From the hawkers, rickshaw drivers and shoe shiners on the streets of downtown Jakarta to the cash-in-hand car mechanics, cleaners and nannies in the smart neighbourhoods of London, the underground economy is booming.

It is predicted that two thirds of the world’s population will be employed without contracts, protection or social benefits by 2020 as the global recession forces people into low-paid work.

Figures published by the Organisation for Economic Cooperation and Development (OECD) show that the world has more people working informally than formally. Campaigners emphasise that informal workers are not necessarily illegal workers. The OECD says that a record 1.8 billion workers are employed in underground activities, compared with 1.2 billion in the formal sector.

The organisation notes that, during a recession, “dismissed workers frequently have to move to the first available job, even if it is of a lower quality than the one they have lost”. It says that this will have a profoundly negative effect on the United Nations’ Millennium Development Goal to halve the number of people who live on less than $1 (69p) a day.

Johannes Jütting, a senior OECD economist and one of the authors of the OECD’s report, says that although the world economy has grown in recent years, employment and its link to poverty was ignored. “Employment has been overlooked for the last 20 years, but the global recession has put it back on the agenda,” he said. “Labour is about the only thing that the poor has to fight off poverty.”

The report is long overdue, according to Martha Chen, a lecturer in public policy at Harvard University and a co-ordinator of Women in Informal Employment: Globalising and Organising (Wiego), a think-tank. She said: “It’s not necessarily true to say that if you develop and grow an economy you create jobs, and it took a long time for the UN to realise that if you are going to talk about poverty, you need to talk about employment.”

However, Dr Chen notes that “national governments have very little say in how people are paid”, and that it is the private sector that can influence the degree to which jobs are formalised, particularly in a globalised world in which multinationals can have a greater say in who gets employed to produce their goods. “We need more corporate social responsibility and we require a mindset change in labour registration,” she said. “So much of the world is operating without it.”

Historically, the underground economy has been seen as problematic. Governments say that they lose tax revenues, unions bemoan workers’ lack of rights, entrepreneurs say that it lacks dynamism and limits job creation, and antipoverty campaigners are critical of low wages and the exploitation of the poorest.

However, Friedrich Schneider, Professor of Economics at the University of Linz, in Austria, believes that the OECD figures for the informal sector are “incredibly high”. He says that it can be dynamic and that in some countries it is an economy in its own right. It takes shape in different ways.

Professor Schneider said: “There are examples where those in developing countries have both a formal job, say, as a policeman, but who also work informally as a security guard. It is not straightforward to say that reducing the informal sector will reduce poverty. One should also ask: ‘How large would poverty be if we had no shadow economy?’.”

He also cautions that rapid scaling-down of an underground economy can have unintended consequences “We’ve seen in places like Colombia that without the informal sector, people enter into criminal activities, such as the drugs business,” he said.

“What is more important is that countries are allowed to develop. The best policies are for developed countries to open their agricultural markets and let them export their goods. Then they can earn a decent income and the developing countries can then consider setting up social security systems to support the workers.”

It is not only developing countries that need to accommodate the informal sector. Maeve McGoldrick, of Need Not Greed, said: “People have been forced to work cash-in-hand in the UK because of poverty and the welfare state. What the authorities see as a problem could, in fact, be a solution if they could harness the informal economy by providing support rather than criminalising people.”

The informal sector may also provide opportunities and a safety net in a way that governments cannot. “Informal work can help to free budding entrepreneurs from red tape,” Duncan Green, head of research for Oxfam, said. “It is often the paperwork and hassle rather than taxation that make people choose not to be in the formal sector. The informal market is particularly important where there is no welfare state to offer alternative sources of security and income.”

However, Mr Green cautions: “We would say these benefits are often exaggerated. The informal economy is here to stay, but it is generally not something to celebrate.”

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive