Difference Between Formal and Informal Sector

In economic terms, the difference between formal and informal sectors is a thing of regulation. The formal economy includes reported payroll items, income taxes, employee taxes and any other official economic factors. The formal sector is an increasingly complex system of economics that historically grew out of the informal sector. The informal sector refers to parts of the economy that are not .

In economic terms, the difference between formal and informal sectors is a thing of regulation. The formal economy includes reported payroll items, income taxes, employee taxes, and any other official economic factors that come with a set system of regulations. The formal sector is an increasingly complex system of economics that historically grew out of the informal sector.The informal sector refers to parts of the economy that are not taxed, regulated, monitored, or included in the gross national product. In this article, the chief differences between the two are discussed briefly.Often called "working under the table," jobs in the informal sector are not reported, and so, more often than not, are not taxed or even monitored. Such jobs are paid in cash, and are usually less secure or stable because they are not protected by government regulation of any kind. The informal sector also includes the "black market," which involves the unregulated trade of goods and services, which includes contraband. An example of this type of commerce is the buying and selling of Cuban cigars; because of the trade embargo, it is illegal to take part in this type of busines trade, however, the demand for authentic Cuban cigars has created a market where a buyer is willing to pay an exorbitant amount for them; the problem of lax regulation exists in that there is absolutely no guarantee that what the person is buying is actually an authentic product.Though difficult to measure or define, the informal sector is an important element in the functioning of any country. Many developing countries have economies much more heavily based in the informal sector simply because regulations, firms, taxes, and other such structures are not yet established. Governments tend to strive toward formalization for the sake of efficient international interaction, however the process is complicated and long-term.