Composition and Challenges of the Urban Informal Sector

Walk through any city in the developing world and the informal sector is impossible to miss – the street vendor selling hot food from a cart, the tailor working from a back room at home, the waste picker sorting recyclables at dawn. These workers are not on any payroll. They have no contracts, no benefits, and no safety nets. Yet they form the backbone of urban economies across the Global South. According to the ILO, the number of workers in the informal economy surpassed 2 billion in 2023 – accounting for a staggering share of global employment. Understanding who these workers are, what they do, and why they remain trapped in precarity is essential to understanding urban life today.

What is the urban informal sector? 🔗

The informal sector refers to economic activities that are not formally registered, regulated, or protected by law. It is not the same as illegal activity. As defined by the ILO, informal economic activities should not be confused with illegal goods or services – they are simply productive activities that operate outside formal regulatory and legal frameworks. A woman making garments at home for a local supplier, a man fixing mobile phones at a roadside stall, a teenager selling cold drinks near a bus terminal – all of these are part of the informal sector. They produce real goods and real services. They just do so without the institutional recognition that comes with formal employment.

According to WIEGO, informal employment is the primary source of work worldwide, comprising nearly 2 billion workers globally, with the bulk concentrated in low- and lower-middle-income countries. In these countries, around three-quarters of urban employment is informal. Even in cities – which are typically more formal than rural areas – the informal economy dominates.

Who makes up the informal sector? 🔗

The informal sector is not a monolithic group. It is remarkably diverse in terms of occupation, income, gender, and vulnerability. WIEGO identifies four major occupational groups that make up a significant share of urban informal employment worldwide: domestic workers, home-based workers, street vendors and market traders, and waste pickers. Each group faces distinct conditions, but all share one defining feature – they are not adequately recognized or protected under labor law.

Street vendors and market traders 🔗

Street vendors are among the most visible workers in any developing city. They sell goods and offer services in public spaces – open-air markets, transport hubs, construction sites, and roadsides – offering everything from fresh produce and prepared food to clothing, auto parts, and haircuts. In sub-Saharan Africa, trade accounts for 43 percent of all informal non-agricultural employment, with street vendors making up between 13 and 24 percent of non-agricultural informal workers in cities like Dakar and Lomé. Official statistics across African, Asian, and Latin American cities show that street vendors constitute between 2 and 24 percent of total urban informal employment – a range that reflects how central they are to the urban retail ecosystem.

Street vending is not simply a marginal activity. These workers generate demand for formal and informal suppliers, create downstream employment for porters and transport operators, and provide low-cost goods in small quantities to urban poor consumers who cannot afford to buy in bulk from supermarkets. Street trade is a consistent feature of urban retail systems worldwide, offering convenient, accessible goods to communities that formal retail largely ignores.

Home-based workers 🔗

Home-based workers carry out paid work in or near their homes, producing goods or services for local, national, or even global markets. They produce a range of goods including textiles, garments, and food, often as subcontractors for larger businesses that prefer to outsource production to cut costs. This makes them a critical but invisible link in global supply chains. In many cities across South and Southeast Asia, for example, garment homeworkers stitch together pieces that will eventually appear in branded retail stores abroad – yet they earn piece-rate wages with no benefits and no job security.

Research from cities like Ahmedabad, Bangkok, and Lahore shows that home-based workers are especially affected by urban housing and zoning policies, because their home is simultaneously their workplace. Lack of basic services – water, electricity, sanitation – directly undermines their productivity. Unlike street vendors who are visible in public spaces, home-based workers are largely hidden from urban policymakers, making it easy to overlook their needs entirely.

Domestic workers and waste pickers 🔗

There are over 76 million domestic workers worldwide, most of them women, providing services like cleaning, cooking, and caregiving for households. Waste pickers – who collect, sort, and sell recyclable materials – number an estimated 20 million globally. Both groups sit at the bottom of the informal labor hierarchy, often earning the least and facing the most harassment and social stigma. Yet waste pickers perform an essential environmental function, managing urban waste in cities where formal waste systems are severely underfunded.

Why do so many people work informally? 🔗

Informal work is not always a last resort. The informal sector is largely characterized by easy entry – meaning that anyone seeking some form of cash income can find work – low barriers, skills gained outside formal education, and small-scale operations. Some workers choose informality for independence, flexible hours, or to avoid regulatory burdens. However, for the urban poor in developing countries, the choice is rarely free. The formal labor market simply does not generate enough jobs to absorb the urban workforce.

The informal sector began expanding significantly in the 1960s when many developing countries failed to create sufficient formal jobs in their economic development strategies. By the 1980s, it was growing alongside formal industry. In the 1990s, rising global competition and production restructuring pushed firms to rely more heavily on informal labor. Today, the informal economy accounts for more than half of newly created jobs in Latin America and around 80 percent in Africa. The sector has become the default labor market for the majority of workers in much of the Global South.

The role of industrial policy reforms in expanding informality 🔗

One of the most significant – yet underappreciated – drivers of informal employment growth is the impact of economic and industrial policy reforms. When governments open their economies to trade liberalization and reduce protections for domestic industries, formal sector firms that once operated under tariff shields often contract or restructure. Workers who lose formal jobs do not simply disappear – many migrate into the informal sector.

Industrial and trade reforms can significantly affect the level of informal employment, and the outcome depends heavily on whether capital can follow labor into the informal sector. When formal industries contract and shed workers but capital remains immobile, the informal sector absorbs more workers without a corresponding increase in investment – and wages and productivity fall. When formal sector industries shift some production to the informal sector without new investment to support that shift, the result is a crowded, lower-productivity informal economy where earnings decline even as employment technically grows.

The Economic Policy Institute has documented how economic restructuring in countries like India, Egypt, El Salvador, Russia, and South Africa has had a measurably negative effect on the quality of employment – reducing earnings and benefits for workers pushed into informal arrangements. In India, for instance, the shift away from state-protected industries created a surplus of displaced workers who had few options beyond self-employment in the informal sector. This process – sometimes called informalization of formal employment – is one of the defining labor market trends of the past four decades.

Employment insecurity: the defining challenge of informal work 🔗

At the heart of the informal sector’s composition lies a critical structural problem: employment insecurity. A 2007 definition of informal employment describes it as work without employment security, work security, or social security. Informal workers have no written contracts, no paid leave, no health insurance, and no protection against dismissal. They are entirely exposed to economic shocks, illness, or policy changes that can wipe out their livelihoods overnight.

Informal workers are unprotected against negative shocks such as ill health, and for many, there is simply no viable path into the formal sector. World Bank research shows that informal workers earn lower salaries than formal workers with equivalent skills, with the formal wage premium estimated at between 10 and 50 percent depending on the country. In Egypt, for instance, an informal worker between 2008 and 2009 had only a 4 percent chance of transitioning into a private sector formal job. The barriers to upward mobility are structural, not individual.

Women face compounded disadvantages. The connection between informal employment and poverty is stronger for women than for men. Women tend to be overrepresented in the most precarious and lowest-earning segments of the informal sector – including home-based work, domestic service, and petty trade – while men dominate the relatively better-off upper tiers of self-employment. In regions like South Asia, Africa, and Latin America, women are primarily employed in the informal services and commerce sectors, where earnings are erratic and protections are virtually nonexistent.

Harassment, eviction, and the hostile urban environment 🔗

Beyond income insecurity, informal workers – particularly street vendors – face an actively hostile policy environment in many cities. Despite providing essential services, many informal workers are regularly harassed or repressed by police and local authorities, subjected to confiscation of goods, demands for bribes, and violent evictions. In September 2011, more than 7,000 street vendors were forcibly removed from the streets of Kampala, Uganda, with bulldozers razing their stalls. Nigeria has deployed specialized enforcement units to carry out mass evictions of traders. In China, informal street vendors have long faced systematic harassment from urban management officers.

Research from the WIEGO Informal Economy Monitoring Study shows that the most common and damaging challenges are not large-scale evictions, but the everyday harassment that vendors face when operating without licenses in uncertain regulatory environments – including confiscation of merchandise, forced relocation, and the payment of unofficial fees. These daily disruptions reduce earnings, erode assets, and make long-term planning nearly impossible.

Rethinking policy toward the informal sector 🔗

The scale of the informal sector demands a fundamental shift in how urban planners and policymakers approach it. Industrial and other policies that upgrade productive structures toward diversification and economic complexity are essential for the long-term transition toward formal employment. But in the short and medium term, what informal workers need most is recognition, protection, and infrastructure. WIEGO’s research recommends that urban planners study the carrying capacity of areas used by informal workers and deliver the infrastructure needed to support them – running water, electricity, storage, and shelter – alongside legal rights such as appropriate licensing and permit practices.

Expanding social protection coverage to informal workers is widely recognized as a critical first step – providing them with the security to take economic risks, invest in their enterprises, and gradually move toward greater formalization. Without addressing the structural causes of informality – including inadequate formal job creation, restrictive regulations, and poorly managed industrial transitions – millions of urban workers will remain locked in precarious livelihoods regardless of how hard they work.

What do you think? As cities in the developing world continue to grow rapidly, should urban planning prioritize formalizing the informal sector or focus on improving conditions within it? And considering that industrial policy reforms often push workers from formal jobs into informal ones, who bears the responsibility for protecting those workers – governments, corporations, or international institutions?

References

1. https://www.ilo.org/resource/statement/world-employment-and-social-outlook-trends-2024-ilo-director-generals
2. https://www.sciencedirect.com/science/article/pii/S0197397515002325
3. https://www.wiego.org/informal-economy/
4. https://www.wiego.org/informal-economy/statistical-picture/
5. https://www.wiego.org/informal-economy/occupational-groups/
6. https://journals.sagepub.com/doi/full/10.1177/0956247816653898
7. https://www.wiego.org/wp-content/uploads/2019/09/IEMS-Sector-Full-Report-Street-Vendors.pdf
8. https://www.urbanet.info/urban-informal-economy/
9. https://www.wiego.org/wp-content/uploads/2019/09/IEMS-Home-Based-Workers-Full-Report.pdf
10. https://en.wikipedia.org/wiki/Informal_economy
11. https://wol.iza.org/articles/do-economic-reforms-hurt-or-help-informal-labor-market/long
12. https://www.epi.org/publication/books_good_jobs/
13. https://wol.iza.org/articles/informal-employment-in-emerging-and-transition-economies/long
14. https://documents1.worldbank.org/curated/en/416741468332060156/pdf/WPS6888.pdf
15. https://www.mdpi.com/2071-1050/14/12/7213
16. https://www.un.org/sites/un2.un.org/files/2024/04/unen_policy_brief_march_2024.pdf
17. https://www.unglobalaccelerator.org/sites/default/files/2023-05/Roadmap_Transition%20to%20formality.pdf