The Informal Sector

“Informality is the symptom that something is wrong in the institution of government, and perhaps even of society as whole. It indicates that much of the law has lost it legitimacy, for it has become virtually impossible for poor people to comply with all the requirements to live and work legally”

– Bernardo Villegas

The Informal Sector

“ Very small scale units producing and distributing goods and services, consisting largely of independent , self-employed producers, some of who also employ family labor and/or a few hired workers or apprentices, which utilize a low level of technology and skill, which therefore operate at low level of productivity , and which generally provide very low and irregular income, and highly unstable employment to those who work on it.”

The Informal Sector according to Internationl Labor Organization

• It is the part of the economy that is intentionally hidden from the view of the government in order to avoid taxes and regulations or because the goods and services being produced are illegal.

The Informal Sector

• Underground, unofficial, hidden, illegal, black, covert, grey, dual, irregular, invisible, parallel, marginal, moonlight, shadow, second, unobserved, twilight, subterranean, and unrecorded

The Informal Sector

• The income generated by this sector of the economy is not considered in the national accounting.

The Informal Sector

Informal sector employment is made up of:

• Employment excluded from formal sector and

• Informal employment that are part of the formal sector.

Reasons for existence of the Underground Economy

1. Unemployment2. Insufficient Income 3. Problems with the

government

• Low levels of productivity and employment

• People look at their jobs as temporary • Health and safety are always at risk • More labor-intensive• Non-payment of taxes• Workers are paid below the minimum

wage• Absence of social protection and

benefits• The company or workers are not

registered• The business is not considered a legal

entity which is independent from its owner or owners

• It is usually owned and managed by blood relatives

• It is usually not well-organized and has only a few workers.

Characteristics of the Informal Sector

Formal sector may be attributed to:

• Failure to declare the occupation of workers of the company

• Temporariness of the job• Insufficient number working hours

or wage compared to what had been officially declared

• Illegitimacy of the business• Operation of business beyond the

official status of the business• The business does not comply

with labor laws

Employment Categories in the Informal Sector

• Homework– A person who works at, or near his/her home in

the production of goods for a fixed agreement with an employer or contractor. They are usually pain on a piece-rate basis.

Employment Categories in the Informal Sector

• Self-employed or self-account worker– A person who has no employer or contractor and

operates business on his/her own. He/she does everything, has no paid employee and assisted only by family members on occasional basis.

Employment Categories in the Informal Sector

• Employer– A person similar to a self-employed but employs

one or more paid employees

Employment Categories in the Informal Sector

• Employee– A paid employee in an informal enterprise.

Employment Categories in the Informal Sector

• Unpaid family worker– One who works without pay in a farm or business

operated by a member of his/her family. He/she works on occasional basis.

• Direct Approach -take surveys-auditing tax returns

Approaches to measuring the Informal Sector

• Indirect or Discrepancy Approach

-discrepancy between individual households and the aggregate national accounts

-seen in the monetary market, in the amount of cash used in a country

Approaches to measuring the Informal Sector

Effects of the Informal Sector to the economy

• Positive 1. Responds to the demand of the

urban services and small-scale manufacturing

2. Provides economy with the operative and entrepreneurial spirit

3. Absorbs those who do not have regular jobs, who lack skills and education, and those who are searching for additional income.

4. Contributes to the national income.

Effects of the Informal Sector to the economy

• Negative1. Limit on government

restrictions on the economy and society

2. Many transition economies would perform at much lower level of production

3. Indicates that there is a weak relationship between the country and its people

Reasons for the existence of the Informal Sector

• Uneven economic development• Incapability of the government to generate

jobs.• Non-payment of taxes and other expenses

required by law provides financial advantage.• They do not want to comply with the laws and

regulations of the government.• Weak or ineffective implementation of laws.

• Players in the informal sector.

• Government and economy

• Consumers

Issues and Problems in the Informal Sector

Laws and Programs Related to the Informal Sector

• Republic Act 8425/Social Reform Policy Alleviation Act of 1997.

Journal Reflection

Too much bureaucracy, red tape, and corruption reportedly hampered the growth of the Philippine economy that resulted in the increase of the informal sector. What can you possibly do? Illustrate your answer by drawing an editorial cartoon. Explain your drawing using 2-3 sentences only.