Formal and Informal Sectors

In MEDCs the majority of people are employed or self-employed and pay taxes on their earnings. If they attempt to avoid their taxes, the inland revenue services fine them large sums of money. LEDCs are different to this. Although they have large numbers of people who are employed in the formal sector who work fixed hours and pay their taxes to the government, there are also an increasing number of people who are employed in the informal sector. The informal sector in LEDCs is made up of jobs that people have found for themselves. These include jobs as beach vendors, shoe shiners and the businesses that set up to serve shanty town dwellers.

The jobs have much in common:

They require little capital to set up
They require few skills.
Many of them are done from home.
They are labour intensive.
They are small scale.

As urban areas in LEDCs continue to grow, the informal sector will also grow as there will not be enough jobs in the formal sector. This robs the government of taxes, but as the money which is earned is generally re-spent the multiplier effect will apply (see below).