The informal sector, or the informal economy, is a part of an economy that is not taxed by the government, neither is it monitored by the government authorities. The activities of the informal sector are not part of the national economy because they are not taxed by the government, and they are not closely supervised by the authorities.The informal economy is a gray market in labor because of the grade of labor involved in the sector. The term informal sector was used by W. Arthur Lewis to describe the employment within developing economies. The term was also used to describe an employment that fell outside the modern industrial sector. The informal sector is characterized by easy entry, lack of stable employer-employee relationship and small business operations. Home based workers and street hawkers dominate the informal sector. Below we discuss the global significance of competition from unregistered businesses.
Despite the growth revival experienced by many Sub-Saharan Africa countries in recent years, relatively few formal jobs have been generated. Unemployment remains high in most of the countries. The informal sector has not been exploited fully by most countries to bridge the deficit in employment. The informal sector in Sub-Saharan Africa contributes 55.5% of Gross Domestic Product (GDP) and creates around 80% of all employment there. Nine in ten workers in Sub-Saharan Africa are employed in the informal sector thus most formal firms in Sub-Saharan Africa face stiff competition from the informal sector. 65.5% of business organizations are competing against the informal sector either for labor, market or raw material. The informal sector in Sub-Saharan Africa is associated with poverty and social issues. However, the area has proved to be a real threat to firms that produce expensive products by offering lower prices for similar goods.
The informal sector has offered more than 27 million jobs to Latin Americans and Caribbean youth alone according to the International Labor Organization. Six out of every ten employment opportunities are in the informal sector. The informal economy in Latin America mostly employ the youths between the age of 15 to 24. Latin America formal firms continue to face competition from the informal sector. 32.6% of the companies in Latin America directly face completion for resources, manpower, and market from the informal sectors. Though the informal sector in Latin America is characterized by low wages, lower productivity, and low quality, the sector continues to offer alternative household incomes and employment
The informal sector plays an important role in the economy of most of the Caribbean region's island nations. Though the sector is overlooked in most countries, it provides the much-needed source of income for most families. The sector is witnessing a rapid growth since it offers an alternative source of livelihood for the many people outside the formal sector. The increase of the informal sector has mainly affected the activities of the formal firms. In the Caribbean, 58.9% of the companies face direct completion from the informal sector for the market share, labor, and raw material. With the continued demand for more goods, the informal sector continues to benefit from the low-income earners in the Caribbean.
The Informal Sector an Important Component of Global Economics
Formal firms in most countries face direct competition from those in the informal sector, especially for raw materials, labor, market shares, and consumer recognition. However, most countries are yet to embrace and promote the activities of the informal sector. Other regions in the world that where registered firms are facing direct and significant competition from the informal sectors include the Arabic-speaking regions, East Asia and the Pacific, South Asia, the Middle East and North Africa, Central Asia, Central Europe and the Baltic Sea, and Western Europe to a lesser extent.