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What is the difference between formal economy and informal economy?

Mr. ABC gets a job at a software company. His letter of appointment is enclosed with a contract explaining his job responsibilities.  He gets a fixed salary in addition to incentives based upon his qualifications and experience. He works in an organized environment where his colleagues enjoy similar benefits. He is entitled to seek claim from the company, if he loses this job or falls sick.  He also has attractive retirement options.

Mr. XYZ works as a porter at the local market. He is often hired by shopkeepers on daily basis to carry heavy sacks of vegetables from the market to the road head. He gets verbal assurance from shopkeepers that he would be paid on daily basis. But it never happens so; his payment gets delayed by days and weeks and when he is paid, it is never up to his expectations or as promised by his employers. Besides, the time he spends on work is never regular. It could be 2 hours a day or sometimes 12 hours a day. There are other people in the market like him, but they are never organized together to realize commonly felt needs. When he falls sick, he not only has no money to afford treatment, but also loses the wage of that day.

The former belongs to the Formal Economy while the latter belongs to the Informal Economy.

In a formal economy, a worker:

•    has a formal contract with the employer
•    has pre-defined work conditions and job responsibilities
•    gets an assured and decent fixed salary with perks and incentives
•    Has fixed duration of work time
•    is part of an organized group of people working in the same environment and is legally and socially aware about its rights
•    is covered by a social security for health and life risks

In an informal economy, worker has:

•    has no formal contract with his employer
•    has no systematic work conditions
•    gets irregularly and unevenly paid.
•    has no forum to express his grievances
•    has no fixed hours of work and mostly earns hand to mouth
•    is not covered by any kind of social security system and has poor knowledge about the need to protect himself socially and economically

Read about… Specific characteristics of the formal economy and informal economy

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