Distinguish between Formal and Informal Sectors of the Economy
By Balaji
Updated on: February 20th, 2023
The Difference between Formal and Informal Sectors of the Economy is based on whether the Government regulates them or not. All public and private sector establishments are classified as formal, while the remaining is classified as informal. The formal sector of the economy includes establishments that are primarily controlled or regulated by the government and are required to follow specific rules and regulations to conduct business.
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1. Distinguish between Formal and Informal Sectors of the Economy
Distinguish between Formal and Informal Sectors of the Economy
The informal sector consists of enterprises or establishments that are not regulated by the government and are not forced to abide by laws and regulations. To Differentiate between formal sector and informal sector, the following points should be kept in mind:
| Formal Sector of Economy | Informal Sector of Economy |
| Includes, Govt. departments, PSUs, and MNCs. | Including small businesses, farmers, and laborers. |
| Includes private firms having a minimum of 10 workers and above. | Includes private firms having less than 10 workers. |
| Employs 6% of the total workforce. | Employs 94% of the total workforce. |
| Provides social security benefits. | No social, legal, or economic security is provided. |
| It offers better pay scales to its workers. | The pay scale is comparatively low than the formal sector. |
| The workers in this sector enjoy job security. | The workers in this sector can be dismissed without any prior notice or compensation. |
Formal vs Informal Sectors of the Economy
The government exercises control over formal sectors of the Economy by legislating important acts and formulating regulations. In contrast, the government has no control over the informal sector, and no act applies except for the Minimum Wages Act.
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