Developing an Original Theoretical Model of Informal-Formal Sector Interaction in Nigerian Urban Economies

The informal sector in Nigerian cities is not a residual category but a dynamic economic subsystem that interacts with the formal economy in complex ways affecting growth, labour allocation, and poverty, and developing an original theoretical model of these interactions constitutes an important contribution to urban economics and development theory. This study developed an original Informal-Formal Sector Interaction Model for Nigerian Urban Economies, drawing on structural economics, segmented labour market theory, and empirical research in Lagos, Kano, and Enugu. A theory-building methodology combining systematic review of 68 informal economy theory publications from 2018 to 2024, extensive primary data collection from 400 informal and 200 formal sector enterprises across three cities, and expert consultation with 25 urban economists was employed. Primary data analysis using transaction network mapping and supply chain tracing revealed that 73 percent of formal sector SMEs sourced at least one input from informal suppliers, and 54 percent of informal sector enterprises served formal sector consumers. The bidirectional dependency was substantially larger than standard dual economy models predict. The original Informal-Formal Interaction Framework proposes four interaction mechanisms: supply chain integration, labour market straddling, competitive coexistence, and regulatory arbitrage. Each mechanism is theorised with firm-level and labour-level implications. The framework predicts that formalisation policies that ignore informal-formal dependencies will reduce total urban economic output by disrupting established supply chain relationships. Expert review confirmed the framework's original contribution. Recommendations include integration-preserving formalisation pathways.

Keywords: informal-formal interaction, urban economy, Nigeria, labour market, original theory