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Difference between Formal Sector and Informal Sector

Sayeba Naushad
Published: February 8, 2023

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Informalisation of the Workforce is a situation where the workforce in the informal sector increases to the total workforce of the country. According to the composition of the workforce in India, it has been divided into two categories; Formal or Organised Sector and Informal or Unorganised Sector. The Formal Sector consists of jobs that have specific working hours and fixed wages; whereas, the Informal sector is where the workers or employees don’t have fixed working hours and wages. 

Formal/Organised Sector

All the public and private sector enterprises that employ 10 or more hired workers come under the category of Formal/Organised Sector. The formal or organised sector consists of all the companies or enterprises where the employees have regular and guaranteed work and wages. It has certain rules and regulations and works by following formal procedures. In India, the employees of central and state governments, banks, railways, and so on can be called organised sector workers. The workers working in the formal or organised sectors are known as Formal Sector Workers. 

Informal/Unorganised Sector

All the private enterprises that hire less than 10 employees come under the Informal/Unorganised Sector category. The unorganised sector consists of activities that focus on the primary production of goods and services and the generation of employment and income on a small-scale basis. In this sector, there is no guarantee of a fixed job or wages and no fixed working hours. People who work as ragpickers, moneylenders, brokers, etc., are considered a part of the informal or unorganised sector. The workers working in the formal or organised sectors are known as Informal Sector Workers

Difference between Formal Sector and Informal Sector

Basis

Formal Sector

Informal Sector

MeaningThe formal sector comprises businesses and economic activities that are under the supervision of the government. The informal sector consists of workers and enterprises that do not come under the regulation of the government. 
Social Security BenefitsThe employees working in this sector are entitled to Social Security Benefits. Unlike the formal sector, the employees in this sector are not entitled to Social Security Benefits. 
Salary/WageThe pay scale of the formal sector is high as compared to the informal sector. This sector has a comparatively low pay scale.
SecurityThe employees in this sector enjoy job security and fixed working hours.No such job security or fixed hours are available to the employees in this sector.
Tax BenefitsThe enterprises in this sector are licensed and are liable to pay taxes to the government. The enterprises in this sector are not liable to pay taxes to the government.
EmployeesAll public and private sector enterprises that employ more than 10 people are considered to fall under the formal sector. All the enterprises that employ less than 10 people are considered to fall under the informal sector.
Trade UnionsThe workers in the formal sector have a right to form Trade Unions to protect their interests.Workers in this sector have no such right of forming a Trade Union.

Source: www.geeksforgeeks.org