Formalization of the Informal Economy: Perspectives of Capital and Labour

Abstract

Informality takes various forms in countries and new forms over time. Hence, there can be no “one size fits all policy” to regulate or improve the conditions of informal workers. Governments tend to regulate to its advantage, for example to gain revenue through taxes. We call this the capital view of formalization. Workers need to benefit from moving from informal to formal arrangements. The labour view of formalization is that the fundamental right of workers and entrepreneurs must be recognized. In this paper, I discuss the journey of the concept of informality in the labour market in developing and developed countries. The debate on formalizing the informal economy can be seen from the lens of capital or the lens of labour. We argue that the capital view is only normalizing the enterprises, while the labour view is actually formalizing, with inclusion of workers in formal systems. The Indian debate on formalization to overcome the formal/informal divide has mainly taken the capital view.