Informal Employment: Definition and Evolution of Informal Employment

Read this article to learn about the definitions and evolution of informal employment!

The distinction that is made between the formal and informal sectors is somewhat recent, beginning after WWII. One must remember that when industrialisation started in the mid-1750s in England and then spread to other countries in Europe and in some of the colonies, all employment was what we know today as informal employment.

There were no security of jobs, no laws regulating employment, and no form of social security. This situation continued till the end of WWII (1945). During the war, production of factory- based goods had to be increased in order to meet the military requirements. Workers thus became a crucial player in this process.

After the war ended, workers started realising their importance in generating wealth for the nation. Trade unions, which had gained considerable influence between the two world wars, became stronger as representatives of the working class. The state tried to provide better facilities to workers.

This included social protection, improvement in the tenure of employment and regulation of work. Many countries, with the exception of USA, adopted the values of a welfare state. In other words, the state took on the responsibility for providing the basic requirements of the population.

The 68th Survey of Distributor Operations: Employment

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In many European countries, the state nationalised core industries such as railways and transport, health services, education, and telephones and telegraph, among others. It also took on the responsibility of assuring all people food, clothing and shelter. This notion of the welfare state helped strengthen the working class movement. As a result, till 1960, it was taken for granted that all workers in developed countries were under legal protection and, thus, in the formal sector.

After WWII, many of the colonies were liberated and they too chose a welfare state and social protection. Even though in such cases all workers were not in the formal sector, it was believed that as these countries developed, workers would be absorbed into that sector. The present situation however shows that the informal sector has grown rapidly in developing countries and it has also marked its presence in the developed ones.


It is difficult to define the informal economy as it is varied. We can see from the above descriptions that there are different categories of people engaged in this sector and they also have different work relations. There is a difference between workers in micro/small industries and street vendors who do not have any employer.


Domestic workers may have several employers and home-based workers may have no idea who their actual employers are. Hence, a single definition may not be possible for defining this sector. The United Nations Human Settlements Programme (UN-HABITAT) lays down three criteria for distinguishing informal enterprises. These are:

a. The units are not registered;

b. The small number of workers employed; and

c. Employees too are not registered.


The same criteria were also laid down by the 15th International Conference of Labour Statisticians (also known as the Delhi Group). This however, is restricted only to informal enterprises and the self- employed such as street vendors, etc. These form around two-thirds of the informal employment. But others such as day labourers, home-based workers, domestic workers, etc., are not covered by this definition.

The question, therefore, is: what is the informal sector? Who are its constituents? As indicated earlier, the informal sector comprises workers who do not have any permanence of employment and who are not regulated by any of the major laws governing employment. Hence, these would include:

a. Workers of small, unregistered or unincorporated enterprises:

In India, according to the Factories Act, 1948, only those production units that employ more than nine workers and use power in their operations or any production unit that employs more than nineteen workers and does not use power would be recognised as a factory.

Hence, all others, namely, those employing nine/nineteen workers or less would not come under the formal sector. The Factories Act is crucial for determining formal employment. Workers covered under this Act are also covered under Employees’ State Insurance Act (providing for medical facilities), pensions and post-retirement benefits.

Hence, other factory workers would be in informal employment. In 2005, there were a total of 30 million (3 crore) workers in small- scale industries. The total employment in the formal sector was 27 million (2.7 crores).

b. Own account operators (self-employed):

These include street vendors, micro entrepreneurs/ household industries (those employing five or less workers), domestic workers, waste recyclers (waste-pickers), home-based workers (also known as industrial out-workers) and daily-wage workers, etc.

Table: Percentage of Self-employed Workers in Unorganised Non-agricultural Work, 2004-5:

Employment Status Urban
Own Account WorkerEmployerUnpaid Family Worker

Self Employed

All Workers










Street vendors are those who occupy space on pavements or any other open space and sell their goods to the passers-by or move from place to place carrying their goods for sale either on handcarts or on their heads. Street vending can be regarded as one of the oldest professions. Even in ancient times, there were traders who would go from house to house to sell their wares which they had brought from far-off places.

This section of the employed is perhaps the most visible in the urban informal economy. Some may feel that they are too visible and their overbearing presence on the streets becomes a menace for commuters, especially for those using the pavements. Civic authorities in most metropolitan cities all over the world treat these ‘intruders’ on public property as a nuisance.

The urban elite views them as eyesores that are a blotch on the urban scenario. On the other hand, for the urban poor, especially the working poor, street vendors are a boon. These traders provide cheap food, clothes and other items of daily use. They are also easy to access as street vendors conduct their business in convenient places in the city where a large number of commuters pass.

Household Industries (HHIs) are those small industries that employ five or fewer workers. These are small units manufacturing school bags, plastic bags, computer components, perform printing jobs, etc. They operate on small capital. The workers, many of whom may have kinship ties with the employer, are paid low wages and they do not have regular working hours. Since the profit levels are low, both workers and the employers can be included in the informal sector.

Domestic Workers are those who work in other people’s houses for pay. Their tasks include cooking, cleaning the house, washing dishes and clothes, child-care, etc. A large majority of these workers are women. The ILO in its hundredth session in June 2011 passed a convention on domestic workers which seek to protect them from physical and economic exploitation by the employers through proper legal measures in its member countries.

Waste-pickers earn their livelihood through collection, segregation and sale of scrap for recycling. They work in appalling conditions in garbage bins on the streets and at landfill sites where garbage is dumped. The Second National Commission on Labour, 2002, made the following observation on rag (waste) pickers:’…, there are 50 lakh strap collectors in the country.

The number is far greater if labourers in scrap establishments and reprocessing units are included. Waste picking ranks lowest in the hierarchy of urban informal occupations Illiterates, unskilled persons, illegal aliens and the poorest of the poor are pushed into this occupation, as they are unable to find any other kind of employment.

The Commission noted that about 92 per cent of scrap collectors were women in the age group nineteen to fifty, the mean age of entry of those in this occupation being nine to ten years. The average monthly household income is Rs 2,233 which is below the urban poverty line.

We find three distinct features of waste-pickers. Firstly, most of them are women; secondly, given the age at entry, child labour is fairly rampant; and thirdly, the income of the waste-pickers is below the poverty line. Another feature is that they are poor immigrants belonging to the lower, mainly scheduled, castes.

Home-based workers are those that work from their homes. They are engaged in a wide range of activities such as £m£-rolling, making of papads, incense, and pickles.

Many of these workers do odd jobs for the larger industries such as sewing buttons on shirts and dresses and finishing work such as cutting excess threads, folding and packaging of garments for the garment industry, embellishment and embroidery work on cloth, as well as jari and zardosi work.

Though home-based workers are self-employed, they work for other, in many cases, larger industries. Hence, they are also known as industrial out-workers. Just as the street vendors are the most visible section of the informal workers, home-based workers are the most invisible ones.

Their numbers are not known and they could be in millions in India. The ILO passed a convention in 1997 on home-based workers in which the most important issue was of having a live register to record the number of home-based workers.

Earlier, the informal economy was popularly known as the informal sector as opposed to the formal sector, and also as the unorganised sector in India. It included all economic units and workers who were not a part of the regulated economic activities and protected employment relations .

The term informal sector did convey, to some extent, the working conditions of those engaged in informal employment. However, to put the formal and informal into two distinct sectors would also mean that they run parallel to each other, which does not happen in reality. There would be no formal sector within the informal sector, but informal employment may exist within the formal sector.

In the early post-Independence period, all workers engaged in large factories were in the formal sector. The exceptions could be those who were taken as casual labour that did not work full time and were there to fill in for permanent workers when there was absenteeism. For example, in the jute mills of Kolkata or textile mills of Mumbai, there was a category of workers called badli workers.

These workers would stand outside the factory gate, just as the shift was about to start. If there was a shortage of permanent workers, these workers were asked to fill in for them. Another category was that of the apprentices, who were taken as trainees.

Since 1991, when the liberalisation programme was introduced in India, we have seen a growth in informal employment. Casual labour and contract labour (labourers working under a contractor) had been engaged in almost all industries. A book edited by Sarath Davala (1993) contains studies on workers in eight major industries in the country.

The findings were based on surveys conducted in these industries. It was found that half the workers in the large-scale chemical industries were either casual or contract labour. In other industries, such as jute, plantations, coal, port and docks, 30 per cent of the workforce was in informal employment. Hence, the term informal employment rather than informal sector is more comprehensive in capturing the employment situation in the economy.

Table: Percentage Distribution of Unorganised Sector Casual and Regular Workers in Manufacturing, 2004-5:

Industry GroupCasualRegular CasualRegularCasualRegular
Food products and beverages10.111.410.88.710.311.1
Tobacco products2.10.510.
Textile products18.614.536.720.422.715.0
Wearing apparel7.511.55.310.97.011.4
Tanning and dressing of leather2.
Wood and products13.
Chemicals and chemical products1.
Other non-metallic mineral products18.62.317.81.418.42.2
Other manufacturing25.449.310.426.822.047.1
All manufacturing100.0100.0100.0100.0100.0100.0
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