy. Therefore, respondents were not asked specifically about the dollar value of their business assets.
T A B L E 2 : A N N U A L B U S I N E S S E A R N I N G S A N D A S S E T S
Nebraskans Latinos African Americans
Annual Business Earnings
Median $3,250 $6,840 $789
Average $4,048 $9,504 $12,156
Business Assets
Median $900 $1,000 NA7
Average $3,364 $3,872 NA
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steps to incorporate their businesses or bring them into compliance in someways, fundamentally, their status preventsthem from fully conforming to a varietyof regulations.
• Desire for hidden income: African Americansand undocumented Latinos cited the desireto create undocumented income.Undocumented Latinos were able to usetheir informal activities to generate incomein ways that kept them invisible. Workingfor their own informal business eliminatedthe need to show documents to agencies orother prospective employers, or run the riskof being discovered with fraudulentdocuments. Similarly, those with certainmeans-tested benefits could not jeopardizethem with documented income. As oneAfrican American respondent said, “I’vebeen on disability since 1994 because ofmy health; but I needed extra cash sinceI’m taking care of my grandbaby. I can’twork a regular job because I’d lose mydisability. The disability isn’t a lot ofmoney, but I need the medical insurance. Ineed that the most.”
• Competitive advantage: Many believe theirsuccess depends on being able to pricebelow the formal market. There is aconcern that paying taxes would negativelyaffect the profitability of their business.
When Jorge, a disc jockey with a thrivingbusiness in a highly competitive market,was asked if he planned to incorporate, hesaid “it depends … on how much I wouldpay in taxes. For instance, if I charge $500and the city charges me $200 in taxes,then it’s not good business for me. That’sto say, I have to inquire how much itwould cost me.”
• Costs of compliance with regulations: Otherssee the barriers to formality as very high.This was especially expressed by many ofthe rural respondents, like Becky, anentrepreneur who made bread, jellies, pies,sweets, noodles and other goods to sell at alocal farmers’ market. She was very businesssavvy, knowing how to control costs, butwhen asked if she would considerformalizing, she indicated she would notbecause her income would have to gotowards paying for a commercial kitchen,and she felt she needed to channel herearnings into the household rather thantowards investing in the business.
• Business size: For some, the current size ofthe business, and their lack of interest ingrowth, made formalizing irrelevant. Theseentrepreneurs did not consider theirinformal activity a business, but rather asimple way to generate a little additionalcash to support household expenses.
It is not surprising that respondentsexpressed a range of attitudes about formalizingtheir businesses. Some were simply notinterested in formalizing; others could becharacterized as interested, but cautious, andfinally, there were a small number who wereboth interested and ready.
As Figure 5 indicates, the percent in eachcategory varied from study group to studygroup. The African American sample appearedto demonstrate the most interest in formalizing.Eleven percent of the microentrepreneurs in thestudy were ready to go, and another 52 percentwere interested but cautious. The highpercentage of African American respondents inboth these categories is likely related to the factthat 38 percent of the sample were workinginformally full time. Their informal activitiesprovided their sole source of income.
Among the rural population, only oneperson, a young woman interested in launchinga full-fledged hair salon, was fully ready toformalize her business. But the rural study alsocontained some 28 percent who alreadyfollowed some of the “rules of the game,”including: several women food producers whoconform to the regulations that permit them tosell at farmers’ markets; a few dog breeders whofollow the rules regarding home breeding; and aretail operation that pays some sales tax. Whilesome of these individuals expressed interest in
formalization, others did not. The rural studyalso included a few entrepreneurs (10 percent)who operated businesses from which the ownersdeclared at least part of their income. Theseentrepreneurs were operating above and belowthe line like many in the United States do.
Among the Latinos, responses variedbetween the documented and theundocumented. Only five percent of thedocumented Latinos expressed real interest informalizing; another 25 percent expressed someinterest; while 70 percent were totallyuninterested, preferring to depend on their jobsas their sustaining income source. Theundocumented, on the other hand, includedmany entrepreneurs (44 percent) who expressedreal interest in the chance to become formal,but were unable due to their legal situation.
What do InformalEntrepreneurs Want?
In the three studies, respondents were askedwhat products and services would be helpful to
their businesses. Table 3 summarizes theiranswers. It’s important to note that mostrespondents had no exposure to businessdevelopment services or microfinance, and manycouldn’t conceive of the types of character basedlending and specially developed training curriculathat are common in the microenterprise industry.
T A B L E 3 : H E L P F U L B U S I N E S S S E R V I C E S
Latinos African Americans Rural
Credit Some (37%) Some Some (28%)
Trades’ Licenses Some Some No
Business Skills Mostly No Yes Some(pricing, marketing, accounts)
Industry Based Training Some Some Mostly No
Health Insurance Yes Yes Yes
Legal Status Yes No No
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Somewhat less than a third of the sampleexpressed interest in financing. Among themwere the Latinos who expressed explicit interestin obtaining credit for items such as floorstrippers and polishers, carpet shampooers andvans for cleaning businesses, and a sophisticatedsound system for a D.J.’s business, amongothers. The majority of these individuals areundocumented, and many of them articulatedother credit needs such as mortgages for homesand educational loans, both of which arepressing issues for the undocumented.
In the rural study, only three expressed adefinite interest in borrowing money: abeautician who planned to purchase a piece ofland to start a beauty-shop; an occasional catererwho would be willing to take a loan to develop acommercial kitchen – when he was ready; and acake baker who was interested in borrowingmoney to grow her business, but worriedwhether or not a bank would approve her.
Several African Americans remarked thatthey would like to secure loans to purchase toolsor a vehicle for their businesses, but they didn’tbelieve they would qualify for a loan. Oneperson explained, “I have bad credit. ... You canhave all the cash in the world, but if yourcredit’s no good, they [banks] don’t want yourmoney.” A few have criminal records that theybelieve prohibit them from approachingfinancial institutions.
Most respondents either saw no need forcredit or were risk averse. Most wereconcerned about the stresses involved andpreferred to build their business over timethemselves. Jody, one of the rural respondentssaid, “That puts a lot of pressure – if you cando your business – you know, if you gopinchers up and you have a big bank loan,that’s devastating. If you go pinchers up andyou have a room full of stained glass or fabric,oh well, you know, that’s just a lesson. But abank loan is – that’s a lot of stress.”8
Both Latino and African Americanrespondents mentioned their interest insecuring trade licenses, denied to them fordifferent reasons. The Latinos were skilledtradesmen in their home countries who wereprevented from fully practicing their tradeshere because their undocumented status
prevented them from applying for thecredentials they needed. A few of the AfricanAmerican respondents reported that criminalrecords blocked their access. One man said,“This is all it’s going to be for the rest of mylife – working for cash. I’m just as good as theguys with a license or a journeyman card, but Ican’t get hired by a firm or get into the unionsbecause I’ve been in jail.”
Interest in improving business skillsvaried. Most of the Latino respondents feltthey already understood business basics.Among the rural residents, there were somewho acknowledged a need to know more –the areas of greatest interest related topricing, marketing and, sometimes, managingtheir accounts.
Some entrepreneurs expressed interest inlearning more about their craft or industry.This was especially true among the Latino and African American respondents.Undocumented tradesmen reported an interestin learning U.S. construction standards, forexample, and some documented women wereexpressly interested in improving theirculinary skills. The rural respondents, on theother hand, expressed minimal interest. As one rural entrepreneur, Robert noted, “Ihave my Time-Life books.” The lack ofinterest in the rural area seemed related to asense that there was little market for thesehigher-end skills. Knowing landscaping, forexample, would not be a benefit when clientssimply wanted, and often could only afford,mowed lawns.
Finally, everyone indicated a strong need for health insurance, and the undocumentedLatinos sought specific remedies for their legal status.
Implications for Policy
If one is interested in assisting informalentrepreneurs, it is important to recognize the
set of policies (federal, state and local) thatconstrain entrepreneurs’ growth andopportunities. Whether one agrees or disagreeswith the general intent of these policies, thechallenges they pose to emerging entrepreneursmust be recognized.
8When asked what pinchers up meant, Jody answered “Oh, when a crab dies, it falls on its back, and its little pinchers go up.”
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Different subgroups of informalentrepreneurs are constrained by differentpolicies. Immigration policies preventundocumented Latinos from formalizing theirbusinesses, accessing credit and becoming toovisible. Policies directed against ex-offendersprevent these individuals from securing licensesfor a variety of businesses, accessing the skilledtrades unions, and often obtaining credit.Furthermore, federal and state taxation policies,as well as state and local licensing andregulations, create a variety of hurdles for low-income, informal entrepreneurs who mightconsider formalizing.
Programs interested in assistingentrepreneurs with these policy challenges canwork on two levels: first, helping entrepreneursto understand and comply with relevantregulation, and second, working to amelioratesome of the more negative effects of thesechallenges through policy advocacy. There areexamples of both these approaches.
Helping Entrepreneurs Comply with RegulationsThe Pioneer Institute for Public Policy inMassachusetts has developed detailed guidescalled “Navigating through Regulations andLicensing Requirements” specific to Boston andother Massachusetts cities. The guides provide astep-by-step approach for registering andlicensing a variety of business types includinghome-based child care, home improvement andstreet vending.
Conexión Américas, which works tointegrate Hispanics socially, economically andcivically into the communities of middleTennessee, has offered Negocio Próspero, atraining course to Hispanic entrepreneurs, since1992. The course is designed to provideHispanic business owners practical tools anduseful guidelines on how to successfully startand run a small business. While the course wasnot initially designed to focus on informalbusinesses, they found that many of theirclients were undocumented, and so, haveevolved an approach that helps them maketheir business the strongest they can withintheir operating constraints. The course includestraining on standards for licensed and regulatedbusinesses and encourages owners to operate
their business within them. Trainers stronglysuggest that if an opening occurs for them toapply for legal status, their efforts to complywith tax policies and other business regulationscan only improve their chances for an approvalof their applications.
Practitioners participating in FIELD’smeeting on this theme identified anotheropportunity with the potential to both attractinformal entrepreneurs to microenterpriseprograms and help them take steps towardsformalization. Acknowledging that someprograms, like the Women’s Housing andEconomic Development Corporation, assisttheir clients with tax preparation to help themsecure the Earned Income Tax Credit,participants proposed marketing tax preparationservices that would help entrepreneurs identifytax benefits for both their household andbusiness. The service – and education aboutEITC and the use of Schedule C – could beeconomically valuable to these entrepreneursand could introduce them to othermicroenterprise services that could advancetheir businesses. The tax service would servemultiple purposes: attracting informals intoprograms, showcasing the advantages ofbusiness formalization, and putting informalson the path to growth.
Influencing Policy on Behalf ofMicroentrepreneursThe Texas Rural Legal Aid Society offers anexample of an organization that works oninfluencing policy, engaged as it is in workingclosely with the Laredo City Council to find aconstructive approach to the contentious issueof informal street vending. The Women’s SelfEmployment Project offers another example.The organization has been working on anawareness campaign to highlight theoftentimes high costs of regulations for theself-employed in the city of Chicago. Whileworking on these policy issues can bechallenging, regulatory policy changes havethe potential to influence large numbers ofentrepreneurs whether they directly receiveservices from a microenterprise program ornot. Learning how to effectively address theseissues could impact substantial numbers ofentrepreneurs.
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Implications for Microenterprise Practice
Do informal entrepreneurs represent a marketfor microenterprise development programs?
The research seems to suggest yes, at least inpart. Each of the studies identified varyingproportions of the Latino, African Americanand rural respondents who would be interestedin some form of program services. Participantsat the FIELD informal economy meetingechoed these findings based on their experience,noting that this was particularly true in the caseof Latinos, African Americans (especially men),and ex-offenders. Latino experts noted thatthere are emerging Latino communities inurban sectors with thriving “informal sub-economies” that could grow stronger withassistance. Participants also noted that there area relative lack of program services directed toAfrican Americans, and African American malesin particular, who remain an underservedmarket in many major American cities. Ruralpractitioners and experts noted that informalentrepreneurs have always been a market forrural microenterprise programs; the challengemay be more how to reach deeper into thosemarkets to serve those who don’t necessarilythink of themselves as entrepreneurs or theiractivities as “businesses.”
If programs are interested in serving thesemarkets, the research suggests that changes inprogram policies, practices andmarketing/outreach will be needed.
Program PoliciesPolicy issues may be particularly vexing forprograms. Funders may condition who can beserved. For example, some funding sourcesprohibit loans to undocumented clients fromtheir money; local government funding mayrestrict the use of their support to tax-payingbusinesses. Funders and programs themselvesmay have concerns regarding support to foodbusinesses, child-care businesses andconstruction businesses that don’t complywith key health and safety regulations. At thesame time, some programs have found itworthwhile to work around these issues andconstraints. On the lending side, thesepolicies include:
• Raising funds with fewer restrictions toserve more challenging populations.
• Establishing loan limits under whichunregistered businesses can accessfinancing.
• Developing alternative methods to verifyidentity, place and length of residence, andto assess the reliability of prospectiveborrowers.
• Using risk-based pricing in lending tounregistered businesses or those owned bythe undocumented, and offering financialincentives to encourage formalization.Additional policies that programs have
instituted, whether providing lending or othertechnical assistance services, include:• Extending entry level services to informal
entrepreneurs, and basing continuedassistance on progress toward formalization.
• Creating policies based on sectors that allowone to work with informal businessesdifferently based on sector and settingexpectations accordingly.The point is that programs need to think
through the implications of serving informalentrepreneurs and develop a set of guidelines forproducts and services that are clear to staff, thatguide program marketing, and are made explicitto prospective clients.
Products and Services As indicated above, the research summarized aset of needs articulated by informalentrepreneurs. While some of them would beinterested in products and services currentlyavailable throughout the industry, there weremany who expressed extreme reluctance orlack of interest, at least initially, in suchcommon offerings as extended multipartbusiness plan courses. The challenge seems tobe both adapting current offerings, makingthem more attractive to long-term informals,and, in some cases, creating new products. A list of such possible products and servicesare included in the accompanying box (seepage 13). Participants at FIELD’s InformalEconomy meeting emphasized two keyconcepts implicit in this list:• Develop “portal” products, that is, entry-
level offerings designed particularly toattract informal entrepreneurs. WHEDCO
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(Women’s Housing and EconomicDevelopment Corporation, Bronx, NY)for some years had such a portal product –an informal care givers group to attractproviders who had not yet met therequirements to be regulated. The intentwas to offer them opportunities for sometraining and networking prior to making acommitment to enroll in formal training.Similarly, the income tax productdescribed above could be another suchportal product.
• Think sector. Focusing on specific sectorsin which many informal entrepreneursoperate allows a program to design aspecific service that makes sense to them
and can ultimately engage them in alonger term process focused on growth.The informal daycare providers’ training isone such example. ACCION NY hasfound that, in its market, informalstended to be concentrated in foodbusinesses, gypsy cabs, and independentgrocers. ACCION NY has three loanproducts designed directly for taxioperators: two are to cover automotiverepairs and/or insurance and the third isfor the purchase of a taxi. These loanproducts do not require bank accounts ortraditional credit histories and generallyemploy strategies such as cosigners andcollateral to offset risks.
Adapting Old, Creating New: Possible Products and Services for Informal Microentrepreneurs
• Training that explicitly demonstrates the advantages of operating formally anddisadvantages of operating informally
• Feasibility analysis to help informal entrepreneurs determine whether they should either“sustain the opportunity” (keep the business as it is) or “increase the opportunity”(move toward formalization or growth)
• “Risk mitigation” planning for transitioning a business to formal status
• Assistance with compliance with regulations• Step by step descriptions on how to incorporate, and how to obtain licenses
and permits• “Expediter services” to help entrepreneurs work through the process
• Rapid, small “on the spot” loans for immediate needs to informal borrowers willing tocommit to credit repair and other services
• Lending products for undocumented entrepreneurs
• Very short courses on pricing, marketing and how to decrease costs
• Extension-style technical assistance in rural areas
• Distance learning for rural communities
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Marketing and OutreachThe research suggests that the failure of someprograms to reach informal entrepreneurs maybe as much about marketing as it is aboutproducts and policies. Effective outreach tothese individuals means paying attention to themessage, to partners, and to the venues wheremarketing occurs. In this respect, participants atFIELD’s meeting underscored:• Messages may need to be tailored
differently to overcome some informals’perceptions that they are not in business, orto demonstrate a willingness to work withundocumented individuals, for example.The importance of culturally appropriatelanguage was also highlighted whenworking with diverse ethnic groups. For allcommunities, it appears that perceptions arean issue. Many informal entrepreneurs,even if they know of an existing agency, donot believe that the agency could actuallyserve them. This is likely due to gender,geographic location, lack of experience, etc.These perceptions need to be overcome.
• Effective outreach also involves identifyingand cultivating those organizations – andindividuals in those organizations – thatare close to the target communities andappear most open to making referrals.These may include cultural organizations,ethnic associations, immigration rightsinstitutions, social services agencies, ESLprograms, churches, etc. It is important totest and assess which ones are most opento collaboration and then build a workingrelationship with them. It can’t be assumedthat every organization will welcome thepotential services readily.
• Being present in local communities is alsokey. Visible staff and staff that reflect thecommunity were also cited as important tobuilding trust. In rural areas, wheredistances are great and where it would becostly to place staff, traveling enterpriseagents may play a key role, conductingextensive outreach and providing referrals toa range of partner enterprise developmentprograms depending upon a client’s needsand interests.
FundingFinally, the research suggests that funding is akey factor limiting services to many of theseinformal entrepreneurs – especially in certainmarkets. For example, in Nebraska, the sevenorganizations that provide direct services in 51rural counties have only 13 staff membersbetween them to cover a very large geographicarea. Densely populated New Jersey, another siteof this research, presents another case. While the2002 Directory of U.S. Microenterprise Programs9
lists 14 organizations engaged in microenterprisedevelopment in the state, very few have presencein the growing Latino communities where manyinformal entrepreneurs operate. In Chicago andBaltimore, microenterprise developmentorganizations do not appear to have sufficientresources to reach out to many of the informalentrepreneurs identified in these studies,particularly those that are male and ex-offenders.
The challenge is to raise the funds that willenable programs to expand services to thesemarkets. Doing so will require programs tocreatively seek resources not only fromtraditional microenterprise development funders,but also from others whose interest in thesepopulations may be based on otherconsiderations – such as an interest in servingex-offenders, or in the economic empowermentof local ethnic communities. It will be importantto make the case that informal entrepreneurshipis not a temporary phenomenon, but somethingthat is a logical consequence of a range of socialand economic forces in the U.S., and thatpeople engaged in this sector stabilizecommunities and create income for those mostin need. Helping them will immediately improvethe well-being of their households andsurrounding communities even in the absence oflarger economic development solutions.
Conclusions and Next Steps
The studies summarized in this Forum suggestthat informal microentrepreneurs are, indeed,
a growing presence in the U.S. economy, whocontribute to the economic security of theirhouseholds and communities. At the same time,the studies illuminate that there are many types
9Britton A. Walker and Amy Kays Blair, 2002 Directory of U.S. Microenterprise Programs (Washington, DC: The Aspen Institute, 2002).
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For More on Microenterprise and the Informal Economy
Readers interested in learning more about this theme are invited to log onto FIELD’s Website, www.fieldus.org, to find additional resources developed by FIELD and ISED, and on
which this Forum is based. They include:
A Literature Review of the Informal Economy. Widespread economic restructuring of the past20 years – a shift from manufacturing to service sector jobs, an increase in marginalemployment, an increase in small businesses, and a decline in male labor force participation –has changed the way people are connected to the labor market in the United States. Scholarshave examined these changes, particularly how they have led to a growing informal economy,briefly defined as those activities that, by occurring outside the normal, regulated economy,escape official record-keeping.
This paper summarizes that research with respect to four major issues: • The definition of the informal economy• The theories or perspectives that attempt to explain the existence of the informal economy in
the United States and other industrialized countries• The characteristics of the people who engage in informal work and the industries that are
most likely to have a high incidence of informal workers• The size of the informal economy
(continued on next page)
of informal entrepreneurs – fromundocumented aliens to ex-felons to long-termresidents of urban and rural communities intenton making a living and providing services totheir neighbors. There are informalentrepreneurs very close to taking the steps toformalization, and many others who arecautiously interested in growing their businessesand would consider making them legal if theybelieved such a step would benefit them.
The studies further suggest that workingwith this market might mean addressing somepolicy and regulatory issues that constrain theirefforts, as well as developing new products andservices that can, first, serve them as they are,and then entice them to formalization as itmakes sense in business terms. While there aresome examples of how these efforts might work,
microenterprise programs are only beginning tounderstand the complexity of this market andto scratch the surface in learning how to assistinformal microentrepreneurs. FIELD, withcontinued support from the Charles StewartMott Foundation, intends to further promoteprogram experimentation that will expandservices to them. Future activities may includeefforts to promote reflection and action onthese issues in specific markets, the formation ofa practitioner learners’ group to collect andexchange experiences, and possible work ondeveloping new products and services explicitlyfor these markets.
Interested readers who would like toparticipate in a learners’ group are encouragedto contact FIELD at [email protected].
For More on Microenterprise and the Informal Economy (continued)
The Informal Economy: Making It In Rural America This FIELD publication, the third ina series, examines the experiences of 29 entrepreneurs living and working in several ruralcounties in Nebraska. The 81-page report shares the entrepreneurs’ motivations, aspirationsand struggles to operate viable businesses, and explores how policies and practices could bechanged to encourage more growth among rural informal businesses.
The Informal Economy: Latino Enterprises at the Margins Based on research involving 38informal, Latino businesspeople – both documented and undocumented – this 90-pagereport reflects on their experiences while also tackling such issues as: what are the barriersLatino entrepreneurs face as they operate their small businesses and how might they behelped to move from the informal to the “formal” economy.
The Informal Economy: Experiences of African Americans This publication, written by theInstitute for Social and Economic Development (ISED) Solutions, explores the experiences of55 African Americans who either operate their own informal businesses or are employedinformally – working for companies that pay them in cash. The 71-page report looks at the prosand cons of participating in the informal economy and the implications for programsencouraging entrepreneurship.
FIELD forum Issue #14 – The Informal Economy and Microenterprise in the UnitedStates This publication details the intersection between microenterprise and the informaleconomy, documenting the experiences of – and key issues for – microenterprisepractitioners. It also describes the diverse types of people who engage in informal work aswell as their motivations and offers a succinct definition of the informal economy.
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