Small business and the informal economy: evidence from the UK

The magnitude of the informal economy has been estimated using either indirect measurement methods that employ proxy indicators or small‐scale household surveys. This paper seeks to provide an analysis of the findings of the first direct survey in an advanced market economy of national business opinion on its magnitude and impacts.

This paper analyses the findings of a UK survey of business opinion on the prevalence of the informal economy in their sector and its impacts on their businesses, namely the Small Business Service's (SBS) 2004/05 Small Business Survey of 7,505 small businesses.

The finding is that 14 per cent of UK small businesses view themselves as negatively affected by the informal economy, with businesses estimating on average that 8 per cent of trade in their sector is conducted on an off‐the‐books basis. The sectors most affected by the informal economy are land transport, construction, the motor vehicle trade, and hotels and restaurants, with fledgling enterprises and businesses in peripheral regions most affected.

This survey records only business perceptions of the size of the informal economy in their sector rather than directly collecting data on the amount of informal work that businesses conduct.

This paper demonstrates that it is wholly feasible to conduct business surveys on the size and impacts of the informal economy and recommends modifications to the SBS survey method to improve data collection.

This paper reports the findings of the first survey in an advanced economy of national business opinion on the size and impacts of the informal economy.