What Is the Difference Between Formal and Informal Sectors?
The formal sector consists of the businesses, enterprises and economic activities that are monitored, protected and taxed by the government, whereas the informal sector is comprised of the workers and enterprises that are not under government regulation. British anthropologist Keith Hart coined the term “informal sector” in 1973 as part of a study on Ghana. There are many conflicting theories as to the role and benefits of the informal sector.
In contrast to the formal sector, the laborers, businesses and activities that make up the informal sector are not registered with or taxed by the government. For this reason, scholars sometimes refer to the informal sector as the black market, shadow economy or underground economy. Originally, the term referred to self-employed small enterprises like street vending, sewing, artisanry and small farming. It now also includes wage-earning jobs like crop-harvesting, cleaning and any other unprotected occupation.
Academics and policy-makers view the informal sector with conflicting views. Some believe the informal sector fuels entrepreneurialism and provides a cushion during economic crises. Others argue that the informal sector undermines taxation and regulation and thereby weakens the overall economy.
Globally, the informal sector is steadily growing. It constitutes the majority of the economy in both Latin America and Africa. This pattern is the result of governments’ failure to plan for sufficient formal jobs in the face of expanding global communication and competition.