People who work and claim benefits do so often because they are in dire financial trouble, a Joseph Rowntree Foundation (JRF) study has said.
Many claimants took illegal cash-in-hand jobs to pay for food and heating or to make debt repayments.
The study's author said they were "hard-working, ordinary people trying to survive day by day".
The study called for reform of the tax and benefits system to move people from illegal jobs into legitimate work.
The JRF study was based on six years of work by the East London Community Links project.
"The government needs to understand and include the informal economy in all its strategies if it is to reach its employment, anti-poverty and regeneration targets"
The Community Links project offers those in deprived areas education, childcare provision as well as help and advice.
It found that people working and claiming benefits did so out of "need not greed".
Spokesman Aaron Barbour said: "If you're poor and living in a deprived area, informal work is actually helping people out of absolute abject poverty, helping them survive.
"It's providing for the basics like food and heating."
Despite the introduction of tax credits, designed to supplement the incomes of the low-paid, many people in the study said they felt the system trapped them in a poverty cycle.
In short, the tax and benefits system provided these people with few financial incentives to give up benefits and declare paid work.
More understanding
People with health and childcare issues were particularly prone to working in what is often called the "informal economy".
"They are hard-working, ordinary people trying to survive day by day," Aaron Barbour, study author and Community Links' policy development manager, said.
"The government needs to understand and include the informal economy in all its strategies if it is to reach its employment, anti-poverty and regeneration targets," he added.
The study called for there to be more support, training and development for people who wanted to move from cash-in-hand to formal work.
It added that there also needed to be tax and benefit reform, based on an understanding of why people worked cash-in-hand.
In addition, employers needed to allow more flexible working for those with health and childcare issues.
As for government measures to combat benefit fraud, the study concluded they had "limited success where poverty drives the decision to work informally".
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