The informal sector is generally understood to refer to very small-scale units producing and distributing good and services, involving little or no capital, using a low level of technology and skills and therefore operating at a low level of productivity, and generally yielding very low and irregular incomes. These units are for the most part unrecorded in official statistics; they tend to have little or no access to organized markets, credit, training or public amenities. Neither recognized, supported nor regulated by the government, they are compelled by circumstances to operate outside the framework of the law and of social protection. Their workers generally live and work in appalling shanty-town conditions.
Informal sector activities take many forms. At one end of the spectrum is the relatively thriving small-scale manufacturing enterprise employing several workers; at the other end are street vendors, shoe-shiners and other engaged in petty service activities that yield barely a subsistence income. In between are such activities as informal transport services, small shops and laundries.
The sector's existence on the fringes of the law has often led public authorities to confuse it with criminal activities, and to subject it to harassment. Government strategies which have favoured urban development and large capital-intensive enterprises have produced biases which operate to the disadvantage of the informal sector, but ironically preserve it. The informal sector is also the very antithesis of everything that the trade union movement stands for – huge masses of people living and working in substandard conditions without the protection of the law or of organized labour. A comparable challenge is faced by employers' associations, whose membership until now has consisted largely of enterprises in the modern sector. The prospects for the integration of the informal sector into the mainstream of economic life will to a substantial degree depend on the engagement of both government, and worker and employer organizations.
The ILO gave the sector its name when an employment mission to Kenya in 1972 observed the phenomenon of large numbers of working poor in urban areas operating outside the formally structured economy.
Informal sector earnings are income for 300 million people. In some countries it contributes a third of gross domestic product. In India, it has been estimated that the underground economy is financially as important as the official economy.