The Informal Sector, The Missing Middle, And Implications for Development Policy

Abstract

The informal sector plays a pivotal role in shaping labor markets and economic structures, particularly in developing and emerging economies. Despite accounting for a significant portion of the workforce, especially in emerging economies, it remains underexplored in policy discourse. It is often treated as a monolith, with recommendations tending to favor formalization over recognizing its complexity as a multifaceted phenomenon. Characterized by the absence of government regulation and oversight, the informal sector demands greater analytical attention. A deeper understanding of its diverse forms and drivers is essential for crafting development policies that are both effective and context-sensitive.

This paper examines the informal sector's complexities, causes, consequences, and recommendations for formalization. It critiques insufficient attention to the sector's diversity and the different impacts of formalization.

Through a case study of India, this paper explores the diverse nature of India’s informal sector divided into different elements: agriculture, manufacturing, informal urban housing, and identifies examples of informal economies that have their roots in culture. The case study highlights the diversity in informal economies.

Keywords: Informal sector; Developing Economies; India; Missing Middle; Culture

DOI: 10.7176/JPID/64-07

Publication date: August 31^st 2025