The impact of international economic sanctions on informal employment

Economic sanctions have become an increasingly common instrument of foreign policy, promoted as a non-violent alternative to military intervention. However, their effects on labour markets remain underexplored. This column examines the case of Iran following the unprecedented international sanctions imposed in 2012 to investigate how sudden and extreme shocks to market access affect the allocation of workers across informal and formal employment. Following the sanctions, workers in industries with greater pre-sanctions exposure to international trade experienced a significant rise in informal employment compared to workers in less-exposed industries. This highlights the role of informal employment as a buffer in absorbing external economic shocks.

Research shows that sanctions reduce GDP growth (Laudati and Pesaran 2023), curtail international trade (Haidar 2017, Felbermayr et al. 2025), and deter foreign direct investment (Mirkina 2018). They also tend to increase poverty (Neuenkirch and Neumeier 2016), widen inequality (Afesorgbor and Mahadevan 2016), hinder human capital development (Chakravarty et al. 2021, Moeeni 2022), and impair firm performance (Ahn and Ludema 2020, Shamsi 2023). ¹ In some cases, sanctions also foster the criminalisation of the economy and state of both the target country and its neighbours, encouraging illegal economic activities such as smuggling (Andreas 2005, Crozet et al. 2021, Bove et al. 2023). Surprisingly, however, there is little evidence on how sanctions affect labour markets.

What happens to jobs when a country is cut off from the global economy?

The sharp reduction in imports and exports triggered by trade embargos can cause job losses in export-oriented industries and those heavily reliant on imported inputs – the materials and components used in the production process (Moghaddasi Kelishomi and Nisticò 2022). Sanctions can also prompt labour reallocation across industries (Etkes and Zimring 2015, Moghaddasi Kelishomi and Nisticò 2022).

Our study (Moghaddasi Kelishomi and Nisticò 2024) shows that this reallocation may also occur between the formal and informal sectors. We hypothesise that in industries highly dependent on imported inputs, sanctions disrupt business operations in ways that increase the likelihood of informal employment. Firms may respond by shifting part of their workforce off the books to cut costs. At the same time, displaced workers may move into informal firms, where employment is more precarious and typically lacks legal protections.

Key findings

We find that:

• Workers in more trade-exposed industries were 5 percentage points more likely to be informally employed after the sanctions.
• Sanctions did not change the overall employment rate or incidence of part-time work, suggesting that the labour market adjusted primarily through rising informality, not job losses.
• The increase in informal employment was concentrated among less-educated workers, underscoring the regressive impact of sanctions.

Figure 1 illustrates the differences in the share of informal employment for industries more versus less exposed to international trade in the three years preceding and the three years following sanctions, from 2008 to 2014. Prior to sanctions, informal employment followed a similar trend across both more and less exposed industries. Following the sanctions, however, the trends sharply diverged. Workers in more exposed industries faced a significantly higher likelihood of being engaged in the shadow economy since 2012, providing evidence that the sanctions were responsible for a 9% increase in informality. The gap in informal employment grew in 2013 and 2014, suggesting that the sanctions had a lasting impact.

We two different measures of informality – lack of social security coverage and employment in small firms – and find consistent results. The 9% increase refers to the main measure; an alternative estimate shows a 6% increase, confirming the robustness of the findings.

Figure 1 Estimated differences in informality rates across industries more versus less exposed to international trade, before and after sanctions (event-study analysis)

Source: authors’ computation based on study data.

Contribution to the literature

Our paper relates to two different lines of research. First, we contribute to the literature on the economic effects of sanctions by focusing on their labour market consequences. Specifically, we provide the first evidence on how sanctions affect the reallocation of workers from formal to informal employment. Second, we add to the growing literature on worker-level labour market effects of trade shocks (Autor et al. 2014; Dix-Carneiro and Kovak 2019). While much of this literature focuses on trade liberalisations – typically through increased import competition – as the primary channel, we offer a different perspective. We exploit the unexpected trade embargo imposed on Iran in 2012 as a quasi-natural experiment to estimate how workers adjust to sudden trade disruptions. While sanctions represent a more severe and abrupt form of negative shock to the economy than a unilateral trade opening, our findings highlight the importance of market access, especially for imported inputs, as an alternative mechanism behind the effect of trade shocks on informality. Unlike the conventional narrative, which emphasises increased foreign competition, we argue that trade embargoes exert their impact by disrupting domestic production. This distinction underscores an alternative channel, which is relevant not only for sanctioned economies but also for understanding the broader consequences of trade policy reversals.

Policy implications

Our study provides insights into a potentially important margin of labour market adjustment through which sanctions can affect the economy of the target country. Our findings highlight the role of the informal sector in absorbing a substantial number of workers displaced by international economic sanctions, therefore carrying relevant policy implications for addressing informal employment and providing targeted social support to trade-displaced workers.

The policy implications are threefold:

• Informal employment acts as a buffer for workers displaced by sanctions, helping avoid mass unemployment. While this flexibility can mitigate short-term social unrest and prevent spikes in open unemployment, it comes at the cost of reduced productivity, tax compliance, and worker protections. A growing informal sector can weaken the economy over time by shrinking the tax base, eroding labour rights, and diminishing human capital investments
• Since poorly educated and low-skilled workers are disproportionately pushed into the informal sector under sanctions, targeted domestic policy interventions – such as wage subsidies, vocational training, or conditional cash transfers – can help mitigate these regressive effects
• Iran’s experience is instructive for other countries facing economic restrictions – such as Russia, Venezuela, Afghanistan, and North Korea. Informality may provide short-term relief, but over time it entrenches inequality and hinders growth. Aid agencies and sanctioning governments should account for these unintended humanitarian consequences.

Conclusion

Economic sanctions are intended to alter state behaviour without the use of force. But their domestic effects, particularly on vulnerable labour markets, are often overlooked. As our study shows, sanctions can trigger significant shifts into informal employment, especially in sectors closely tied to global trade. Policymakers must recognise this channel of adjustment—and the trade-offs it entails—when designing both sanctions regimes and support mechanisms for affected populations.

Source : VOXeu