The informal economy makes up a large part of South Africa’s economic activity. It includes small businesses and individuals earning a living outside of formal structures. These businesses are usually not registered for tax, do not follow labour laws, and operate with few formal processes. Common examples include street vendors, spaza shops, car guards, and home-based services. Many families depend on this income, especially in areas with high unemployment.
Key Takeaways
- Widespread Economic Role: The informal economy supports millions of South Africans through unregistered businesses and informal jobs. It remains vital in areas where formal employment opportunities are scarce.
- Common Activities: Typical informal work includes spaza shops, car guarding, street vending, home-based services, and waste picking. These activities help many families earn an income and meet basic needs.
- Limited Protections: Informal work lacks legal protections, labour rights, and access to formal financial systems. This limits the ability of informal workers to achieve long-term financial stability and business growth.
About Arcadia Finance
Secure a loan effortlessly via Arcadia Finance. You will not pay any application fees and can pick from 19 trusted lenders, all operating under South Africa’s National Credit Regulator rules. Experience a smooth, dependable service tailored to your personal financial requirements.
What Is The Informal Economy?
The informal economy consists of every kind of economic activity, business, job, and worker that falls outside the reach of formal legal systems, whether in legislation or actual practice. This encompasses the absence of formal business regulations as well as the lack of legal and social safeguards for employees.
South Africa’s Informal Economy
The informal economy in South Africa holds a key position in the national economy, though it is frequently underestimated. It offers employment and earnings to millions who are unable to secure work in the formal job sector. The most recent Quarterly Labour Force Survey (QLFS), published by Statistics South Africa (Stats SA), indicates that informal employment represented 19.5% of all jobs during the final quarter of 2024, confirming its place as the country’s second-largest provider of employment after the formal economy.
In 2023, Statistics South Africa carried out its Survey of Employers and Self-Employed (SESE). This study gathers data on enterprises that do not fall under the value added tax (VAT) system. Such enterprises are categorised as part of the informal economy.
Although the nation has faced economic challenges, the informal sector has demonstrated its ability to endure. In 2023, about 1.9 million South Africans were operating businesses that were not VAT-registered, showing an increase from 1.5 million ten years before. This area of the economy is especially important for individuals with low levels of formal schooling. In every province apart from the Western Cape, where the figure stood at 45.3%, the majority of informal business operators had not achieved a matric qualification.
Characterisation of the Informal Sector in South Africa
Employment (Key Traits of People Working in the Informal Sector)
People working in the informal sector in South Africa typically do so without any legal protection or formal recognition. They are excluded from labour laws and are not part of any social security schemes. Most individuals are self-employed or operate as sole traders, and they usually work outside of trade unions. Wages tend to be low, and there is no access to benefits such as paid sick leave or annual holidays. The lack of regulation makes it difficult for these workers to access stable employment conditions.
Habitat (Land and Housing Used by the Informal Sector)
Many informal businesses make use of public spaces or private land without proper authorisation. These setups often involve makeshift structures that do not follow official building standards or zoning regulations. Construction is generally done with the help of family members, using basic materials. As a result, there is no access to mortgage financing or any form of housing subsidy. These limitations affect the security and durability of trading spaces within informal areas.
Enterprise (Activities Found in the Informal Sector)
Enterprises in the informal sector function in markets that are unregulated and highly competitive. These businesses are usually small in scale, often family-owned, and easy to start due to low entry barriers. They rely on locally available resources, use basic tools or methods, and require manual labour. Most do not benefit from formal business support, legal protections, or access to institutional credit. This environment allows for quick setup, but it also limits growth opportunities and long-term sustainability.
Credit (Financing Options in the Informal Sector)
Credit in the informal sector is not governed by any regulatory body and receives no financial subsidies. Loans are generally small, easy to access, and come with minimal paperwork or administration costs. Borrowers are not usually required to provide collateral, and lenders often agree on repayment terms that are based on the borrower’s situation. Although these arrangements are flexible, they can also involve high and inconsistent interest rates, making it harder for informal business owners to plan their finances securely.
Who Works Informally in South Africa?
A significant portion of South African workers operate in the informal economy. According to Statistics South Africa, about 30% of the national workforce and 24% of urban employment are in informal work. In metro areas like Johannesburg and Cape Town, this translates to roughly one in four workers.
Age and Gender Patterns
Informal employment spans all ages, but younger adults aged 15–24 and those aged 65 plus have higher rates, roughly 29% and 31% respectively in metro regions . Gender-wise, men and women participate almost equally. In major cities, around 24% of men and 23% of women are informally employed.
Race and Geographic Spread
Black Africans dominate the informal economy, making up about 89% of informal business owners as of 2023. Regionally, the highest concentrations are found in Gauteng (28.9%), followed by KwaZulu‑Natal (16.8%) and Limpopo (15.8%).
Employment Type
Among informal workers in metros, about 62% are employed by someone else (informal wage employment), while around 37% are self‑employed. A study from 2007 noted that home‑based workers make up roughly 26% of the informal workforce, and street vendors around 15%.
Typical Informal Economic Activities in South Africa
The informal economy in South Africa covers a wide range of everyday services and small-scale businesses. Most of these revolve around essential needs or simple services, often operating without formal agreements, licences, or tax registration. The key activities include the following:
Spaza Shops
Spaza shops are small convenience outlets found in townships and informal settlements. They often operate from people’s homes and stock everyday items such as bread, milk, sugar, snacks, frozen foods, and cleaning products. These shops began during Apartheid, when formal shops were inaccessible for many non-white South Africans, and today still serve as vital local shops for their communities.
Foreign nationals, particularly from Somalia and Ethiopia, many now run spaza shops, making up over 60% of these enterprises in some areas. They often provide additional services, such as selling airtime or acting as simplified banking outlets via mobile banking apps. Despite their informal status, efforts by the City of Johannesburg in late 2024 pushed for spaza shops to register, and some have started accessing support and health inspections.
Car Guards
Car guards are frequently seen outside shopping centres, train stations, and smaller parking areas. They offer to “watch” or “guard” your car while you shop, letting you park and then leaving a tip when retrieving your vehicle. This work is common for people who cannot access formal jobs, many are male migrants from other African countries, or individuals with limited formal qualifications. Car guards commonly work six days a week, about nine hours a day, earning between R4.64 and R30 per hour, or roughly R50 to R350 per day. The work involves risk, including verbal abuse and potential violence on the job. Some municipal areas have started formalising car guards through official registration, indicating a shift from semi-formal to regulated work.
Street Vending and Market Trading
Street vendors are another core part of the informal economy. They sell items such as cooked food, fresh fruit and vegetables, clothing, household goods, and crafts. Many work at busy intersections, outside factories, in taxi ranks, or on railway platforms. A report confirms that street vending makes up one of the four main types of urban informal employment worldwide, alongside domestic work, home-based work, and waste picking. In South African cities, this activity is especially widespread, sometimes numbering over half a million vendors. In 2007 street vending made up around 15% of non-agricultural informal employment.
Domestic and Home-based Work
Informal domestic workers provide cleaning, childcare, meal preparation, gardening, driving, and sometimes security services for households. Many are employed without formal contracts or labour protections, meaning they often miss out on benefits such as UIF or paid leave. It was highlighted that domestic work is a major form of informal wage employment, especially undertaken by women. Another substantial group is home-based workers, who conduct business from their own homes; activities include sewing, basic manufacturing, crafts, remote services, or food preparation. In 2007, home-based work accounted for roughly 26% of the informal labour force .
Waste Pickers
Waste pickers collect recyclable materials, such as plastic, paper, metal, and glass, from landfills, streets, and communal bins. They sort, process, and sell these materials to recycling agents or middlemen. Although South Africa lacks large-scale statistics, waste picking remains a prominent activity within the informal sector. Women in Informal Employment: Globalizing and Organizing (WIEGO) spotlights it as a global informal occupation alongside domestic work, home-based work, and street vending . Waste pickers play key roles in public health and recycling systems, despite often working without protection or recognition. In some areas, they have formed small co-operatives to gain more consistent income and safeguards.
Stokvels and Burial Societies
While not direct income-generating businesses, stokvels and burial societies are core informal financial systems within South African communities. These are voluntary, member-based savings groups. Stokvels often operate on a rotating savings system, with fixed contributions collected weekly or monthly and distributed to a member in turn. Burial societies focus on pooling funds to support families when a member dies, covering funeral costs and helping with logistical support. Over half of adult South Africans belong to a stokvel, which together manage about R50 billion annually. Though they do not form part of official GDP, they support informal economic resilience by providing savings, credit, and shared risk capacities.
Benefits of Informal Economy
The informal economy offers several advantages, depending on the situation:
- Enables people, particularly the self-employed and informal traders, to generate income when formal employment opportunities are scarce. This helps individuals and families meet their daily needs.
- Allows participants to avoid paying taxes to a government that may be viewed as inefficient or corrupt. This keeps more money in their own hands.
- Provides goods and services that are in demand but not formally approved or regulated. This can fill gaps in the market that the formal economy does not cover.
- Helps preserve local community ties and cultural practices by operating outside the formal global economy. This can protect unique traditions and ways of life.
Of these, the chance to earn a living when the formal economy is failing is often seen as the most significant benefit.
Conclusion
The informal economy is a significant part of South Africa’s broader economic system, providing income and opportunities for millions of people who might otherwise struggle to earn a living. It includes a wide range of small businesses and informal jobs that operate outside formal regulations and tax systems. While this sector offers flexibility and supports many households, it also comes with challenges such as a lack of legal protections, limited access to finance, and unstable working conditions. As the informal economy continues to grow, many businesses and individuals are seeking ways to improve their stability and income prospects.
Frequently Asked Questions
What is meant by the informal economy?
The informal economy refers to economic activities and jobs that are not regulated by the government or recorded in official statistics. These include small businesses and individual workers who are not registered for tax or subject to formal labour laws.
Who works in the informal economy in South Africa?
Roughly 30% of the South African workforce operates in the informal economy. This includes street vendors, spaza shop owners, domestic workers, home-based businesses, car guards, and waste pickers.
What are the main benefits of informal work?
Informal work allows people to earn an income when formal jobs are unavailable. It also offers flexibility and requires minimal start-up costs, making it accessible to many who would otherwise be excluded from the formal sector.
What are the risks of working informally?
Informal workers typically lack legal protections, benefits such as paid leave or pensions, and access to formal finance. They also face unstable income and limited opportunities for business growth.
Can informal businesses become formal?
Yes, many informal businesses can register with government bodies, pay tax, and gain access to support services. Doing so can help improve income security and provide access to wider markets and financial tools.
Fast, uncomplicated, and trustworthy loan comparisons
At Arcadia Finance, you can compare loan offers from multiple lenders with no obligation and free of charge. Get a clear overview of your options and choose the best deal for you.
Fill out our form today to easily compare interest rates from 19 banks and find the right loan for you.
