The Informal Economy Is the Signal Everyone Is Missing
Cash transactions and unreported income are growing faster than official GDP across OECD countries — a signal about institutional trust, work structure, and the limits of economic measurement with major policy implications.
The economic data that drives policy, that calibrates monetary decisions, that frames political debates about growth and stagnation, is systematically incomplete. Not because the statistical agencies that produce it are incompetent — they are, by and large, among the most sophisticated measurement organizations in the world — but because the economy they are measuring is increasingly different from the economy that is actually operating.
The gap is the informal economy: economic activity that is real, that produces genuine income and genuine consumption, but that falls outside the measurement apparatus because it is unrecorded, unreported, or deliberately obscured. That gap has been growing in OECD countries for a decade. The rate at which it is growing has accelerated since 2020. And the implications of a systematically undercounted economy are not primarily fiscal — they are analytical.
The Signal
The Bank for International Settlements publishes an annual currency demand analysis that uses cash withdrawal patterns to estimate the fraction of economic activity occurring outside the formal banking system. Its 2025 report identified an anomaly: currency in circulation as a percentage of GDP has been growing in all G7 economies since 2020, despite the simultaneous increase in card and digital payment infrastructure that would be expected to reduce it. In the US, currency in circulation grew 18% in the 2020-2025 period while nominal GDP grew 26% — a ratio that the BIS models as implying a 6-9% expansion in cash-based informal activity.
This is not the informal economy of the developing world — cash-dominant, institutionally thin, driven by limited banking access. This is a different phenomenon: the voluntary return to informal economic arrangements by people who have full access to formal financial infrastructure but are choosing not to use it for a growing fraction of their economic activity.
The Historical Context
Informal economic activity has always existed in developed economies. Tax compliance economists estimate that the informal economy in the US has historically represented 8-11% of GDP; in Italy, 20-25%; in Greece, closer to 30%. These are not precise numbers — the definitional and measurement challenges are substantial — but the orders of magnitude are established.
What has changed is the direction of travel. The informal economy in OECD countries had been declining as a percentage of GDP through most of the 1990s and 2000s — driven by the expansion of electronic payment systems, improved tax enforcement technology, and the formalization of previously informal service sectors. The reversal since 2020 is a structural departure from a 25-year trend.
The prior episode most analogous to the current reversal is the post-1973 expansion of informal economic activity in the US and UK, driven by a combination of high tax rates, high inflation eroding formal wage gains, and declining institutional trust in government. The parallels to the current environment are significant, though the mechanisms are not identical.
The Mechanism
The expansion of the informal economy is being driven by three distinct forces operating on different populations.
Gig and platform economy workers have normalized income arrangements that exist in a regulatory grey zone. The earnings of Uber drivers, Airbnb hosts, Etsy sellers, and the broader network of platform-mediated economic activity are formally reportable but inconsistently reported. The tax enforcement apparatus built for payroll-derived income is poorly calibrated for income that arrives in hundreds of small transactions across multiple platforms. The compliance rate for this income category is structurally lower than for traditional employment income.
Declining institutional trust is producing deliberate informalization among populations that previously participated fully in the formal economy. Survey data from the Pew Research Center and equivalents in the UK and Germany shows statistically significant increases in the percentage of respondents who report reduced willingness to participate in formal economic institutions — including formal banking, formal employment contracts, and formal tax reporting — driven by declining confidence that these institutions treat participants fairly.
Inflation-driven barter and reciprocal exchange have expanded at the community level. This is the most difficult to measure and the most culturally significant: networks of informal exchange — tool sharing, child care exchange, food growing and sharing, skilled trade reciprocity — that substitute for formal market transactions in specific communities. These networks are not captured by GDP measurement methodologies because they do not involve money; they are nonetheless real economic activity that is growing and providing genuine welfare support to participants.
Second-Order Effects
The policy implication is the most immediate. Monetary policy calibrated to official GDP data is potentially miscalibrated if the official data is systematically understating economic activity. If inflation is running at the rate suggested by official CPIs but a growing share of the economy is operating outside the price system, the transmission of monetary policy through price mechanisms may be weaker than models predict. This could explain some of the persistent "overheating" anomalies that have puzzled central bank researchers in the post-2020 period.
The fiscal implication runs in the opposite direction from the standard tax-gap narrative. The growing informal economy represents both a revenue loss (activity that should be taxed but is not) and a measurement problem (policy based on official GDP that understates actual economic activity may be systematically mis-targeting). The standard policy response — enhanced tax enforcement — addresses only the first of these problems and potentially exacerbates the second by accelerating informalization among trust-sensitive populations.
The social implication is the most complex. Informal economic networks, when they function well, build social capital and community resilience. They are the economic expression of social trust at the local level. The expansion of informal exchange in communities with declining formal economic participation may represent adaptation and resilience rather than dysfunction. Policies that suppress it without providing adequate formal-economy substitutes may damage genuine welfare without improving measured welfare.
What to Watch
BIS currency demand analysis: The annual report is the most reliable single indicator. Watch for currency-in-circulation ratios continuing to diverge from digital payment growth expectations.
IRS voluntary compliance data: The IRS publishes periodic estimates of the tax gap — the difference between taxes owed and taxes paid. The next estimate, due in 2027, will provide the most direct measurement of informal economy growth.
Platform 1099 reporting compliance: Following IRS rule changes requiring platform companies to report payments above $600, compliance rate data will provide the first large-scale measurement of gig economy income formalization. Watch for IRS enforcement data in 2026.
Official vs. survey-based GDP: Researchers at the BLS and independent institutions regularly compare official GDP with consumption-based and survey-based GDP estimates. Growing divergence between these measures would confirm that the measurement gap is widening.