Ethnic/Informal Economy Essay

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Ethnic/informal economies are inconsistently defined by scholars. But fortunately, there is a common theme to the definitions one finds in the literature. All variants convey a sense of economic action embedded in solidaristic, co-ethnic social relations. Economic behavior is influenced by informal rules and practices that govern the normative behavior of group members.

An informative literature has emerged despite the lack of consistency in defining ethnic/informal economies. Researchers concentrate on how foreign-born groups establish and maintain economic niches that are usually accentuated by a profusion of small businesses. The field examines how limited acculturation and structural assimilation in the immigrant generation gives rise to collective action that promotes enterprising economic action. A substantial body of research documents how immigrant minorities draw on social ties in order to facilitate the development of informal economic relations. Family ties and ethnic group membership typically provide the social underpinnings of these economic relations.

The ability to draw on social connections in order to gain access to resources that are useful for economic action is an example of what scholars refer to as social capital. The literature describes many ways in which immigrants make use of family- and ethnic-based interpersonal connections in gaining access to resources such as business related information and financial credit. Economic activities, embedded in social relations, necessitate a sense of interdependence among in-group members that engenders trust and solidarity, and allows for sanctions to be imposed on those who violate the trust of others. Understanding such practices, which are steeped in informal institutionalized arrangements, is essential for understanding the origins and maintenance of ethnic/ informal economies.

Interest in ethnic/informal economies is part of a larger scholarly examination of economic segmentation. This view conceives of the labor market as divided into a primary market where opportunities for advancement are prevalent and a low-wage secondary market with little opportunity for advancement. Most studies of ethnic/informal economies explore how immigrants draw on family- and ethnic-based social networks in an effort to build economic relationships and institutions that improve group members’ job opportunities and facilitate the growth of self-employment within the group.

What has the literature taught us about the social bases of ethnic/informal economies? Researchers have revealed a number of informal mechanisms based on social relations that facilitate economic action. The most important outcomes of these mechanisms are the dissemination of employment and business related information, and providing access to informal financial institutions. Normative use of these resources and the repayment of debts are encouraged by enforcing trustful behavior under the threat of sanctions. Informal social bases of economic action tend to emerge among groups as members try to overcome limited economic options due to language barriers, poor human capital, or non-fungible foreign-earned human capital. And immigrant groups often face discrimination and prejudice. A tendency for group members to react to these problems by looking within their group for practical and emotional support encourages ethnic solidarity, which in turn encourages informal group practices that provide access to resources. Internally generated resources contribute to the growth of self-employment and this leads to increased opportunities for getting ahead. But there are winners and losers in the ethnic community. People seeking to better their lives and that of their family are involved in the rough and tumble environment of market economics. Even a modicum of success in small business usually requires out performing some competitors and matching the performance of others. This is a daunting task because ethnic/informal economies tend to be hotbeds of competition between small businesses.


  1. Portes A. & Sensenbrenner J. (1993) Embeddedness and immigration: notes on the social determinants of economic action. American Journal of Sociology 98: 1320-50
  2. Sanders J. and Nee, V. (1996) Immigrant self-employment: the family as social capital and the value of human capital. American Sociological Review 61: 231-49.

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