The informal sector includes economic activities that are not regulated or taxed and often arise out of necessity. It can be difficult to define and varies greatly, but tends to have a lack of taxation in common. The extent of the sector is difficult to assess and can result in economic damage.
An informal sector refers to economic activities that do not meet the characteristics of traditional sectors. These economic activities are often carried out 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 individuals try to create definitions, they are often subject to scrutiny and debate. The reason for this is because the term informal sector can be applied to a wide range of activities in a variety of settings, motivated by different motives. One of the safest ways to describe this part of an economy, therefore, is to say that it does not fit the terms and definitions of any formal sector.
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 there are a limited number of jobs. As a means of survival, individuals develop methods to earn income. This usually involves the creation of informal industries. Although not subject to regulation, as they become more common, standards can be developed.
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 who stay on the street and watch vehicles to prevent this from happening. While this type of arrangement is usually on a donation basis, the standards mandate appropriate payments for these services. Standards may also require higher payments to be made at night.
While informal sectors can vary greatly, there is one thing they tend to have in common: a lack of taxation. While some of these sectors 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 result in economic damage. This usually occurs when there is an important informal sector that involves an illegal activity, such as black market exchange.
It is often difficult to assess the extent of an informal sector, as there are no means of measuring it. Little, if any, documentation is likely to exist detailing methods and participants. The revenue generated tends to be hidden or immediately reinvested in other segments of the economy.
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