FORMAL ECONOMY WORKER

A worker whose economic activities are recorded in statistics, registered, protected and covered by labour legislation and other relevant laws of the state.

"The employment of formal workers is regulated by labor market legislation; such workers receive benefits, cannot be dismissed unless the firm has accumulated sufficient evidence, and receive severance pay when dismissed. This implies that the adjustment cost associated with the employment of such workers is higher compared to the employment of informal workers, which is not governed by any legislation."
(Goldberg, P.K., and N. Pavcnik, The Response of the Informal Sector to Trade Liberalization, Yale University, May 2003, visited 2009-06-25)

If the formal economy is considered to be the official economy as recognized by governments, those workers who are part of the formal economy are generally more likely to earn decent wages, receive job-related benefits, have secure employment contracts and be covered by relevant laws and regulations. In most developing nations, formal workers tend to be more experienced and better educated than informal workers, a fact often interpreted as evidence that low-skill workers face barriers to entry into the formal sector.

As the economically active population increases, the formal economy is unable to absorb all those seeking work, especially in the developing world. Many turn to the informal economy because they cannot find jobs or are unable to start businesses in the formal economy.
(adapted from A spotlight on inequality: the informal economy, The Inequality Predicament, Chapter II, United Nations, 2005, pp. 29-42, visited 2009-06-25)