What Is the Difference Between Formal and Informal Working?

There’s a general understanding that the word “work” refers to any job or task that people perform in exchange for money or for some other type of benefit. However, economists have identified two common types of work: formal and informal. Although both types of work involve jobs and tasks in exchange for money or benefits, there are some differences between the two involving things such as contracts, compensation, and job security.

Formal work refers to work in which a company hires an employee under an established working agreement that includes, salary or wages, health benefits, and defined work hours and workdays. In most instances, employees don’t work under a signed contract, but rather work under the agreement reached when the employer offered the job to the employee. This agreement remains in force until the employer makes a change and informs an employee about those changes. Employees in a formal work agreement are often given an annual performance evaluation and are eligible for salary increases and promotions based on their performance.

Informal work refers to work in which an employer hires an employee without an established working agreement. With informal work, employees don’t receive health benefits and are often hired temporarily. Their work hours are not guaranteed, which means that in one week they may work 30 hours, and the following week they may work only 10 hours. Informal workers are treated like contractors, and often bounce from one job to another. In most instances, informal workers are paid in cash, but if they are paid by check, no taxes are deducted from their salary.

One primary difference between formal work and informal work is that formal work is far more stable than informal work. The reason for this is that companies invest time, training, and education in formal work employees, so that they can gain new skills that will benefit the business. Companies that provide informal work are seeking temporary employees to perform short-term tasks, typically seasonal work, which will end in a few weeks or months.

Another major difference is that formal work typically pays higher wages than informal work. The reason is that formal work tends to require a higher level of education or training than informal work. For example, a computer programmer is a type of formal work that requires a specific set of skills. In contrast, a person hired to haul old computers to a recycling dump is performing informal work that doesn’t require any type of specialized training. As a result, formal workers typically earn higher salaries and wages than informal workers.

Formal and informal work is also different when it comes to taxes. Formal workers are taxed under the existing tax guidelines and receive paychecks that reflect these taxes. Informal workers are not taxed and are responsible for paying their own taxes. As a result, a country that relies mostly on informal work may not receive all the taxes owed under the law, since there may be millions of workers that choose not to report their incomes and pay taxes on that income.