Formalization or Informalization of Work? A Simple Industrial Organization Approach

The paradox of the recent development experience in India is that while the pace of modernization has picked up momentum, aided, to a large extent, by the tremendous strides in the information technology, there is also a growing trend toward informalization of the work force. The dominance and growth of the informal, unorganized sector – in terms of at least employment of labour – has overshadowed the organized, formal sector. There are several empirical studies on the growth of informal sector in India and also some theoretical studies that attempt to capture the interrelationship and interaction between the formal sector and the informal sector in terms of general equilibrium analysis in the overall context of macroeconomic policy making. The present paper, however, seeks to examine the factors behind the emergence and sustenance of informal work. To be more precise, we intend to examine the issues related to the employers’ decision whether to hire/employ, if possible, workers under formal or informal arrangements. In other words, the paper primarily attempts to analyze an employer’s labour choice problem under alternative contractual arrangements.