Abstract This paper provides a critical review of the informal sector debate in recent studies of Third World poverty and employment. The use of the informal sector concept in the ILO World Employment Programme studies at country, city and sector level is discussed and definitional confusions in different conceptualizations are identified. Recognition of the essentially dependent and involutionary nature of the informal sector has resulted in critical concern with the limitations of this dualist model, both as a theoretical concept and as a basis for policy recommendations. An alternative more satisfactory model is presented, based on petty commodity production and its subordinate relationship to the capitalist sector. In identifying a continuum of productive activities, with complex linkages and dependent relationships, the dynamics of production and constraints on expansion are distinguished. Clarification as to whether the linkages are benign or exploitative is essential in order to assess whether petty commodity production is tolerated by or functional to, the capitalist system.