It is customary to include all economic activities that are not officially regulated as informal sector activities. The usual definitions used to distinguish the informal sector from the formal one appear to be problematic or fussy at their edges. This dichotomy is not mutually exclusive as often thought but is in fact interdependent in many respects. It is also argued that informal enterprises often move upwards in a hierarchy of organizational forms and finally end up as formal sector units through vertical linkages. The informal sector provides jobs for very vulnerable low-income groups in rural and urban sectors while contributing to the GDP immensely in developing countries. This paper critically examines the nature of the informal sector in Sri Lanka and studies the links between the informal sector and its economy. The analysis entirely employs secondary data and information. The findings of the study demonstrate that the domestic (traditional) agriculture and related activities in Sri Lanka are dominated by the informal sector, which in turn is further strengthened by underworld activities. The fear of tax burden, bribes, bureaucratic bungling, archaic rules and regulations, and lack of dividends in formal activities drive many people from the formal sector to the informal one. The informal sector provides jobs and reduces unemployment and underemployment, but in many cases the jobs are low paying and job security is poor. It bolsters entrepreneurial activities, but at the detriment of state regulations’ compliance, particularly regarding tax and labor regulations.
Informal Sector; Linkages; Employment; State Regulations.