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This paper explores the relationship of the informal economy to the formal economy and to the formal regulatory environment. It begins with a comparison of the earlier concept of the ‘informal sector’ with the new expanded concept of the ‘informal economy’, which includes microentrepreneurs, own account operators, informal wage workers, and industrial outworkers. It argues that (a) most informal enterprises and workers are intrinsically linked to formal firms; (b) different segments of the informal economy are over-regulated, de-regulated, or under-regulated; and (c) there are benefits and costs to both formality and informality. The paper concludes that the appropriate role for government is (i) to ensure that the formal regulatory environment is not biased in favour of formal firms and workers over informal enterprises and workers (or vice versa) and (ii) to regulate the commercial and employment relationships between formal firms, informal enterprises, and informal wage workers.

This study documents four key facts about informal economic activities: (1) the size of the informal sector varies greatly across nations; (2) this size is strongly correlated with economic development, the tax burden, and the rule of law; (3) the informal sector emphasizes small‐scale, self‐financed, and unskilled labour- intensive economic activities; and (4), while financial markets are generally segmented along formal/informal lines in developing nations, there is no compelling evidence that this is true for labour markets. The chapter reviews the existing theoretical literature on the informal sector and describe a simple model with a trade‐off between tax evasion and access to formal sources of outside finance that is consistent with much of the existing evidence. Finally, the study discusses the challenges associated with measuring informal sector assets.

This paper studies the effects of regulation on economic growth and the relative size of the informal sector in a large sample of industrial and developing countries. Along with firm dynamics, informality is an important channel through which regulation affects macroeconomic performance and economic growth. A heavier regulatory burden, particularly in product and labour markets, reduces growth and induces informality. These effects are, however, mitigated as the overall institutional framework improves.

Indonesia’s posyandus are an excellent example of important local quasi-public goods (health care) produced largely by volunteers, but with crucial inputs from government and other formal sector providers. This paper identifies the circumstances under which the formal sector’s inputs are especially successful in inducing voluntary activities that contribute to both the quantity and quality of the care provided. Data from three rounds of Indonesia’s Family Life Survey (IFLS) are used to estimate the causal effect of formal sector interventions on the quantity and quality of the healthcare provided by the informal sector. The model includes posyandu and community level fixed effects so that the effect of the intervention is identified using only longitudinal variation in the extent of interventions.

The Westphalian paradigm suggests that sovereign nation-states formally constitute the only legitimate institutions of international policy creation, enactment, and enforcement. This paper seeks to highlight the policy potency of nongovernmental organizations by turning to a debate that questions the relevancy of the Westphalian paradigm. One of the most contentious points in this debate is the role and legitimacy of the various actors involved in globalization. The mechanism of ‘soft law’ is discussed, which allows non-state actors to participate — in an increasingly formalized way — in policy processes traditionally and even exclusively populated by sovereign nation states. Ostrom et al.’s Institutional Analysis and Development (IAD) framework is used to clarify the institutional implications of non-sovereigns in policy formation. Ultimately, the soft law mechanism illustrates that the informal sector is gaining access — as and through NGOs — to powerful policy networks where formal sovereignty is decreasingly relevant.

This chapter analyses the impact of India’s external trade on employment in the post-liberalization era. It arrives at the conclusion that although India’s exports have increased, they have not had any noticeable impact on employment. The chapter attributes this pessimistic finding to the skill-intensive nature of India’s exports, shedding of excess labour by most firms in the manufacturing sector, and growth in labour productivity. The incorporation of the informal manufacturing sector in the analysis of the impact of trade on employment is an important feature of this chapter.

This chapter deals with specific micro-econometric characteristics reflecting on some aspects of formal–informal relations. Certain observations in the chapter were derived from primary surveys conducted in the states of West Bengal, Maharashtra, and Gujarat. The chapter tries to provide answers to some distinct questions: Whether productivity in the informal sector is lower than it is in the formal sector and what are the constraints in raising productivity in the former? What are the channels through which productivity changes take effect? Is productivity change in the informal sector capable of explaining the wage-employment movements significantly?

This chapter examines unemployment trends since the time of the democratization of South Africa. It argues that the rise in unemployment is best explained by the rapid growth in the labour force relative to the growth of formal sector employment, as a result of which the burgeoning residual labour force was absorbed either into the informal sector, which might disguise unemployment, or into open unemployment. The growth of each of these variables is examined in more detail: in Section 2 the labour force, in Section 3 formal sector employment, and in Section 4 informal sector employment. The main topic, unemployment, is covered in Section 5. Section 6 updates the analysis by examining the period 2003-7 and poses the question: has a turning point now been reached? Section 7 concludes.

This introductory chapter sets out the purpose of the book, which is to analyse the deeper impact of reformatory or deregulatory policies on the welfare of informal workers by incorporating the general equilibrium effects of such policies. The book provides some analyses of political economic issues, governance mechanisms, and the general policy environment that sustains or penalizes the dynamism of informal markets. It also reflects on the organizational relationship between the formal and the informal and related micro mechanisms. An overview of the subsequent chapters is presented, followed by a brief discussion of the elements of economic reforms in India.

This chapter discusses the role of unionization in a country with a sizeable informal segment. It provides a set of examples where formal and informal sector production/service activities coexist for similar product/service categories, where labour is fully mobile, and capital as an input is classified into several specific-factor categories within and outside formal production facilities. It develops two models that are fairly appropriate representations of the true dualistic (formal–informal) production patterns in most developing countries. Using an extended 2 × 2 Heckscher–Ohlin–Samuelson structure with a formal–informal production organization for the same commodity, it is shown that a tariff cut in the import-competing sector increases both informal wages and employment under fairly reasonable assumptions.

This chapter analyses the impact of trade on employment in the informal sector of India’s manufacturing sectors. The analysis is based on data for the year 2005–6, for as large a number as 81,000 enterprises at the 3-digit level of industrial classification, covering 66 industries across 25 states. One of the main findings of the chapter is that forward and backward linkages between the organized and unorganized manufacturing sectors do exist, but these are prominent mostly in the states where the export orientation of industry is considerable. Also, the favourable employment-generating effects of trade are much more significant in the case of relatively large enterprises employing more than six workers. The chapter also suggests that increased imports in the post-liberalization era may have destroyed jobs in the manufacturing sector. It concludes with suggestions for promoting employment in the manufacturing sector.

This chapter presents a general equilibrium model to theoretically examine the activities of the informal sector in dual economy labour markets. By linking the unorganized sector to the organized sector through aspects of capital mobility and labour productivity, it estimates and theorizes in more formal ways the effects of reforms on the wages and employment status of workers in the informal sector. It establishes via rigorous general equilibrium models that trade liberalization in the formal sector can raise both employment and wages in the informal sector if capital is easily mobile between the two sectors. Even if capital is sticky, downsizing of the capital-intensive import-competing sector may lead to increased output in the labour-intensive informal segment and an increase in informal wages. The issue of capital mobility thus takes on an important role in shaping the magnitude and directionality of informal wages subject to exogenous policy changes in the organized sectors of an economy.

The informal sector industry in India is large and important both in terms of employment it provides and industrial output it generates. According to recent estimates for India, the informal sector employment was as high as 92.8 per cent of total employment in 2009–10. Further, as elsewhere in other developing countries, an often noted feature the informal sector is that it is not a transitory phenomenon. Understanding the functioning of the informal sector is, therefore, necessary, for understanding the economic structures of countries such as India. This chapter traces the origin of the concept of informal sector and related debates. It briefly discusses the State’s approach to the informal sector in India and presents some estimates of the magnitude of the sector. It also provides an overview of the challenges and constraints faced by small and informal manufacturing enterprises in India.

This chapter examines the connection between production and outsourcing from the formal sector and its implications for economic development within its large informal counterpart. It primarily discusses the nature of production organization between the formal and informal sectors operating through vertical linkages and subjected to external shocks. It contemplates that deregulation, economic reforms, and increasing global exposure should affect informal activities, wages, and employment in a developing country.

This book is about poverty and the urban informal sector, as engaged in by the garbage collectors or scavengers and the plastic recycling or scrap trading entrepreneurs of Delhi. It explores a variety of questions regarding these entrepreneurs through a ‘field-view’ rather than ‘book-view’ of Indian society, and as seen through the lens of every successive layer of an urban informal sector market chain, that of scavenging and plastic recycling. While theoretical ideas about poverty, human development, and markets are interwoven into each chapter, this introductory chapter briefly sets out the present-day scenario in India as regards the existence of the informal sector and urban poverty. It also discusses neoliberal reforms and labour market dynamics in present-day India and contextualises the existence of the informal waste recovery and plastic recycling sector in developing countries.

This chapter summarizes the results of the volume and discusses relevant issues and areas for further research. Once viewed as a precipitate of formal activities, the informal sector has gradually expanded in as many forms as imaginable in a complex economy. Yet it has received less than its due emphasis in appropriate contexts essentially because it predominantly remained a feature of underdevelopment. It emphasizes the need for more research in order to comprehend how formal institutional support may be extended to informal enterprises for inclusive development.

Begins with a discussion of why industrialization is usually accompanied by the concentration of industries in urban areas. It then introduces the Harris–Todaro model, which has been the dominant model of migration in the subject of economic development. In this model, a relatively high, exogenously fixed manufacturing wage pulls rural workers to the urban formal sector, migration ceasing only when the urban informal sector is large enough to equalize the rural wage with the expected urban wage. A subsequent model uses the fact of asymmetric information between employers and employees that leads to adverse selection to make the high manufacturing wage endogenous. The concluding model incorporates forward‐looking behaviour, selection, job search in the city, and the role of immigrant worker network in this search.

The purpose of this chapter is to assess the compatibility between theoretical models of the urban informal sector (UIS) and empirical evidence on the workings of that sector in the context of developing countries’ labour markets. The major point is that, although the UIS is an excellent idea which has served us well in the 1970s and 1980s, there is a need in the next round of research to refine the terminology and the models in light of empirical findings which have come to the fore in the interim. Wage employment or self-employment in small-scale units may be better than or worse than employment in the formal sector. This is not a new point: diversity of earning opportunities and other job characteristics within the informal sector has long been noted. But only recently has this view come to the fore.

This chapter examines the welfare implications of changing wage and employment situations in the informal sector by constructing a comprehensive model. The structure involves an agricultural sector and incorporates several allied issues central to the considerably neglected analytical relationship between agriculture and informal activities. It is well known that better prospects for agricultural exports and productivity should increase agricultural wages. However, such an outcome depends on capital movement between the formal and informal manufacturing sectors. The inter-relationship sought between the agricultural and manufacturing sectors offers added value to a general set of results that focus on effects of external shocks to movements in informal wages and employment.