"The informal sector consists of units engaged in the
production of goods or services with the following
characteristics:
- Small-scale units, comprising, firstly, ‘informal, ownaccount enterprises – that is, those unincorporated enterprises that are run without regular employees (but perhaps with unpaid family workers or occasional hired labour)’; and, secondly, enterprises of informal employers who employ one or more persons on a continuous basis.
- Few barriers to entry: initial capital and skill requirements are low.
- Informal skills acquisition: most entrepreneurs learn through informal apprenticeships in the sector, while a few have received vocational training.
- Limited access to formal credit: capital needs are met informally from family, friends, money lenders and other business interests.
- An informal internal organization with a relatively flexible and informal hierarchy of work and roles: often the own account or self-employed worker is worker, manager and owner, all at once. They display little or no division between labour and capital as factors of production.
- Informal relationships with suppliers, clients and the state: few have licences or formal contracts, their hours of operation are flexible and contacts are irregular. They therefore tend to be ‘invisible’, unregulated and uncounted by official statistics, particularly by economic censuses. Thus, the entrepreneur avoids taxes, licence fees and requirements to conform to standards. Labour tends to be unprotected. Labour relations – where they exist – are based primarily on casual employment, kinship or personal and social relations, rather than on contractual arrangements with formal guarantees.
- Combinations of different activities can exist in a single unit: these can exist simultaneously or by frequent change in activities, so it can be difficult to classify the business according to the standard industrial classification. Products may be made and sold in the same place and other producers’ products may also be sold.
- Predominance of an undercapitalized or labourintensive process of production: the limited nature of the technology being used may hamper the ability of business to produce continuously and may limit the operator’s ability to plan for investment and improved operation.
- Consumption and production are not separated: part of what allows informal-sector businesses to keep operating is their use of personal and domestic assets, such as living quarters, vehicles and furniture. Furthermore, business expenditures, income, assets and labour are almost seamlessly linked to those of the household. This can be a problem for policymakers who like to separate consumption and production as different spheres for statistical and taxation purposes."
UN-Habitat (2003) The challenge of slums - Global report on human settlements. London & Sterling: UN-HABITAT - Earthscan. pp 100-101.
