We often refer to the Informal Economy as the informal sector or grey economy. Informal Economy unlike the formal one is not taxed and neither is monitored by any form of the government.
The fact cannot be avoided that the Informal sector does contribute a significant portion to the economy of the developing nations. But the next fact is that Informal Economy can create a bit of trouble and even us unmanageable.
But since the Informal sector provides a critical economy especially to the poor. This is why it has been rapidly expanding for many years. Although it has been spreading at a high rate still it's challenging to merge the Informal Economy into the formal sector.
In many of the countries, the formal economy is included in the GDP or GNP of the country but the activities of the informal economy are not included in Gross Domestic Product or Gross National Product. But this is the case in many of the countries, whereas there are still few nations who have lately or many years ago included the informal Economy in their GDP such as Italy that swells up their GDP by 18%. Even in recent years many of the European nations have also included some of the informal sectors such as prostitution and narcotics in the calculation of their official GDP. This has given the rise in their GDP almost by 3-7%. Also, remember that the informal sector added in such a way is also described as a grey market in labor.
Some of the other things that are included in the informal sector are the black market, underground economy or the shadow economy, agorism, and system D economy. Receiving such an economy is also sometimes referred to as the money received under the table or of books records or even working for the cash.
Nature of Informal Economy
This sector has several characteristics and qualities including skills that are gained being far from formal education. The informal sector has easy entry without any restrictions. This means anyone can join the sector without any experience or qualifications, you can instantly join the work and get cash in return. In the Informal sector, you won't find any properly established relationships between the employer and the employees that lack stability. It is operated on a small scale without much investment.
You cannot exactly define the work done in the informal sector. The type of work varies and is also diverse and depends on the amount invested in the work, technology being used, and the income generated by the work. And the workers participating in such a sector and working there are classified as employed one.
There is a huge spectrum of jobs or works that are included in the informal sector. It includes the oneself-employed or unpaid family labor to the street vendors. It does include shoe shiners or junk collectors. This will give you an idea about how broad the informal sector is. Since this was the lower tier of the informal sector, the upper tier of the informal sector is also there that majorly includes the small scale services or the manufacturing businesses with limited entries. This upper section of the informal sector has higher setup costs as compared to the other work and even they have complicated license management with irregular working hours. But the major thing or major information that arises here is that the people associated with the informal economy, even if they are self-employed, don't have the work protection, benefits, or representations. These features are much different as compared to the employees of the formal sector since they have structured benefits, regular working hours, and proper location.
Social impact and viewpoint
As per the theories and ground researchers, it is found that the workers associated with the informal sector earn less than those associated with the formal sector. Not only do they receive low wages but as they do not have job protection, stable income. But besides all these drawbacks, Informal Economy is still a great portion then the people realize. The women also have a great role in the Informal Economy since the poor working women are highly concentrated in the Informal economy.
The informal sector also many times lacks the growth potential and can also trap the employees in menial jobs. But it also provides a chance for a large portion of the population to escape from extreme poverty and provides them an opportunity to fulfill their basic needs. But this doesn't mean that the people trapped in poverty only become parts of the informal economy. Even the people engaged in the formal sector do the Informal jobs as their part-time work to add advantage which is called moonlighting.
If we observe this from the viewpoint of the government, then as per them the informal sector is creating a vicious cycle. Since this sector isn't included in the GDP calculation, the government may be hindered from collecting tax from them to finance the public sector.
But still, some governments see it as a benefit as it enables excess labor to be absorbed and also mitigates unemployment issues. The informal sector can produce goods, generate employment, and contribute to exports and imports which is critical for the government as well. The informal sector has not been registered with the state and this is why neither can form a trade union or can get social security.
Informal Economy workers put in more working hours as compared to the formal Economy workers who are protected by many employment rules and regulations.
Therefore, although the Informal Economy is not included in the calculation of the GDP still it contributes a great portion to the economy. The very first advantage generated by the informal sector is that it helps in eradicating poverty and provides people with enough wages to fulfill their basic needs such as goods, clothes, shelter, etc. This is why equal importance should be given to the informal economy as well and it should be supported. Even the people associated with the informal Economy should be provided with the proper security of wages and employment.