formalsector

The formal sector refers to parts of an economy that operate within the legal and regulatory framework of a country. It includes registered businesses, government entities, and workers employed under formal contracts who pay taxes and are covered by social protection programs. Activities in the formal sector are typically measured and regulated by official statistics.

Characteristics include registration with authorities, formal accounting, adherence to labor laws, and eligibility for formal credit and public benefits. Formal workers usually have written contracts, minimum wage protections, and social security coverage, though benefits and enforcement vary by country. The formal sector is generally associated with higher productivity and stability, but can involve higher regulatory costs and less flexibility for small firms.

The formal and informal sectors are used to describe two ends of a spectrum. The informal sector encompasses unregistered activities and workers outside official protections, such as street vendors or small family enterprises. In many developing economies, the informal sector is large relative to the formal sector, complicating tax collection and social protection extension.

Policy efforts aim to enlarge the formal sector by simplifying registration, reducing regulatory burden, and offering incentives for formalization. Programs may include simplified tax regimes, social security enrollment, and access to formal credit. Critics warn that formalization policies can impose costs on small firms and may not improve livelihoods if formal jobs remain scarce.