Inequality between Formal and Informal Sector: Factors and Solutions

The government sets minimum wage standards for formal sector workers in different regions, ensuring a baseline level of incsome. Minimum wage laws vary by province, with higher rates in urban areas. These policies help formal workers secure higher and more predictable incomes. 

Informal workers, on the other hand, are typically not covered by these minimum wage regulations, and their income often depends on market demand, negotiations with employers, or daily earnings. As a result, informal sector wages are usually lower, and the lack of regulation increases the contras with formal sector incomes.

Legal and Regulatory Barriers

Businesses and workers in the formal sector operate under a clear legal framework, which includes employment contracts, labor regulations, and business laws. This structure ensures that formal workers are protected by legal rights such as minimum wages, working hours, and benefits. 

The informal sector often exists outside the formal legal framework, which means workers and businesses lack legal recognition, making it difficult for informal workers to access government support, credit, and legal protections. 

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Inequality between those sector are driven by this factor

• Education and Skills, Formal sector workers generally have higher education and skills, allowing them access to better-paying jobs, while informal workers often have lower educational attainment and are confined to low paying jobs.

• Lack of Legal Protection and Social Security, Informal workers typically lack access to social protections like health insurance and pensions, leaving them vulnerable, unlike formal workers who enjoy these benefits.

• Job Stability, Formal sector jobs offer more stability, with contracts, regular wages, and career advancement opportunities, whereas informal workers face income instability and market fluctuations.

• Access to Technology and Capital, Formal workers have better access to technology and capital, boosting productivity and earnings, while informal workers rely on traditional tools and face challenges in accessing finance.

• Social Stigma, Informal work is often viewed as less prestigious, affecting societal perceptions and expectations of income, with formal jobs seen as more desirable.

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Some solution for the issue are

• Increase Access to Education and Skills Training, Expanding vocational training and certification programs can help informal workers improve their skills, leading to better job opportunities in the formal sector or enhanced earnings in the informal sector.

• Expand Social Security Coverage for Informal Workers, The government should enhance social protection for informal workers by increasing access to programs like BPJS Ketenagakerjaan, providing health insurance and pensions to improve their financial security.

• Strengthen Inclusive Policies for the Informal Sector, Implementing inclusive policies, such as simplifying the legalization process for small businesses and increasing access to microcredit, can empower informal workers to boost their productivity and income.

• Digitalization and Improved Access to Technology, Enhancing access to digital technology can open new markets for informal workers. Government initiatives should include digital training and improving internet infrastructure to help informal workers leverage technology for better earnings.

• Social Awareness Campaigns,  Promoting a positive perception of informal work through social awareness campaigns can help reduce stigma and enhance appreciation for informal workers, motivating them to improve their contributions to the economy.