Urban inequality: informal economies and gated communities

Formal and informal economies

The formal economy is registered, taxed and regulated: contracts, regular wages, minimum wage, sick pay, pensions and safety rules. The informal economy is unregistered and untaxed: street vendors, waste pickers, home-based workers, casual labourers, rickshaw drivers.

The ILO (2018) found about 2 billion people, over 61% of the world's employed population, work informally, and 93% of informal employment is in emerging and developing countries.

Source: ILO (30 April 2018)

Why informality creates inequality

Informal workers have:

• lower and irregular pay, so income inequality widens;
• no security: no contract, no sick pay or pension, can be evicted from street pitches;
• poor working conditions and few human rights protections (long hours, hazards, child labour);
• no access to credit or training.

Because they pay no tax, governments also have less to invest in services. The June 2025 mark scheme also credited the counter-argument: informal pay is better than none, so the informal economy can reduce inequality. The January 2024 mark scheme credited causes of inequality such as rural-urban migration, discrimination, governance and corruption, colonial legacy and urban growth straining services.

Gated communities

A gated community is a residential area with walls, gates, security guards and private services (often schools, shops, leisure). They are common in developed and emerging world cities.

• They reflect inequality: only higher-income groups can afford them.
• They respond to inequality: residents seek safety from crime and escape poor public services.
• They reinforce inequality: they fragment the city, privatise public space, reduce contact between social groups and divert investment away from public services.

Worked example

Explain how the informal economy can both widen and reduce urban inequality.

1. Widen: informal work is low-paid and insecure with no social protection, so informal workers fall further behind formal workers.
2. Widen: no tax is paid, so the government has less to spend on services for the poor.
3. Reduce: it gives income to people who would otherwise have nothing, often the poorest migrants.

Answer: Mostly it widens inequality, but it is better than no income: a balanced answer shows both.

Check yourself

1. Using the ILO figures, how many percentage points higher is informality in Africa than in Europe and Central Asia? Give your answer to 1 decimal place.
   Show answer

   60.7 percentage points. 85.8 - 25.1 = 60.7 percentage points.

2. Which is an example of informal employment?
   • A teacher in a state school
   • A bank clerk with a contract
   • A factory worker with sick pay
   • An unregistered street food seller
   Show answer

   An unregistered street food seller. It is unregistered and untaxed.

3. Why are informal workers especially vulnerable when they fall ill?
   • They pay too much tax
   • They usually have no sick pay or social protection
   • Their employers must keep paying them
   • They have pensions
   Show answer

   They usually have no sick pay or social protection. No social protection means no income when not working.

4. Gated communities are said to reinforce inequality because they
   • provide cheap housing for the poor
   • increase public investment in slums
   • separate richer residents from public spaces and services used by others
   • reduce crime for everyone in the city
   Show answer

   separate richer residents from public spaces and services used by others. They fragment the city and privatise space.

5. How can a large informal economy reduce public services in a city?
   • Less tax is collected to fund services
   • Informal workers demand fewer services
   • It increases government revenue
   • It makes services free
   Show answer

   Less tax is collected to fund services. Untaxed activity reduces revenue.

6. Explain why gated communities develop in cities with high income inequality.
   Show answer

   Wealthy residents fear crime and are dissatisfied with poor public services, so they pay for walled, guarded estates with private security and services, separating themselves from poorer groups.. Fear, wealth, separation.

Practise with instant feedback Print this lesson

Sources

• Pearson Edexcel International Advanced Subsidiary/Advanced Level in Geography specification, Issue 3 (September 2025)
• International Labour Organization (30 April 2018): More than 60 per cent of the world's employed population are in the informal economy
• Pearson WGE02/01 mark scheme, June 2025
• Pearson WGE02/01 mark scheme, January 2024

Last updated 8 November 2026. Spotted a mistake? Tell us.