The Informal Sector in Jamaica

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Dec 2006
The informal economy plays an important, yet often overlooked, role in economies throughout the world. Informal activities can provide a much needed source of income for a great number of people. At the same time, informality motivated by regulatory distortions, tax evasion, or in the pursuit of illegal activities can be a development trap that deprives governments of needed funds and leaves participants without legal protection. This paper is one output of a broader effort aimed at better understanding the informal sector in Jamaica. Using various techniques, this paper first estimates the size of the informal sector in Jamaica, finding that the informal economy represented a large and growing share of the overall economy, measuring in the vicinity of 40 percent of total economic activity as currently measured. This growing sector represents a diverse group of enterprises and workers, ranging from local peddlers to sophisticated small entrepreneurs. The second component of the paper explores these and other characteristics of the informal sector which should be taken into account when prescribing new policies or programs.