Informal Sector / Unorganized Sector
The term ‘informal sector’ was first used by Keith Hart in 1970s (The Informal Economy) during his field work in urban areas of Ghana (Income Opportunities and Urban Employment in Ghana). During his field work among the urban workers in Ghana, he came across to a large self-employed sector, which provided means of livelihood for new entrants to the urban labour force who failed to acquire employment in the formal sector.
International Labour Office (ILO), from its country mission in Kenya (1972) widened the scope of informal sector. As per ILO, an enterprise should be classified as informal, if it employs only a handful of workers on low in curve, using simple equipment and works outside the framework of laws and regulations.
1. The ILO report on Employment, Incomes and Equality in Kenya (1972) defined informal sector by the characteristics of the economic unit.
2. In the fifteenth International Conference of Labour Statistician in 1993. It defined informal sector as follows:
The informal sector is regarded as a group of household enterprises or unincorporated enterprises owned by household that includes:
a. Informal own-account enterprises, which may employ contributing family workers and employees on an occasional basis; and
b. Enterprises of informal employers, which employ one or more employees on a continuous basis.
3. According to Narul Amin, the informal sector is usually defined to include all economic enterprises and employment that are not protected or regulated by the government laws and social security system.
4. Kanpe Ronald Hope defines informal sector as the subterranean sector alternatively reformed to as the informal, hidden, underground, shadow, secondary, black, invisible or parallel economy.
5. Nick Devas and Carde Rakodi, opined that the informal sector is a common shorthand term for small scale, un-enumerated, sometimes illegal economic activity.
6. Kulshretha defines informal sector as the sector of economy where the labour force is self-employed with family support in income activities such as trading and street vending that do not have formal structure and designated areas and is characterised by small scale labour intensive operations.
7. As per Meshram, the informal sectors are traditionally said to include the mass of the working poor whose productivity is much lower than in the modern informal urban sector.
GROWTH OF INFORMAL SECTOR IN INDIA
In the mid 1950s, W. Arthur Lewis developed a theoretical model of economic development based on the assumption that there was an unlimited supply of labour in most developing countries and that this vast pool of surplus labour would be absorbed as the modern industrial sector in these countries grew. The informal sector plays a vital role in economic development of all the countries. Particularly, developing countries one third of national income comes from this informal sector only. The informal sector reduces the unemployment. The entrepreneurs are in this sector for their livelihood rather than for making more profit. Some informal entrepreneurs are earning more than the formal employees in our country, like vegetable vendors, agents, brokers, foot-path traders etc. Majority of the entrepreneurs are community based in this sector. In India, each community has their own business. Rural, urban and city side also community based entrepreneurs are more. For example, foot wears and beauty parlor etc. The informal sector develops the Indian economy invisibly. Most of the rural and urban people are continuing their family business, because of lack of employment opportunity. In India most of the family businesses are in the informal sector. The earned income from this sector has utilized for the purpose of their children education, family commitments, personal savings, etc. So, the government should take necessary steps to convert this sector into formal.
Over the past decade, the informal economy is said to account for more than half of the newly created jobs in Latin America. In Africa it accounts for around eighty percent. Many explanations exist for why the informal sector has been expanding in the developing world over the past few decades. The kind of development that has been occurring may have failed to support the increased labor force in a formal manner. The increased subcontracting can also explain expansion due to globalization and economic liberalization. Finally, employers could be turning toward the informal sector to lower costs and cope with increased competition.
Historically, development theories have asserted that economic activity will shift from informal to formal as economies mature and develop. In fact, much of the economic development discourse is centered around the notion that formalization indicates how developed a country’s economy is; for more on this discussion, see the page on fiscal capacity. However, evidence suggests that the progression from informal to formal sectors is not universally applicable. While the characteristics of a formalized economy – full employment and an extensive welfare system – have effectively organized work and welfare for some nations, such a structure is not necessarily inevitable or ideal. Indeed, development appears to be heterogeneous in different localities, regions, nations, and the type of work practiced. For example, small-scale businesses and manufacturing are at one end of the spectrum of the type of work practiced in the informal economy; on the other, “street vendors, shoe shiners, junk collectors and domestic servants.” Regardless of how the informal economy develops its continued growth that it cannot be considered a temporary phenomenon.
It is important to discuss features and characteristics of informal sector, which are as follows:
1. The informal sector is characterised by excessive seasonality of employment and preponderance of casual and contractual employment. It has a typical production organisations and work relationships, absence of social security measures and welfare legislations, negation of social standards and workers rights and denial of minimum wages.
2. The workplace is scattered and fragmented and working hours varies according to the informal agreement between the employer and workers.
3. There is no formal employer and employee relationship. The employer employs workers as per his/her requirement with a formal agreement of wage rate and working hour. There are no such written documents on employment.
4. Workers in the informal sector are usually subject to indebtedness and bondage as their paltry income is insufficient to meet the livelihood requirement.
5. The workers working in the informal sector are subject to exploitation. Their wage rate is considerably lower compared to their counterparts working in the organized sector. The work status is of inferior quality and inferior terms of employment, both in remuneration and employment.
6. The informal workers need to receive more attention from the trade union.
7. The informal sector usually includes economic enterprises and employment not protected or regulated by government laws and social security system.
Problems of informal sector workers
1. Problems of Seasonal employment: The agricultural labourers need continuous work due to rainfall and climatic conditions. On an average a farm labourer finds employment for about 197 days in a year and for the rest of the year they are unemployed. Agricultural labourers cannot get continuous work throughout the year.
2. Problems of the Home-based workers: No policy or Law for home workers exists in India. Most of the labour laws are designed to protect workers' wages and working conditions in the organized (formal) sector. When the workplace is in the home, such laws cannot offer protection to the workers.
3. Problems of the Street, Market Vendors: Most of the Street vendors are subjected to all forms of harassment by the police and the municipal authorities because they do not possess licenses. The harassment vendors faced at work are mainly related to their illegal status. Municipal authorities and police raid their places and confiscated their goods. They had to pay fines to release their goods. This causes loss, as they cannot ply their trade during that period.
4. Problems of Waste Pickers and Recyclers Health Injuries: physical injuries like cuts and pricks are common among them. This is poor segregation at source and the non-usage of protective gloves. Back pain due to manual work and trolley pushing is a problem some collectors face. A waste picker’s health is affected by a variety of factors like living conditions, eating habits, personal hygiene, etc.
5. Labour in informal economy is generally low-paid or gains low returns: Small firms making some money tend to use this to establish more small firms, rarely expanding to become a big firm. It is the lack of assets, capabilities, volatile earnings, poor access to social protection that make this sector vulnerable.
6. Poverty and Indebtedness: Workers in the unorganized sector have a much higher incidence of poverty than their counterparts in the organized sector. The low levels of income and uncertain employment in the unorganized sector make the workers unable to meet their basic necessities and other social and other cultural responsibilities.
7. The prevalence of informal work is also associated with high inequality: Workers with similar skills tend to earn less in the informal sector than their formal sector peers, and the wage gap between formal and informal workers is higher at lower skill levels.
8. Irregularities in Minimum Wages: Most of the studies undertaken to analyse the conditions of employment in the unorganized sector have examined the wage levels and earnings of workers and have found that the daily wages in the informal sector are below the minimum rate of wages.
9. Lack of social security: Often, a worker cannot be economically active. It may be due to biological reasons such as sickness or old age or on account of personal circumstances such as an accident. In the informal sector, there are no social security measures to provide risk coverage and ensure maintenance of basic living standards at times of such crises.
10. Informality also has a gender bias. Women are more likely to be engaged in the informal economy but significantly more likely than men to be working as informal workers in the formal sector. They usually get the most hazardous and laborious tasks. There is gender discrimination with harder work, less work security and lower wages for women.
Factors responsible for the development of informal sectors in India
1. High Levels of Informal Employment: Despite India’s economic growth over the past decades, a significant proportion of non-agricultural employment still falls within the informal economy. This informal sector is characterized by work arrangements not protected by formal labor laws and lacking access to social security benefits.
2. Informality Penetration in Formal Sector: Informality is not confined to traditional sectors like street vending or small-scale manufacturing. Increasingly, informality has penetrated the formal sector as well. This phenomenon arises due to the limited creation of formal jobs to accommodate the growing workforce.
3. Limited Formal Job Creation: The formal sector in India has yet to be able to generate enough employment opportunities to absorb the growing working-age population. This scarcity of formal jobs drives many individuals, including educated youth, to seek informal work options, either as a primary source of income or as a supplementary means of survival.
4. Gender Bias in Informality: Women’s participation in the labour force is marked by a higher likelihood of engagement in the informal economy. This is particularly evident in women’s overrepresentation in roles characterized by informality within the formal sector. For instance, women often occupy contract-based or temporary positions that lack job security and benefits.
5. Contract Labour and Outsourcing: The rise of contract labour and outsourcing practices in the formal sector has contributed to the growth of informal employment. Many businesses opt for these arrangements to reduce costs and regulatory obligations. However, this often results in job insecurity, lack of benefits, and limited avenues for career advancement for workers.
6. Complex Informal Dynamics: Addressing informality requires more than just incentivizing or enforcing formalization. The informal sector’s growth is influenced by intricate social, economic, and cultural factors. These factors include lack of skills development opportunities, inadequate access to credit and social protection, and the presence of unorganized and fragmented industries.
7. Legislative Measures and Social Security: India has taken steps to tackle informality through legislative measures like the Unorganized Workers Social Security Act and the Contract Labour (Abolition & Regulation) Act. These laws aim to provide a safety net for informal workers by extending social security benefits and regulating contract labour practices.
8. ILO’s Involvement: The International Labour Organization (ILO) collaborates with the Indian government, workers’ and employers’ organizations, civil society, and academia to address informality. The ILO’s initiatives include policy research, sector-specific projects, and efforts to facilitate policy dialogue.
9. Project Examples: Two specific projects exemplify the strategies being employed to combat informality:
o The Way out of Informality: This project focuses on policy dialogue, research, and best practice identification, particularly in the automobile sector in Pune, Maharashtra.
o Formalizing Employment in Domestic Work: This project aims to bring domestic workers within the purview of labour regulations and laws by collaborating with employers, domestic workers, and the government.
From the above discussion, we understand the prevalence of the informal sector in India is influenced by a complex interplay of factors, including limited formal job creation, gender biases, contract labour practices, and social dynamics. Tackling informality requires multifaceted approaches that encompass legislative measures, social security enhancements, and collaborative efforts involving various stakeholders.
References:
Problems Faced by Informal Workers In Different Sectors In India ~ Link
Unit 1-Informal Sector: An Overview ~ Link
India’s informal economy: Challenges and solutions ~ Link
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