What is the Difference between Formal and Informal Sectors of the Economy?

By Shivank Goel|Updated : September 5th, 2022

The difference between formal and informal sectors of the economy is that all public and private sector establishments come under the formal sector, and the remaining are counted in the informal sector. The formal sector of the economy comprises those establishments which are controlled or regulated majorly by the government and are required to follow specific rules and regulations to carry out their business activities.

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.

Differences between Formal and Informal Sectors of Economy

Formal Sector

Informal Sector

Includes, Govt. departments, PSUs and MNCs

Includes small businesses, farmers and labourers

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

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FAQs

  • The informal sector employs a more significant number of people, i.e., 94% of the workforce.

  • The formal sector provides social security benefits & other facilities as well.

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