Question

• What is meant by the term “informal economy”? What are its characteristic features? What relation does it have to the “formal” economy, and what challenges has it presented for how we think about the economy?

Answer 1

What is meant by the term “informal economy”? What are its characteristic features? What relation does it have to the “formal” economy?

Most economies of the world prefer to have a stable form of employment which can easily be tracked and include in the gross domestic product of the economy.

Majorly all developed countries of the world have a major section of the economy being formal which can easily be tracked by the relevant tax authorities and have a stable employee employer relationship thus being formal in their approach respectively.

On the other hand primarily in the developing and underdeveloped countries employment is not certain and sees people doing jobs with no significant rules being in play for their survival. The revenue generated through these jobs is usually in the form of cash and does not get tracked while measuring an economies relative success nor are these industries tracked since the amount of money which employees usually generate is significantly low respectively.

Formal sector is characterized by a definite employee employer relationship and is closely monitored by all relevant agencies be it employment tracking ones, taxation authorities or others which require such data to be analyzed on real time basis respectively.

On the other hand, informal sector is characterized by no employee employee relationship and cash payment which can also be daily in nature. Further the working conditions and hours are not defined and are primarily found in underdeveloped or developing countries respectively. The choice of work maybe legal or illegal dependent upon the type of industry but usually these workers have no tax obligations and cannot be included while calculation of the gross national product of the country as a whole respectively.

What challenges has it presented for how we think about the economy?

The major challenge which this presents on how we think about the economy is that the in tracking of an economies activity this sector never gets tracked. So the actual rates may be different in real life than reported by the country.

Further these industries do not have a defined employee and employer relationship and therefore it becomes extremely hard for authorities to tax, track or include in any welfare scheme.

Therefore when the government tells us details of growth, employment rates, gross domestic product or others, the informal sector is never included in the same. This may lead to a situation when we might feel that an economy is doing well while on the other hand, this may not be true on ground respectively.

Please feel free to ask your doubts in the comments section.