The Informal Economy: Where Most People Actually Work
It is five in the morning in Ahmedabad. Ramaben is already awake. She rolls up the thin mattress she shares with her daughter-in-law and two grandchildren in a room barely larger than a car. She washes her face with water from a plastic bucket. She eats cold roti with a scraping of pickle. Then she walks forty minutes to a construction site on the outskirts of the city.
Ramaben is fifty-three. She carries bricks on her head. She mixes cement. She works from six in the morning to six in the evening, with a half-hour break for lunch — more roti, brought from home in a steel tiffin.
She earns three hundred rupees a day. About four dollars.
She has no contract. No one wrote down the terms of her employment. If she is injured — and construction is one of the most dangerous occupations in India — there is no insurance, no compensation, no sick leave. If the contractor decides tomorrow that he does not need her, she will simply not be called. There will be no notice, no severance, no record that she ever worked there.
Ramaben does not pay income tax. She is not registered with any government agency as a worker. Her work does not appear in any official employment statistics. If you look at the data, Ramaben barely exists.
But Ramaben is not an exception. She is the rule.
In India, roughly 80 to 90 percent of all workers are like Ramaben. They work without contracts, without benefits, without legal protections. They are the invisible foundation on which the visible economy rests.
Welcome to the informal economy.
Look Around You
Look at the people who build the buildings you live and work in. Look at the women who cook in restaurants, the men who drive autorickshaws, the vendors who sell vegetables on the roadside, the domestic workers who clean homes, the garbage collectors, the watchmen.
Almost none of them have a written contract. Almost none of them have health insurance or a pension. Almost none of them can complain to a labor court if they are cheated.
These are not the edges of the economy. This IS the economy. The formal sector — with its payslips, PF contributions, and HR departments — is the exception, not the rule.
What "Informal" Actually Means
The term "informal economy" was coined by the British anthropologist Keith Hart in 1973, based on his research in Ghana. He noticed that official employment statistics completely missed the economic activity of most Ghanaians — the street traders, the artisans, the small-scale producers, the people doing odd jobs to survive.
The International Labour Organization (ILO) later formalized the definition. The informal economy includes:
- Workers without written contracts
- Workers without social security benefits (health insurance, pension, paid leave)
- Workers in enterprises that are not registered with the government
- Self-employed workers in unregistered businesses
- Domestic workers, home-based workers, street vendors, day laborers
What all these workers share is not a particular type of work but a particular type of vulnerability. They exist outside the framework of legal protections that formal workers enjoy.
This does not mean they are outside the economy. Far from it. The informal economy produces goods and services, generates income, and sustains hundreds of millions of families. In India, the informal economy accounts for roughly half of GDP — and the vast majority of employment.
+--------------------------------------------------------------+
| FORMAL vs. INFORMAL ECONOMY |
+--------------------------------------------------------------+
| |
| FORMAL SECTOR | INFORMAL SECTOR |
| ============================|==============================|
| Written contract | No contract or verbal only |
| Regular salary | Daily/piece-rate wages |
| Health insurance, PF | No benefits |
| Paid leave, sick leave | No work = no pay |
| Workplace safety rules | Whatever the site provides |
| Can file labor complaint | No legal recourse |
| Taxes deducted | Mostly outside tax net |
| Shows up in statistics | Invisible in data |
| | |
| ~10-20% of Indian workers | ~80-90% of Indian workers |
| ~50% of India's GDP | ~50% of India's GDP |
| | |
| Software engineers, | Construction laborers, |
| bank employees, | domestic workers, |
| government servants, | street vendors, |
| factory workers in | agricultural laborers, |
| large firms | autorickshaw drivers, |
| | home-based piece workers |
+--------------------------------------------------------------+
A History Older Than Formality
Here is something that most people do not realize: the informal economy is not a failure of modernization. Informal work is the historical norm. Formal employment — with contracts, benefits, and legal protections — is the historical exception.
For thousands of years, most human beings worked informally. The farmer who tilled their own field, the artisan who sold their wares in the bazaar, the fisherman who cast their net — none of them had employment contracts. None of them received benefits from an employer. They worked, they earned, they survived.
The formal employment relationship is a creation of industrialization — specifically, of large-scale factories that needed to organize and control hundreds of workers. The factory needed predictable labor, so it offered regular wages. Governments needed to tax and regulate, so they created legal frameworks for employment. Unions demanded protections, so benefits were established.
But this formal employment relationship only ever covered a minority of the world's workers. Even in the most industrialized countries, significant portions of the workforce — domestic workers, agricultural laborers, casual workers — remained outside the formal system. In developing countries like India, the formal sector was always a thin layer atop a vast informal base.
The economist Hernando de Soto, in his book The Other Path (1989), argued that the informal economy in Latin America was not a sign of backwardness but a rational response to excessive regulation. When the cost of registering a business is too high, when labor laws are too rigid, when bureaucratic procedures are too cumbersome, people simply work around the system. They go informal not because they want to, but because the formal system is too expensive or too exclusionary to enter.
There is truth in this argument — but it is not the whole truth.
Why Informality Persists
If formal employment is better — and by most measures, it is — why do so many people remain informal?
Because the formal sector does not have enough jobs. India's economy has grown enormously since 1991, but formal employment has not grown at the same pace. Much of India's growth has been "jobless growth" — increases in GDP driven by capital-intensive industries and services that employ relatively few people. The IT sector, which drives much of India's export earnings, employs fewer than 5 million people in a country of over 1.4 billion.
Because entering the formal sector has costs. Registering a business requires dealing with multiple government agencies. Complying with labor laws requires paperwork, record-keeping, and payments that many small businesses cannot afford. For a street vendor selling chaat, the cost of formalization — licenses, taxes, regulatory compliance — may exceed the meager profit.
Because informality offers flexibility. A construction laborer who works as a daily wage earner can move from site to site, take time off to visit family in the village, or switch occupations when one dries up. This flexibility comes at a terrible cost — no security — but in an economy with few stable options, it is a rational adaptation.
Because employers prefer informality. Hiring informal workers is cheaper. No provident fund contributions. No gratuity. No difficulty in firing. Many formal-sector companies — large ones, with HR departments and corporate social responsibility reports — rely on layers of informal labor: contract workers, temporary staff, workers supplied by labor contractors who bear none of the obligations of a formal employer.
This last point is crucial. Informality is not just about small businesses and street vendors. It is embedded within the formal economy itself. The gleaming IT park employs janitors through contractors. The five-star hotel's kitchen staff are supplied by a manpower agency. The automobile factory assembles cars using components made by workers in small, unregistered workshops.
The formal and informal economies are not separate worlds. They are intertwined — and the relationship is often exploitative.
What Actually Happened
In 2017, the Indian government implemented the Goods and Services Tax (GST), one of the most ambitious tax reforms in the country's history. One of its stated goals was to bring the informal economy into the formal tax net.
The results were mixed. Many small businesses registered for GST, but the compliance burden was crushing. A shopkeeper who had never used a computer was now expected to file quarterly returns online. Businesses at the margin — those earning just above the threshold — sometimes shrank deliberately to stay below the limit.
In 2016, demonetization — the sudden withdrawal of 86% of India's currency — was also partially justified as a way to formalize the economy by attacking cash transactions. The informal economy, which runs almost entirely on cash, was devastated. Construction workers went unpaid. Street vendors lost their customers. Agricultural markets froze.
The economy eventually recovered, but the lesson was painful: formalization by shock — by suddenly imposing formal-sector rules on an informal-sector economy — does more harm than good. The workers who suffer most are those with the least capacity to absorb the blow.
Women in the Informal Economy: Double Invisibility
If the informal economy is invisible, women within it are doubly so.
Women make up a large and disproportionate share of informal workers worldwide. In India, women dominate certain categories of informal work: domestic labor, home-based piece work (rolling beedis, sewing garments, assembling electronic components), agricultural labor, and the collection of forest produce.
Their work has several distinctive features.
It is done at home or in someone else's home. A woman rolling beedis works in her own house. A domestic worker works in her employer's house. In neither case is there a visible "workplace" that can be inspected or regulated.
It is often combined with unpaid domestic work. The woman who rolls beedis also cooks, cleans, fetches water, and takes care of children and elderly family members. Her paid work is squeezed into the gaps between her unpaid work — and neither is fully visible.
It is paid less than men's informal work. Even within the informal economy, women earn less than men. In agriculture, the gap is about 30%. In construction, women carry bricks while men lay them — and the brick-carrier earns less, because carrying is classified as "unskilled" while laying is "semi-skilled."
It is the most precarious work in the most precarious sector. Domestic workers can be fired on a whim. Home-based workers are paid by the piece — if orders dry up, income drops to zero. Street vendors can be evicted by the police. For women informal workers, there is no floor beneath the floor.
The Self-Employed Women's Association (SEWA), founded in Ahmedabad in 1972 by Ela Bhatt, was one of the first organizations in the world to recognize and organize informal women workers. SEWA registered as a trade union — a radical act, because the workers it organized did not fit the traditional definition of "employees." They were self-employed: vegetable vendors, garment workers, construction laborers, waste pickers.
SEWA's insight was profound: these women were workers. Their work generated value. They deserved the same recognition, organization, and protection that factory workers received.
"The poor are not the problem. The poor are the solution." — Ela Bhatt, founder of SEWA
SEWA grew to over two million members. It created cooperatives, insurance schemes, banks, and training programs. It demonstrated that informal workers could organize — and that organizing could transform their lives.
The Debate: Formalize or Protect?
Policy makers face a genuine dilemma when it comes to the informal economy.
One school of thought says: formalize. Bring workers into the formal system. Register businesses. Issue contracts. Extend social security. This approach sees informality as a problem to be solved.
Another school of thought says: protect. Rather than trying to make informal workers formal — which may be impossible given the structure of the economy — extend protections to workers where they are. Provide health insurance that is not tied to employment. Build pension systems for informal workers. Recognize street vendors' rights to public space. This approach sees informality as a reality to be managed.
The truth, as usual, is that both approaches are needed — and the balance depends on context.
India's labor code reforms of 2019-2020 attempted to simplify the country's sprawling labor laws — over forty central laws were consolidated into four codes. The goal was to make it easier for businesses to comply and for workers to access protections.
But critics pointed out that the reforms also made it easier for companies to hire and fire workers, to use contract labor, and to avoid unions. The fear was that in the name of "flexibility," the reforms would push more workers from formal to informal status — the opposite of the stated goal.
The Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), passed in 2005, took a different approach. Rather than trying to formalize rural workers, it guaranteed 100 days of paid work per year to any rural household that demanded it. The wage was modest, the work was manual (road-building, pond- digging, land-leveling), but the guarantee was revolutionary: for the first time, a government recognized the right to work as an enforceable legal entitlement.
MGNREGA has been criticized for corruption, for creating dependency, for not paying on time. Many of these criticisms are valid. But it has also been credited with raising rural wages, reducing distress migration, and giving women (who make up over half of MGNREGA workers) an independent source of income.
It did not formalize the informal economy. But it built a floor beneath it.
+--------------------------------------------------------------+
| APPROACHES TO INFORMALITY |
+--------------------------------------------------------------+
| |
| FORMALIZE | PROTECT IN PLACE |
| ============================|==============================|
| Register businesses | Provide universal social |
| Issue contracts | security (not tied to |
| Extend labor laws | formal employment) |
| Bring into tax net | Health insurance for all |
| Build formal institutions | Pension for informal workers |
| | Right to work guarantees |
| | Street vendors' rights |
| | Organize informal workers |
| | |
| Risk: Costs push businesses | Risk: Does not address |
| further underground | root causes of informality |
| | |
| Best for: Enterprises on | Best for: Workers who |
| the margin of formality | cannot be formalized |
| (medium-sized businesses) | (domestic workers, vendors, |
| | agricultural laborers) |
+--------------------------------------------------------------+
The Human Face of Informality
Behind every statistic is a life.
Meet Kamalesh. He is a rickshaw puller in Kolkata — one of the last cities on earth where human beings still pull other human beings in hand-drawn carriages. He came from a village in Bihar thirty years ago. He rents his rickshaw for fifty rupees a day and earns about three hundred. He sleeps on the rickshaw at night, under a tarpaulin when it rains.
Kamalesh has no savings. When he fell ill with tuberculosis three years ago, he went to a government hospital and waited six hours to see a doctor. He lost two weeks of income. He borrowed money from a moneylender at an interest rate he cannot calculate but that eats a quarter of his earnings every month.
He sends money home. His wife and three children live in the village. He sees them twice a year — once for Chhath Puja, once for Holi. His eldest daughter is fifteen. He wants her to finish school. He is terrified she will not.
Kamalesh is not a statistic. He is a man. And there are millions like him — men and women who sustain the visible economy through their invisible labor, who build the buildings they could never afford to live in, who cook the food they cannot afford to eat in the restaurants they clean.
Informal Does Not Mean Unproductive
One common misconception about the informal economy is that it is unproductive — a low-efficiency sector that drags down overall growth. This is wrong.
Dharavi, in Mumbai, is often called "Asia's largest slum." It covers just 2.4 square kilometers. It is home to perhaps a million people. And it generates an estimated $1 billion in economic output every year.
Dharavi is an industrial ecosystem. Its tiny workshops produce leather goods, pottery, textiles, plastic recycling, food products, and jewelry. Its workers are skilled — many of them artisans with knowledge passed down through generations. Its supply chains are complex and efficient, linking small producers to large markets.
Dharavi is informal. Its workshops are unregistered. Its workers have no contracts. Its buildings violate every building code imaginable. And yet it is one of the most productive and entrepreneurial places on earth.
The lesson: informality is not the same as inefficiency. Many informal enterprises are resourceful, innovative, and adaptable. What they lack is not entrepreneurial spirit. What they lack is security, access to credit, legal recognition, and the political power to protect their interests.
Think About It
How many people do you interact with in a typical day who work informally? Count them. Does the number surprise you?
If informal workers suddenly stopped working — no domestic help, no street vendors, no autorickshaws, no construction laborers — what would happen to your city within a week?
Why do you think the Indian government has struggled to formalize the economy despite decades of effort? Is formalization even the right goal?
Think about a domestic worker you know (or know of). What would their life look like if they had a written contract, health insurance, and paid leave? What would it cost the employer?
"The informal economy is not a problem to be solved but a reality to be understood." Do you agree?
The Bigger Picture
The informal economy is not a marginal phenomenon. It is where most of humanity works.
When we talk about "the economy," we usually mean the formal economy — the world of corporations and government employment, of GDP statistics and stock markets and quarterly earnings reports. But this is the tip of the iceberg. Below the surface lies an ocean of work that is uncounted, unprotected, and undervalued.
The informal economy is not going away. Even in rich countries, informal work is growing — through gig platforms, freelancing, and the erosion of traditional employment. The sharp line between formal and informal is blurring. A software engineer who freelances through an app has more in common with a street vendor than either might admit: both lack benefits, both face income uncertainty, both depend on forces beyond their control.
The question for the twenty-first century is not how to eliminate the informal economy — that is neither possible nor desirable. The question is how to ensure that all workers, regardless of the form their work takes, have access to a basic floor of dignity: a living wage, healthcare, security in old age, and protection from exploitation.
This is not charity. It is economic common sense. A healthy, educated, secure workforce is more productive than a desperate, sick, and frightened one. Investing in informal workers is not a cost — it is the foundation of sustainable growth.
Ramaben, carrying bricks in Ahmedabad at the age of fifty-three, is building the economy with her body. The least the economy can do is not break her.
"Development, if not engendered, is endangered." — UNDP Human Development Report, 1995
And we might add: development, if not extended to the 80% who work informally, is an illusion — a shiny surface stretched over a foundation of sand.
In the next chapter, we confront one of the oldest fears in economic life: the fear that a machine will take your job. From the Luddites to artificial intelligence, the story of automation is a story about who benefits from progress — and who pays the price.