The informal sector refers to economic activity that operates outside formal regulatory frameworks: unregistered businesses, undeclared workers, cash-based transactions, and self-employment without legal protections such as contracts, pensions, or workplace safety standards. The term was popularized by anthropologist Keith Hart in his 1973 study of urban labor in Accra, Ghana, and was rapidly adopted by the International Labour Organization (ILO) in its 1972 Kenya employment mission report.
Typical activities include street vending, smallholder farming, domestic work, informal transport (such as matatus, jeepneys, or tuk-tuks), waste picking, and unregistered home-based manufacturing. Workers in this sector generally lack access to social security, collective bargaining, and formal credit, and they are often invisible in national statistics.
According to ILO estimates published in Women and Men in the Informal Economy: A Statistical Picture (3rd edition, 2018), roughly 2 billion workers — about 61% of the global employed population — earn their living informally, with the share exceeding 85% in sub-Saharan Africa and significantly lower in advanced economies. Women are disproportionately concentrated in the most precarious informal activities.
Policy debate around the informal sector tends to fall along several lines:
- Dualist view: informality is a residual of underdevelopment that will shrink with growth.
- Structuralist view: informality is produced by how formal firms outsource risk and cost down the value chain.
- Legalist view, associated with Hernando de Soto's The Other Path (1986), argues that burdensome regulation pushes entrepreneurs into informality.
- Voluntarist view: some workers rationally choose informality to avoid taxes and red tape.
The ILO's Recommendation No. 204 (2015) on the Transition from the Informal to the Formal Economy is the leading international instrument guiding formalization strategies, emphasizing rights, productivity, and social protection rather than mere enforcement.
Example
In India, the 2016 demonetization of 500- and 1,000-rupee notes by the Modi government disproportionately disrupted the informal sector, which the Periodic Labour Force Survey estimates employs over 80% of the country's non-agricultural workers.
Frequently asked questions
The informal sector covers legal activities conducted outside regulatory frameworks (e.g., unregistered street vending), while the shadow or black economy typically also includes illegal goods and services. The categories overlap but are not identical.
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