Informalisation

Also called: Informalisation of workforce · Topic: Employment, Unemployment and Informalisation · NCERT: Class 11, Ch 6 "Employment: Growth, Informalisation and Other Issues"

Meaning

Informalisation means that the quality of jobs gets worse, because a growing share of workers end up in jobs with no written contract, no paid leave and no social security. This can happen in informal firms and also in formal ones. It matters because India's economy has grown, but most jobs have not become secure. About 89% of workers were informal in 2019-20.

Formula: share of informal employment (%) = (informal jobs in both the formal and informal sectors ÷ total employment) × 100

Explanation

What workers lose

• Social security means protection from the employer or society against old age, sickness, maternity, injury or job loss. As per the ILO, it guarantees access to health care and income security, and it is a basic human right [2].
• Informal workers can go 10-20 years without:
• maternity benefit;
• PF (Provident Fund, a savings fund that both employer and employee pay into);
• gratuity (a lump sum paid when a worker leaves after long service);

• a pension.

• Private-sector pay is lower than public-sector pay for the same work.

• Informalisation is not the same as casualisation.
• Casualisation means moving into casual wage work, which is paid by the day or by the task, with no promise of work tomorrow.
• Informalisation is about losing protection. A "regular" job can still be informal if it has no contract and no PF.

How it happens

• Organised firms acting as unorganised units (Class 10):
• Registered firms run parts of their work as small, unregistered units to evade taxes and labour laws.

• Organised-sector jobs have been lost since the 1990s, and those workers moved into low-paid unorganised work.

• Contract labour:

• The worker is hired through a contractor to work for a principal employer (the firm where the work is actually done).
• The worker gets lower wages and little job security.

• The Contract Labour (Regulation and Abolition) Act, 1970 is now part of the OSH Code (Occupational Safety, Health and Working Conditions Code, 2020), which merges 13 laws [2].

• Outsourcing:

• Big firms give out work as piece-rate jobs (paid per piece made, not per day) to tiny firms or to homes.

• The big firm saves on wages and does not have to give social security.

• Mill closures and the loss of formal jobs: see the Ahmedabad case below.

Box 6.2: Informalisation in Ahmedabad (NCERT Class 11)

• Before: over 60 textile mills employed 1,50,000 workers.
• Workers had secure jobs and a living wage (enough to meet a family's basic needs with dignity, which is more than the minimum wage).

• They had health and old-age cover and a strong union that also ran welfare activities.

• The closures: mills across India began closing in the early 1980s. Mumbai's mills closed fast. Ahmedabad's closures stretched over about 10 years.

• The job losses: over 80,000 permanent and 50,000 non-permanent workers lost their jobs and were pushed into the informal sector.
• The social fallout:
• recession and communal riots;
• alcoholism and suicides;
• children taken out of school and sent to work;

• a whole class pushed from the middle class into poverty.

• The "balance of power" in the home changed. The unemployed mill worker now peels garlic, and his wife earns the money by rolling beedis.

• Lesson: informalisation is not only about lower income. It breaks families, communities and social peace.

Measuring it: enterprise vs job

• Informal sector is measured by the enterprise. It means small, unincorporated (not a company), unregistered units, mostly owned by households. This is the ILO 15th ICLS, 1993 definition. (ICLS is the International Conference of Labour Statisticians, organised by the ILO.)
• Informal employment is measured by the job. It covers all paid work that is "not registered, regulated or protected" by law, and it also includes unpaid work in a family enterprise. This is the ILO 17th ICLS, 2003 definition [4].
• In 2003 the focus moved from the production unit to the job [4]. In India, NCEUS (the National Commission for Enterprises in the Unorganised Sector, also called the Arjun Sengupta Commission) adopted the job-based view.
• Worked example: there are 100 workers.
• 80 work in the informal sector, and all of those jobs are informal.
• 20 work in formal firms, but 10 of them have no contract or PF.
• Informal employment = (80 + 10) ÷ 100 × 100 = 90%.
• The informal sector's share is only 80%. The gap of 10 comes from informal jobs inside formal firms.

In India

• What planners expected, and what happened:
• Planners expected the informal share to shrink as the economy grew, with workers moving into factories and offices.
• Instead, about 89% of workers were informal in 2019-20.

• India has more than 50 crore workers, and almost 90% of them are in the unorganised sector (2025) [2].

• Who bears it most: most workers from SC, ST and backward communities are in the unorganised sector. They also face social discrimination (Class 10).

• The policy push to reverse it (formalisation):
• 4 Labour Codes: 29 labour laws were combined into 4 codes [2].
• The Code on Social Security, 2020 merges 9 laws [2]. It:
  • opens ESIC (Employees' State Insurance Corporation, which gives medical care and sickness cash benefits) to all sectors, including gig and platform workers [2];
  • gives fixed-term employees the same social security as permanent staff, and removes the minimum service rule for their gratuity [2];
  • creates a social security fund for the unorganised sector [2].
• e-Shram: a national database of unorganised workers, launched in 2021 [2].
  • Each worker gets a Universal Account Number (UAN) on a self-declaration basis [3].
  • Registrations passed 30.95 crore by 22 July 2025 [3].
  • Women made up 53.77% of enrollees (June 2025) [2].
  • The "One-Stop-Solution", launched on 21 October 2024, links workers to many social security schemes [3].

• Voluntary schemes:

  • PM-SYM gives a pension of ₹3,000 a month after age 60. It had 51.35 lakh members (May 2025) [2].
  • Atal Pension Yojana had 7.25 crore subscribers (December 2024) [2].

• Coverage outcome: social protection coverage rose from 19% (2015) to 64.3% (2025), which is 94.3 crore people, as recorded on the ILO's ILOSTAT database [2].

• Caveat: this counts anyone covered by at least one legally backed cash scheme. It does not mean they have a formal job with a contract [2].

• EPFO payroll data: there were 1.29 crore net additions in 2024-25 [2]. This is a debated proxy (an indirect measure) for formal jobs, because a new member may be a new job or just an old job that has now been registered.

Don't confuse with

• Informal sector: this is defined by the enterprise (15th ICLS, 1993). Informalisation of the workforce is about the job (17th ICLS, 2003). A temporary computer operator in a government office, with no contract or PF, is in informal employment even though the employer is formal.
• Casualisation: this is a shift in the status of work, into daily or short-term wage work. The casual share fell from 31.8% (1993-94) to 19.9% (2023-24), but informality stayed near 90%. Status and security move separately.
• Formalisation: this is the opposite process. Firms and workers move into the registered, taxed and regulated economy through GST, Udyam, EPFO/ESIC and e-Shram.
• Unemployment: an informal worker is employed. The problem is poor job quality, not the lack of a job.

Prelims Hooks

• Informal employment = paid work "not registered, regulated or protected" by law, whether the employer is formal or informal. This is the ILO 17th ICLS, 2003 definition [4]. The informal sector follows the 15th ICLS, 1993 definition.
• Trap: the share of informal employment can be higher than the informal sector's share of employment, because formal firms also hire informal workers.
• About 89% of workers were informal in 2019-20. Almost 90% of India's 50 crore+ workers are unorganised (2025) [2].
• Box 6.2 (Ahmedabad): 60+ mills and 1,50,000 workers. 80,000 permanent + 50,000 non-permanent workers lost their jobs after closures that began in the early 1980s.
• e-Shram (launched 2021) gives a UAN on self-declaration [2][3]. It passed 30.95 crore registrations (July 2025) [3].
• The Contract Labour Act, 1970 is now in the OSH Code, which merges 13 laws. The Code on Social Security, 2020 merges 9 laws [2].

Mains Points

• Growth without decent work (GS-III):
• Planners expected informality to shrink with growth, yet about 89-90% of workers are still informal (2019-20; 2025) [2].

• This links to jobless growth, weak manufacturing and the dual labour market. It also fails the ILO's decent work pillars (employment, rights at work, social protection, social dialogue) under SDG 8 [4].

• Formalisation: carrots vs sticks:

• The Labour Codes, e-Shram and ESIC for gig workers raised coverage to 64.3% (2025) [2].
• But compliance costs (money and time spent on registration, returns and PF/ESIC contributions) can push MSMEs to stay small or hide workers. That is the same "organised firms acting as unorganised units" problem.
• EPFO data (1.29 crore, 2024-25) cannot cleanly separate job creation from job registration [2].

• Suggest simple thresholds, state-paid contributions for poor workers, and portability of benefits through the UAN.

• Social justice angle (GS-I/GS-II):

• The Ahmedabad closures led to poverty, child labour, riots, suicides and a change in gender roles at home.
• SC/ST and backward communities are concentrated in the unorganised sector.
• So labour reform is also a question of social justice and dignity, not only of income.

Related concepts

• Casualisation of workforce
• Informalisation of the organised sector
• Contract labour
• Social discrimination in the labour market
• Informal employment
• Formal employment
• Formalisation of the economy
• Decent work

Read more

• Casualisation, informalisation and formalisation