Automation, Changing Employment, and Informal Economies

Automation is the use of machines, software and robots to do tasks that people used to do, changing employment patterns, while the informal economy consists of economic activities that are not regulated, taxed or registered by the state, such as street vending, small-scale repair work and casual labor. In brief: automation raises productivity and removes some jobs while creating others that need different skills. According to the International Labour Organization (ILO), around 2 billion workers, roughly 60% of global employment, work informally, especially in low- and middle-income countries. Informal work gives income and flexibility, but usually lacks job security, social protection and safe conditions.

Technology and informality are two major forces behind the way work is changing around the world. This guide explains automation and its effects on jobs, the characteristics of informal economies, the gig economy, compares formal and informal work in a table, works through calculations, outlines the history and corrects common mistakes.

What is automation and how does it change work?

Automation covers industrial robots in factories, automatic checkouts and ticket machines, warehouse robots, software that processes documents and, increasingly, artificial intelligence that can write, translate or analyze images. Tasks that are routine and predictable, whether manual (assembly-line work) or clerical (data entry), are the easiest to automate. Tasks that need complex judgment, creativity, social skills or flexible movement in unpredictable settings, such as caring, teaching and skilled trades, are harder, although the boundary keeps moving.

Automation raises productivity (output per worker), lowers costs and can improve quality and safety. For companies, it can also make it cheaper to produce in rich countries and may reduce the advantage of low wages elsewhere, which is one reason for reshoring.

How is employment changing?

• Job losses and job creation: some occupations shrink, such as typists, bank tellers and assembly workers, while new ones appear, such as data analysts, robot technicians and app developers. Studies disagree on how many jobs are at risk, and estimates range widely, because many jobs change by losing some tasks and not disappearing completely.
• Skills and polarization: demand tends to grow for high-skill and for some low-skill service jobs, and fall for middle-skill routine jobs, which can increase inequality.
• Shift between sectors: employment moves from manufacturing and agriculture to services.
• New forms of work: the gig economy, in which people do short-term tasks through digital platforms, such as ride-hailing and delivery, offers flexibility but often few benefits and unstable incomes. Remote work has also grown.
• Need for training: workers need to learn new skills throughout their lives, and governments and companies are urged to invest in education and retraining.

What is the informal economy?

The informal economy includes workers and businesses that operate outside formal rules: street vendors, market traders, waste pickers, domestic workers, small-scale builders and repairers, unregistered taxi drivers and family workers in small enterprises. In many low- and middle-income countries, informal work is the main source of employment, especially in Sub-Saharan Africa and South Asia, where it can exceed 80% of jobs, while in high-income countries it is smaller but still present.

Advantages: it provides jobs and income for people who cannot find formal work, requires little capital to start, is flexible and supports low-cost goods and services in cities. Disadvantages: low and irregular income, no contracts, pensions, health insurance or paid leave, unsafe conditions, vulnerability to police harassment or eviction, no access to credit and no tax revenue for governments, which limits public services. Governments try formalization by simplifying registration, extending social protection and giving vendors legal spaces to trade, though strict enforcement can harm livelihoods. Informal and formal sectors are linked, as formal firms often buy goods from informal producers.

Formal and informal work compared

Worked example: jobs, productivity and informality

The values are hypothetical and illustrate the calculations.

1. Productivity gain: a factory with 200 workers makes 100,000 units a year, or 500 per worker. After installing robots, 120 workers make 120,000 units, or 1,000 per worker. Productivity doubled (+100%), output rose by 20%, and 80 jobs (40%) were lost.
2. Job changes in a region: automation removes 6,000 jobs, but new activity creates 3,500 jobs in maintenance and other sectors. The net change is 3,500 − 6,000 = −2,500 jobs, and 3,500 ÷ 6,000 = 58% of the lost jobs are replaced, though often needing different skills.
3. Informal share: a country has 30 million workers, of whom 19.5 million are in informal jobs. The informal share is 19.5 ÷ 30 = 65%.
4. Lost tax revenue: if each informal worker would pay 150 a year in taxes in the formal sector, the revenue lost is 19.5 million × 150 = 2,925 million, or 2.9 billion.
5. Income of a vendor: a street vendor earns 12 a day, 6 days a week, 50 weeks a year: 12 × 6 × 50 = 3,600 a year, with no paid leave and no pension, and an illness of 2 weeks loses 12 × 12 = 144 of income (4%).
6. Gig earnings: a delivery rider is paid 4 per delivery and makes 20 deliveries in a day. Gross earnings are 80. If costs for fuel and vehicle are 22 and the platform takes 15% of the 80 (12), the net is 80 − 22 − 12 = 46 for the day.

How have views on technology and work developed?

Fear of machines taking jobs is old. The Luddites, English textile workers, destroyed machines in 1811–1816. The economist John Maynard Keynes wrote in 1930 about “technological unemployment” but expected that people would eventually work much less. In practice, technology has repeatedly replaced some jobs and created others, such as the automation of agriculture and manufacturing, which was followed by the growth of services. The concept of the informal sector was introduced by the anthropologist Keith Hart in 1971 and developed by the ILO in a study of Kenya in 1972. Hernando de Soto and others debated whether informality is a drag or a sign of entrepreneurship, and the ILO has since worked on standards for the transition to formality. The rapid spread of AI since the early 2020s has renewed the debate about the future of work.

Which mistakes are common?

Mistake 1: Assuming that automation only destroys jobs

It removes tasks and some jobs, but also creates new demand and new occupations. The overall effect depends on how fast the economy adapts and on training and policy.

Mistake 2: Equating informal work with illegal activity

Most informal work produces legal goods and services. It is simply unregistered or unprotected.

Mistake 3: Thinking that informal economies exist only in poor countries

They are larger in poorer countries, but exist everywhere, for example in undeclared casual work and domestic work.

Mistake 4: Believing that formalization is simple

Forcing workers into rules without support can push them into hardship. Gradual measures such as easier registration and social protection work better.