We examine how trade sanctions affect the allocation of workers across formal and informal employment. We analyse the case of unprecedented trade sanctions imposed on Iran in 2012 and use a difference-in-differences approach to compare the probability of  working in the informal sector before and after 2012 for individuals employed in industries with pre-existing different levels of exposure to international trade. Our findings suggest that, in the short run, the informal sector absorbed a significant fraction of workers displaced by the trade shock caused by the sanctions, shedding light on a potentially important dimension of labor reallocation whereby trade sanctions can affect the economy of the target country.