The informal sector includes economic activities that do not fit traditional sectors and are often developed out of necessity. They are not regulated or taxed, and can involve illegal activities. Lack of opportunity often drives informal sectors, and they tend to lack taxation. It is difficult to assess their extent due to little documentation.
An informal sector refers to economic activities that do not fit the characteristics of traditional sectors. These economic activities are often developed out of necessity and are not regulated or taxed. In some cases, they may involve illegal activities, but this is not always the case.
An informal sector is a concept that can be very difficult to define. Even when people attempt to create definitions, they are usually subject to scrutiny and debate. The reason for this is because the term informal sector can apply to a wide range of activities in a variety of contexts which are driven by different motives. One of the safest ways to describe such a portion of the economy, then, is to say that it does not fit the terms and definitions of any of the formal sectors.
In many cases, an informal sector is driven by a lack of opportunity. This is often seen in third world countries where unemployment is high and the number of jobs is limited. As a means of survival, individuals develop methods of earning income. This often involves the creation of informal industries. While these are not subject to regulation, as they become more common, standards may develop.
For example, in some countries the theft of easily removable auto parts such as windshield wipers, side mirrors and hubcaps is extremely common. Identifying an opportunity, there are people standing in the street and guarding vehicles to prevent this from happening. While this type of arrangement generally operates on a donation basis, regulations dictate adequate payments for these services. Standards may also dictate that higher payouts should be provided at night.
While informal sectors can vary widely, there is one other thing that they all tend to have in common: the lack of taxation. While some of these industries can generate a substantial amount of revenue, the nation or local jurisdiction does not receive direct benefits. In some cases, the existence of such sectors can cause economic damage. This often occurs when there is a significant informal sector involving an illegal activity, such as black market foreign exchange.
It is often difficult to assess the extent of an informal sector because there are no means to measure it. There is likely to be little documentation relating to the detailed methods and participants. The revenue generated tends to be hidden or immediately reinvested in other segments of the economy.
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