India's Labour Market Structure

Formal employment means work that is protected: the worker has a written contract, paid leave and social security such as a provident fund, pension or health insurance. Informal employment means work without these protections. In India, a very large share of workers, around 90% by most estimates, are in informal employment. Moving workers from informal to formal work is called formalisation, and it is one of the biggest goals of India's labour policy.

Why does the difference matter?

Think of two workers who both earn ₹15,000 a month. One works in a company that pays into his PF, gives him paid leave and covers him under health insurance. The other works at a small eatery with no contract. If the second worker falls sick, he loses his wages and maybe his job. He has no savings for old age.

So the two jobs pay the same, but one gives security and the other gives none. A country with mostly informal jobs has workers who are one illness or one bad month away from poverty. The government also collects less tax and finds it hard to reach these workers with help.

Two different ideas: informal sector and informal employment

Students often mix these up.

• Informal sector is about the business (enterprise). India's National Commission for Enterprises in the Unorganised Sector (NCEUS), set up in 2004 and chaired by Arjun Sengupta, defined it as unincorporated private businesses owned by individuals or households, run as proprietorships or partnerships, with fewer than 10 workers.
• Informal employment is about the job. A worker is informally employed if the job gives no social security from the employer and no paid leave, even if the company is large and formal.
• So a big formal company can have informal workers too. For example, a contract security guard at a large bank, with no PF and no paid leave, is in informal employment inside a formal enterprise.

Where did these definitions come from?

The International Labour Organization (ILO) sets global rules for counting work, through a meeting called the International Conference of Labour Statisticians (ICLS).

• The 15th ICLS (1993) defined the informal sector, based on the type of enterprise.
• The 17th ICLS (2003) added the job-based idea of informal employment, which counts unprotected workers in both formal and informal enterprises.
• India's NCEUS used these ideas and gave its own definitions of the unorganised sector and unorganised workers in its reports from 2007 onwards.

How does India measure it?

The main source is the Periodic Labour Force Survey (PLFS), run by the National Statistics Office (NSO) under the Ministry of Statistics and Programme Implementation (MoSPI). The PLFS sorts workers into three types:

1. Self-employed: People who run their own work, like farmers, shopkeepers or street vendors, plus family members who help without pay.
2. Regular wage or salaried workers: People who get a salary regularly from an employer.
3. Casual labourers: People who get daily or short-term work, like construction labour.

According to the PLFS 2023-24 (July 2023 to June 2024), about 58.4% of workers were self-employed, 21.7% were regular wage or salaried, and 19.8% were casual labourers. Even among the regular salaried workers, about 58% had no written job contract, and about 53% were not eligible for any social security benefit. This shows that even having a "salary" does not always mean having a formal job.

Other data sources tell part of the story too:

• EPFO and ESIC payroll data: monthly counts of new members. It shows formal hiring, but also counts workers who were only newly registered.
• e-Shram portal (2021): a national database of unorganised workers, with more than 30 crore registrations.
• Annual Survey of Unincorporated Sector Enterprises (ASUSE): counts small unregistered businesses.

Why is India so informal?

Several reasons work together:

• Agriculture still employs a large part of the workforce, and almost all farm work is informal.
• Small firm size: Most businesses are tiny. Many stay small on purpose to avoid labour laws and compliance costs.
• Complex labour laws (until recently): Many laws applied only above a certain number of workers. So firms stayed below that number.
• Low skills and education limit access to formal jobs.
• Contract labour: Even large firms hire many workers through contractors, without PF or leave.

What has India done about it?

• Four Labour Codes: The Code on Wages (2019), the Industrial Relations Code (2020), the Code on Social Security (2020) and the Occupational Safety, Health and Working Conditions Code (2020) came into force on 21 November 2025. They replace 29 old central labour laws and extend social security to gig and platform workers.
• Digital payments and GST (2017): These bring more businesses into the tax and banking net, which makes formal hiring easier.
• Hiring incentives: PMRPY (2016), ABRY (2020) and now PMVBRY (2025) pay part of the cost of formal hiring.
• Social security for the unorganised: e-Shram, the Pradhan Mantri Shram Yogi Maan-dhan pension scheme (2019) and Ayushman Bharat health cover.

Commonly confused concepts

• Organised vs formal: In Indian usage, "organised sector" usually means registered businesses with 10 or more workers. "Formal employment" is about the job's protections. A job in the organised sector can still be informal.
• Unemployment vs informality: An informal worker is employed, but in an unprotected job. Low unemployment numbers can hide very high informality.
• Formalisation vs job creation: Registering an old worker with the EPFO is formalisation, but it is not a new job. EPFO data mixes both.
• Gig workers: They are a newer type of informal worker, who get work through apps. The Code on Social Security, 2020 recognises them for the first time.

Issues, criticism and the way forward

• Measuring is hard: Different surveys use different definitions, so figures on informality range from about 85% to over 90%. India needs one clear, regular measure.
• Low-quality jobs: Growth of self-employment and unpaid family work, especially among women, may reflect a lack of good jobs rather than choice.
• Cost for small firms: Formal hiring raises costs for tiny businesses. If pushed too hard, some may shut down or hide workers.
• Women's work: Many women work in home-based or unpaid family work, which is almost entirely informal.
• Way forward: Experts suggest simpler compliance for small firms, portable social security that follows the worker (not the employer), better skills training, growth of labour-intensive manufacturing, and stronger data through regular PLFS and enterprise surveys.

Concepts to Know

• Social security: Protection given to a worker against risks like old age, illness, accident or job loss, through pension, insurance or provident fund.
• Unincorporated enterprise: A business that is not registered as a company. The owner and the business are legally the same, like a local kirana shop.
• Proprietorship and partnership: A proprietorship is a business owned by one person. A partnership is a business owned by two or more people who share profits.
• ILO (International Labour Organization): A UN agency, set up in 1919, that sets global labour standards. India is a founding member.
• ESIC (Employees' State Insurance Corporation): A body that gives health insurance and cash benefits to workers, under the ESI Act, 1948.
• Compliance cost: The time and money a business spends on following rules, such as filing returns and keeping records.