nformal employment in developed and developing economies: Perspectives and policy responses
December 2013
International Labour Review 152(3-4)
DOI: 10.1111/j.1564-913X.2013.00196.x
Project: Evaluating the informal economy in South Asia
Authors:
Colin C Williams
The University of Sheffield
Mark A. Lansky
International Labour Organization
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The aim of this introductory article is to provide a critical overview of how informality has been defined and measured, together with selected findings on its extent and character, and a summary of competing views regarding its role in contemporary economies and how it can be tackled. The outcome is a set of conceptual frameworks for understanding both the burgeoning literature on informal employment and how each of the perspectives presented in this Special Issue contributes to the advancement of knowledge on this subject so as to set the scene for the articles that follow.
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Informal employment in developed and developing economies: Perspectives and policy responses
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DOI: 10.1111/j.1564-913X.2013.00196.x
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International Labour Review, Vol. 152 (2013), No. 3–4
Informal employment in developed and developing economies: Perspectives and policy responses
Colin C. WILLIAMS* and Mark A. LANSKY**
Abstract. The aim of this introductory article is to provide a critical overview of how informality has been defined and measured, together with selected findings on its extent and character, and a summary of competing views regarding its role in contemporary economies and how it can be tackled. The outcome is a set of conceptual frameworks for understanding both the burgeoning literature on informal employment and how each of the perspectives presented in this Special Issue contributes to the advancement of knowledge on this subject so as to set the scene for the articles that follow.
In the past two decades, according to Google Scholar, 3,170 outputs have been published with the “informal sector” in the title and a further 1,550
with the “informal economy” in the title. Making sense of this voluminous literature is a difficult task.
Accordingly, the aim of this introductory article is to provide some conceptual frameworks to understand the various definitions and measurement methods used in the literature, the differing perspectives on the role of informality in contemporary economies, and the varying policy approaches regarding how it should be tackled.
In doing so, the intention is not only to provide some heuristic devices for understanding this voluminous literature, but also to show how the ten articles in this Special Issue contribute to advancing knowledge on patterns of informality and its dynamics across the global economy – from labour law violation in developed countries to survivalist strategies in developing and emerging economies.
The remainder of this article is organized into five main sections. The first addresses the perennial challenges of defining and measuring informal employment by reviewing the range of definitions and diverse measurement methods that are being used. The second section then considers the emergence of more
* University of Sheffield, email: c.c.williams@sheffield.ac.uk. ** Managing Editor, Inter- national Labour Review, ILO, email: lansky@ilo.org. The authors would like to express special thanks to Uma Rani, Jayati Ghosh and Guy Mundlak for their helpful suggestions.
Responsibility for opinions expressed in signed articles rests solely with their authors, and publication does not constitute an endorsement by the ILO.
Copyright © International Labour Organization 2013
Journal compilation © International Labour Organization 2013
nuanced understandings of the variable magnitude and character of informal employment across the globe, along with current patterns of informality. This is followed in the third section by an overview of the contrasting theorizations of the role of informal employment in contemporary economies, whilst the fourth section provides a conceptual framework for understanding the various ways in which informal employment can be and is being tackled. Against this background, the fifth section then reviews how each of the perspectives presented in this Special Issue contributes to the advancement of knowledge on informal employment, thus setting the scene for the articles that follow.
Defining and measuring informal employment
How to define informal employment and distinguish it from formal employment has been an ongoing debate ever since Keith Hart first introduced this concept in his work on Kenya and Ghana four decades ago (respectively ILO, 1972, and Hart, 1973). Across the vast literature that has ensued, all definitions delineate informal employment in terms of what is absent from it or insufficient about it relative to formal employment, although what precisely is denoted as lacking or missing differs depending on whether an enterprise-, jobs- or activity-centred definition is used.
Informal enterprises, informal jobs and underground activities
Starting with the enterprise-centred definition, the 15th International Conference of Labour Statisticians in 1993 adopted a Resolution concerning statistics of employment in the informal sector that attempted to solve the ambiguities in meaning by defining “employment in the informal sector as comprising all jobs in informal sector enterprises, or all persons who, during a given reference period, were employed in at least one informal sector enterprise, irrespective of their status of employment and whether it was their main or a secondary job” (Hussmanns, 2005, p. 3). Focusing upon the type of firm and its legal status, this Resolution defined informal enterprises as “private unincorporated enterprises ... i.e. enterprises owned by individuals or households that are not constituted as separate legal entities independently of their owners, and for which no complete accounts are available that would permit a financial separation of the production activities of the enterprise from the other activities of its owner(s)” (ibid.). Since this definition was aimed primarily at improving labour statistics in developing countries, where the informal sector plays a major role in employment and income generation, it stressed that the activities of informal enterprises “are not necessarily performed with the deliberate intention of evading the payment of taxes or social security contributions, or infringing labour or other legislations or administrative provisions”. The concept of informal sector activities was thus initially distinguished from the concept of the hidden or underground economy (para. 5(3) of the Resolution).
Recognizing that this enterprise-centred definition did not capture all informal employment (e.g. in formal enterprises, private households or subsistence farming), the 17th International Conference of Labour Statisticians in 2003 adopted Guidelines concerning a statistical definition of informal employment, which complemented the enterprise-centred definition of “employment in the informal sector” with a job-focused definition of informal employment so as to include jobs both within and outside informal enterprises:
Informal employment, which encompasses all of the jobs included in the concept of employment in the informal sector except those which are classified as formal jobs in informal sector enterprises, refers to those jobs that generally lack basic social or legal protections or employment benefits and may be found in the formal sector, informal sector or households (ILO, 2011, p. 12).
This job-centred definition thus recognizes that formal businesses sometimes employ workers informally, evading payment of social security contributions, severance payments and other payments in case of dismissal. Moreover, it broadens the concept of informality to include the labour of household members producing goods exclusively for their own final use (e.g. subsistence farming), which was also excluded from the enterprise-centred definition adopted in 1993 (see Hussmanns, 2005). The full scope of “informal employment” is defined in paragraph 3 of the 2003 Guidelines, as follows:
(1) Informal employment comprises the total number of informal jobs as defined in subparagraphs (2) to (5) below, whether carried out in formal sector enterprises, informal sector enterprises, or households, during a given reference period.
(2) ... informal employment includes the following types of jobs:
(i) own-account workers employed in their own informal sector enterprises ...;
(ii) employers employed in their own informal sector enterprises ...;
(iii) contributing family workers, irrespective of whether they work in formal or informal sector enterprises ...;
(iv) members of informal producers’ cooperatives ...;
(v) employees holding informal jobs (as defined in subparagraph (5) below) in formal sector enterprises, informal sector enterprises, or as paid domestic workers employed by households ...;
(vi) own-account workers engaged in the production of goods exclusively for own final use by their household ..., if considered employed according to paragraph 9(6) of
the resolution concerning statistics of the economically active population, employment, unemployment and underemployment adopted by the 13th ICLS.
...
(5) Employees are considered to have informal jobs if their employment relationship is, in law or in practice, not subject to national labour legislation, income taxation, social protection or entitlement to certain employment benefits (advance notice of dismissal, severance pay, paid annual or sick leave, etc.). The reasons may be the following: non-declaration of the jobs or the employees; casual jobs or jobs of a limited short duration; jobs with hours of work or wages below a specified threshold (e.g. for social security contributions); employment by unincorporated enterprises or by persons in households; jobs where the employee’s place of work is outside the premises of the employer’s enterprise (e.g. outworkers without employment contract); or jobs for which labour regulations are not applied, not enforced, or not complied with for any other reason. The operational criteria for defining informal jobs of employees are to be determined in accordance with national circumstances and data availability.
While the above enterprise- and jobs-centred definitions dominate the literature on informality in developing and emerging economies, an activitycentred definition has been more common in developed countries, where informal employment typically occurs in the “underground economy” (European Commission, 1998 and 2007; OECD, 2012; Williams and Windebank, 1998). In this setting, the most frequently used reference is the Handbook on Measuring the non-observed economy, co-published in 2002 by the OECD, IMF, ILO and CIS STAT (Interstate Statistical Committee of the Commonwealth of Independent States) as a supplement to the System of National Accounts, SNA 1993 (see OECD et al., 2002). “The Handbook puts the informal sector in a broader context of non-observed economy and relates it to three other concepts, with which it is often confused: underground production; illegal production; and household production for own final use” (Hussmanns, 2005, p. 9). The SNA 1993, to which the Handbook refers, defines “underground production”
(hereinafter also termed “informal employment”) as
all legal production activities that are deliberately concealed from public authorities for the following kinds of reasons: to avoid payment of income, value added or other taxes; to avoid payment of social security contributions; to avoid having to meet certain legal standards such as minimum wages, maximum hours, safety or health standards, etc… (OECD et al., 2002, p. 139).
The characteristic of informal employment in this activity-based definition, therefore, is that the activity is not declared to, is hidden from or unregistered with the authorities for tax, social security and/or labour law purposes. If the good and/or service supplied is also illegal (e.g. drug trafficking), the activity is not counted as informal employment but defined separately as “criminal” activity; and if the activity is unpaid, it is also excluded. However, while any type of production unit (formal/informal sector enterprise or households) can be engaged in any type of activity (legal/registered, legal/underground, or il- legal), most informal activities in developing and transition countries are neither underground nor illegal, as they typically represent a survival strategy for the workers involved in them and for their households (Hussmanns, 2005, p. 10).
Significantly, since the International Labour Conference adopted its Resolution concerning decent work and the informal economy in 2002, the ILO has been using the term “informal economy” to refer to “all economic ac- tivities by workers and economic units that are – in law or in practice – not covered or insufficiently covered by formal arrangements”, in recognition of the wide diversity of informality across countries. However, given that the different definitions recalled above result in different enterprises, jobs and/or activities being classified as informal, it is important to recognize the definition used when reviewing studies. It is also crucial to understand the methods being used to assess the prevalence and nature of informal employment.
Measurement methods
Recent years have brought significant methodological advances in the measurement of informality, particularly in developing countries. A major contribution in this field is attributable to the work of the Expert Group on Informal Sector Statistics, the so-called Delhi Group, which was set up in 1997 by the United Nations Statistics Division to document data collection practices (e.g. national definitions and survey methodologies), exchange experience in the measurement of the informal sector, and recommend improvements in the quality and comparability of informality statistics. In particular, the Delhi Group, along with WIEGO (Women in Informal Employment: Globalizing and Organizing), actively collaborated with the ILO’s Department of Statistics to produce today’s most comprehensive and up-to-date reference work on the measurement of informality (see ILO, 2013b). In practice, however, diverse methods have been used to evaluate the extent and nature of informal employment, ranging from direct surveys to indirect methods that use proxy indicators and/or seek statistical traces in data collected for other purposes (ILO, 2013b; OECD et al., 2002; OECD, 2012; Williams and Ram, 2009).
Indirect methods seek evidence of informal employment in macroeconomic data collected and/or constructed for other purposes. They range from methods using monetary indicators as proxies, such as the number of large denomination banknotes in circulation, the cash deposit ratio and money transactions, through those using non-monetary proxies, such as discrepancies in the labour supply figures across different surveys, very small enterprises and electricity demand, and those using discrepancies between income and expenditure either at the aggregate level or at the household level, to measurement methods using multiple rather than single indirect indicators, such as the multiple-indicator multiple-cause (MIMIC) approach (for a review, see Williams and Ram, 2009).
Direct methods involve surveying people and/or businesses about informal employment. These direct survey methods differ in terms of whether they: explicitly communicate their definitions to respondents; use the household or enterprise as the unit of analysis; collect data through mail-shot questionnaires, telephone interviews, online surveys, or face-to-face interviews of the unstructured or structured variety; investigate the supply and/or demand side, and use quantitative, qualitative or mixed-methods surveys (idem).
In developed economies, the trend is towards indirect measurement methods for estimating the prevalence of informal employment and direct survey methods to assess its character and the reasons underlying it. In developing economies, however, direct methods are more common, not least because informal sector surveys are easier to administer in countries where most of the informal economy is neither underground nor illegal, simply representing subsistence activity undertaken by the poor for survival. On the whole, indirect methods tend to produce higher estimates than direct survey methods (for a comprehensive discussion and advocacy of direct survey methods, see ILO, 2013b). It is important, therefore, to be aware of the method being used.
The variable extent and character of informal employment
For much of the past century, a formalization thesis prevailed, according to which informal employment would naturally and inevitably disappear with modernization (Boeke, 1942). But as this failed to happen, this formalization thesis was for a time replaced by an informalization thesis which argued that the advent of neoliberal deregulatory globalization was driving universal growth of informal employment (see Williams, 2010). Over the past few decades, however, a more nuanced understanding of the variability of patterns of formalization/informalization has emerged in the face of compelling empirical evidence of the persistence of widespread informality in many developing and transition countries that have experienced strong economic growth, with increased formalization. In the developed world too, informality is currently still estimated to account for average GDP shares of 18.4 per cent in the EU27 and 8.6 per cent in Australia, Canada, Japan, New Zealand and the United States (Schneider, 2013).
Numerous recent studies have indeed mapped the variable magnitude of informal employment and directions of change in informality, not only crossnationally, but also locally and regionally, by sex, and by socio-demographic group. The outcome has been a more contextualized appreciation of informal employment, as widespread and growing in some populations, but smaller and declining in others (Sepulveda and Syrett, 2007; Williams and Renooy, 2013). In particular, discrimination by sex, age, ethnicity or disability tends to relegate the most vulnerable and marginalized groups to informality (ILO, 2013a; on the effects of social regulation in the absence of formal regulation, see also Harriss-White, 2003).
According to the most recent estimates published by the ILO, non- agricultural employment in the informal economy accounts for 82 per cent of total employment in South Asia, 66 per cent in sub-Saharan Africa, 65 per cent in East and South-East Asia (excluding China), 51 per cent in Latin America and 10 per cent in eastern Europe and Central Asia. These regional averages conceal wide inter-country variations – e.g. 33 per cent in South Africa vs 82 per cent in Mali, 42 per cent in Thailand vs 83.5 per cent in India, 40 per cent in Uruguay vs 75 per cent in Bolivia – and they would be even higher if subsistence agriculture were taken into account. Some aggregate estimates also conceal significant gender gaps: in sub-Saharan Africa, 74 per cent of women’s non-agricultural employment is informal as against 61 per cent of men’s, while the gap is much narrower in other regions, e.g. 83 vs 82 per cent in South Asia (ILO, 2013a, pp. 6–7).
Just as more context-bound understandings are emerging regarding the variable magnitude and growth of informality, the same has been occurring with regard to its character. Building on the long-standing recognition that informal employment can be conducted on a “waged”, own-account or household basis, there has been a progressive unpacking of the different varieties of each of these forms of informal employment.
From a western perspective, informal wage employment has conventionally been depicted as low-paid work conducted under sweatshop-like conditions. However, there has been growing recognition of a continuum of informal wage levels, just as there is a continuum of formal wage levels, and although the mean informal wage is lower than the mean formal wage, the ranges overlap, meaning that some informal wage work is higher paid than some formal wage work (Jütting and Laiglesia, 2009; Krstic´ and Sanfey, 2011). There has also been recognition that wage employment can be concurrently both formal and informal, thus challenging the conventional formal/informal binary. Studies in eastern Europe, for example, have found that formal employees working for formal employers are sometimes paid two wages, an official declared wage and an additional unofficial, undeclared “envelope” wage (Meriküll and Staehr, 2010; Round, Williams and Rodgers, 2008; Williams, 2007; Woolfson, 2007). Whether such hybrid remuneration is more widely prevalent, however, has so far not been investigated.
Informal own-account employment, meanwhile, can also be viewed as composed of a continuum of types. At one end are profit-motivated, marketdriven varieties ranging from “false self-employment” – where a person works for one employer but is “self-employed” and pays no wage tax, has no rights such as dismissal protection and no vacation entitlements – through to various forms of “proper” informal self-employment where the formal self-employed conduct various portions of their trade informally or where those working on an own-account basis do so wholly informally in unregistered enterprises or on their own (e.g. street vending or other subsistence activities in developing countries). Indeed, a burgeoning literature on “informal entrepreneurship” has emerged, a large segment of which addresses whether such entrepreneurship is driven by exclusion from the formal economy or voluntary exit from the formal economy due to the costs of operating formally (Bureau and Fendt, 2011; Cross and Morales, 2007; De Soto, 1989 and 2000; Nwabuzor, 2005; Williams, Nadin and Rodgers, 2012).
In all developing regions, self-employment accounts for greater shares of non-agricultural informal employment than wage employment: from nearly one-third worldwide, the proportions are 53 per cent in sub-Saharan Africa, 32 per cent in Asia and 31 per cent in North Africa. In Latin America and the Caribbean, the distribution of non-agricultural informal employment in 2012 was 38.6 per cent in wage employment, 10.9 per cent in household wage employment and 41.4 per cent in self-employment (ILO, 2013a, p. 7). In many developing countries, contributing family workers, agricultural employment and subsistence farming also account for substantial shares of informal employment, particularly in sub-Saharan Africa and South Asia, where over half of total employment is in agriculture.
At the other end of the continuum of types of informal self-employment, more community-oriented non-market forms of own-account work have been identified. These range from activities conducted by normally for-profit entrepreneurs but for redistributive or social rationales, through forms of informal “social entrepreneurship” pursuing social and/or environmental objectives (Williams and Nadin, 2012), to “paid favours” conducted for and by kin, friends, neighbours and acquaintances for community-oriented rationales. Such solidarity-driven forms of own-account work have so far been discussed only in relation to developed economies, perhaps reflecting the monetization of unpaid one-to-one community exchange in their marketized societies (Williams, 2004b). Whether this form of informality also occurs in many developing economies, however, is doubtful. At any rate, the variable character of informal employment in different contexts is so far poorly understood.
The role of informal employment:
Competing perspectives
How is the role of informal employment in the contemporary global economy explained? There are four dominant perspectives on this point, each of which is briefly reviewed below.
Modernization perspective
Throughout the twentieth century, the mainstream belief was that as economies modernized, the formal economy would become ever more dominant, and informal employment, seen as a residual from some past regime of accumulation, would fade away (Boeke, 1942; Geertz, 1963; Lewis, 1955). Any persistence of informal employment was therefore taken as a signal of “traditionalism”, “under-development” and “backwardness” (Geertz, 1963; Gilbert, 1998; Lewis, 1955; Packard, 2007). From this perspective, as Lyon (2007, p. 165) asserts, informal workers are seen as “a residual labour category”, which, as Bromley (2007, p. xv) puts it, is viewed as “unimportant and destined to disappear”.
Viewing informal employment as “the mere vestige of a disappearing past [or as] transitory or provisional” (Latouche, 1993, p. 49), a pre-modern traditional endeavour that persists at the fringes of modern economies, implies that there is only one trajectory of economic development – one in which there is an inevitable, even natural, linear development path towards formalization. However, there is now recognition that informal employment is ubiquitous, extensive and even growing relative to the formal economy in some countries (Buehn and Schneider, 2012; Dibben and Williams, 2012; Feld and Schneider, 2010; ILO, 2002 and 2011; Rodgers and Williams, 2009; Schneider and Williams, 2013). Indeed, it has been estimated that the majority (60 per cent) of the global workforce is engaged in such employment (Jütting and Laiglesia, 2009). This has resulted in new explanations regarding its role in contemporary economies.
The political economy perspective
One explanation argues that informal employment is not a leftover from a previous production system but an integral component of current accumulation practices in late capitalism. According to Fernandez-Kelly (2006, p. 18), “the informal economy is far from a vestige of earlier stages in economic development. Instead, informality is part and parcel of the processes of modernization”. Viewed from this political economy perspective, the sphere of informal employment is not only a key component of the new downsizing, subcontracting and outsourcing arrangements that have emerged under deregulated global capitalism, but also a receptacle into which surplus labour is cast to eke out a living in the absence of alternative means of survival (Castells and Portes,
1989; Davis, 2006; Gallin, 2001; Slavnic´, 2010; Taiwo, 2013, in this Special Issue). As Meagher (2010, p. 11) asserts: “Informal economic arrangements … have entered into the heart of contemporary economies through processes of subcontracting ... and diminishing state involvement in popular welfare and employment” (see also Barrientos et al., 2011; ILO, 2013a, pp. 7–9). As argued by Bhattacharya (2007, p. 6), however, “a distinction needs to be made between the purely marginalized or survivalist urban informal sector, and the ‘productive’ informal sector, irrespective of its vulnerability or otherwise, which is inexorably linked with the process of capitalist accumulation and dynamics”. Indeed, even the marginalized segment operates with definite supply and demand links to the (formal) capitalist economy through the sourcing of products it sells, its customers and, in some cases, illicit arrangements with law enforcement officials for (informal) permission to operate (ibid.)
On the one hand, therefore, informal employment is viewed as a direct result of businesses arrangements aimed at maximizing production flexibility, profits and cost reduction by violating labour law or subcontracting to businesses employing informal workers or the “falsely self-employed”. On the other hand, informal employment is also seen to be a direct by-product of the shift away from the full employment/comprehensive formal welfare state regime characteristic of the Fordist and socialist era. In the new post-Fordist and post-socialist era of deregulation, liberalization and privatization, those of little use to capitalism are no longer maintained as a reserve army of labour and socially reproduced by the formal welfare state. Instead, they are decanted into the informal economy and driven by necessity to participate in such work (Ahmad, 2008; Castells and Portes, 1989; Gallin, 2001). In short, participants in informal employment are unwilling and unfortunate pawns in an exploitative global economy which has made work more precarious and poorly paid. As Davis (2006, p. 186) puts it, such “primitive forms of exploitation … have been given new life by postmodern globalization”. In recent years, however, it has been recognized that not all informal employment can be depicted in this manner.
The neoliberal perspective
Over the past decade or so, studies have begun to show that some informal employment is not due to a lack of choice but more a matter of choice because of the greater autonomy, flexibility and freedom found in this sphere. This has been recognized not only in the (majority) context of developing countries (Cross, 2000; Cross and Morales, 2007; De Soto, 1989 and 2000; Neuwirth, 2011; Perry and Maloney, 2007), but also in post-Soviet transition economies (Chavdarova, 2002; Round, Williams and Rodgers, 2008; Williams, Round and Rodgers, 2013) and in the western world (Williams, 2004a; Snyder, 2004; Venkatesh, 2008; Williams, 2006).
This representation has gained much support from neoliberal commentators portraying informalization as a populist reaction to high taxes, a corrupt state system and too much interference in the free market, resulting in workers making a rational economic decision to voluntarily exit the formal economy in order to avoid the costs, time and effort of formal registration (e.g. Becker, 2004; De Soto, 1989 and 2000; London and Hart, 2004; Nwabuzor, 2005; Williams, 2004a). As Nwabuzor (2005, p. 126) asserts: “Informality is a response to burdensome controls, and an attempt to circumvent them”; or, as Becker (2004, p. 10) puts it, “informal work arrangements are a rational response by micro-entrepreneurs to over-regulation by government bureaucracies”. For De Soto (1989, p. 255), therefore, “the real problem is not so much informality as formality”. In this view, the remedy would thus be to reduce the burdensome constraints that force up labour costs and prevent flexibility, and to remove the welfare constraints that act as a disincentive to those seeking formal jobs.
The post-modern perspective
Since the turn of the millennium, a fourth perspective has emerged, particularly in relation to developed economies. Drawing inspiration from a wider body of critical, heterodox, post-development and post-structuralist literature, a small body of thought has challenged the conventional “thin” depiction of monetary exchange as universally market-like and profit-motivated. Besides informal work conducted under profit-motivated market-like relations, this has revealed the existence in developed countries of own-account informal work for and by kin, neighbours, friends and acquaintances for reasons other than financial gain, including redistributive, familial and community solidarity rationales (Morris, 2011; Persson and Malmer, 2006; Pfau-Effinger, 2009; Slack and Jensen, 2010; White, 2009; White and Williams, 2010; Williams, 2004b). Indeed, one recent study reveals that 55 per cent of all informal employment in Europe is performed for and by kin living outside the household, friends, neighbours and acquaintances for redistributive and social rationales (Williams and Renooy, 2013). From this perspective, therefore, informal employment is again voluntarily chosen, but rather than being a rational economic decision as in the neoliberal model, it is here more of a solidarity-oriented community endeavour.
Conventionally, these representations of the role of informal employment have been treated as universally valid, and therefore seen as competing perspectives. Recently, however, the literature has begun to show signs of a more nuanced understanding which views each of these perspectives as more relevant to some forms of informal employment and some contexts than others. The underlying argument is that only by combining them can a fuller, finer-grained understanding be achieved. For example, it has been argued that although informality in all contexts is due to a mix of the exit and exclusion rationales:
• the “exclusion” view of the political economy perspective is more applicable to informal waged employment and the “exit” view of the neoliberal perspective to informal self-employment (Chen, 2006; Perry and Maloney, 2007; Williams and Round, 2010);
• exclusion is more relevant to relatively deprived populations and exit to relatively affluent groups (Evans, Syrett and Williams, 2006; Pfau-Effinger,
2009; Williams and Round, 2008);
• exit is more common in developed economies and exclusion in developing economies (Oviedo, Thomas and Karakurum-Özdemir, 2009); and
• all four perspectives are necessary to understand informal street entrepreneurs (Williams and Gurtoo, 2012).
Policy approaches to informal employment
In theory, governments have several policy options for dealing with informality: they can choose to do nothing about it, or they can seek to reduce it either by deregulating the formal economy or by facilitating formalization. In practice, however, a broad international policy consensus has already been reached on the formalization option, as reflected in the Resolution concerning decent work and the informal economy adopted by the International Labour Conference in 2002 – and subject to the Recommendation it is expected to adopt in 2014 (see ILO, 2013a). Within this broad framework, specific policies obviously depend on the extent and types of informality prevalent at country level. These policies will be considered at the end of this section, following a brief review of the implications of the theoretical alternatives to formalization.
Doing nothing
There are at least four theoretical rationales for doing nothing about informal employment: the revenue-to-cost ratios may be so low that it is not worth governments intervening; the informal economy is a test bed for new business ventures conducive to economic development and growth; solidarity-oriented own-account informal work is a principal source of active citizenship, especially in developed economies; and it is a key means of livelihood for a very large proportion of the population in many developing and emerging economies. The problem, however, is that a laissez-faire approach would have significant negative effects on formal businesses, informal workers, customers and governments.
From the perspective of formal businesses, informal-sector employment gives an unfair competitive advantage to illegitimate businesses. This results in a deregulatory culture that entices law-abiding firms into a local “race to the bottom”, away from regulatory compliance, and ultimately creates circumstances of “hyper-casualization” as more formal enterprises turn to informality in order to compete. For informal enterprises, the key rationales for intervention centre on their disadvantaged position outside, or at the margins of, the formal economy, resulting in exploitative relationships with the latter, lack of legal protection relative to formal enterprises, and inability to develop and grow due to structural constraints on their access to the capital and support available to formal enterprises (Evans, Syrett and Williams, 2006; Gallin, 2001; Williams and Windebank, 1998).
Workers employed informally, meanwhile, seek intervention because: they are denied the protection of workplace health and safety standards; they are deprived of employment rights such as minimum wages, working time limits, annual leave and other holiday entitlements, sickness pay, redundancy pay, and training; they have low job security and low employability for lack of employer references and evidence of prior employment; they are unable to gain access to credit; they cannot build up rights to state pensions and other contributory benefits or access occupational pension schemes; they lack collective bargaining rights; and they risk detection and prosecution (Chen, 2006 and 2012; ILO, 2002; Williams and Renooy, 2013). Policy rationales for intervention in favour of informal workers in developing countries also extend to poverty alleviation and the protection of fundamental rights, particularly in regard to forced labour, child labour and discrimination. Indeed, women, children, migrants and older workers are especially vulnerable to exploitation and abuse in the informal economy (ILO, 2013a).
From the perspective of customers, the rationales for intervention are similar in that they find themselves without legal recourse if a poor job is done, insurance cover and guarantees in relation to the work performed and compliance with health and safety regulations. Finally, for governments, the rationales for intervention are that informal employment causes a loss of revenue because of non-payment of taxes and social contributions, thereby reducing the amount of resources available to the State to promote social integration and mobility with detrimental effects on social cohesion; it weakens trade unions and collective bargaining; it undermines regulatory control over the quality of jobs and services provided in the economy; and, if a significant segment of the population is routinely engaged in informal activity, it may well encourage a casual attitude towards the law more widely (Williams and Renooy, 2013).
In sum, the negative impacts of doing nothing mean that interventions to tackle informal employment are required. But what forms of intervention are available?
Deregulation
This option, grounded in the neoliberal perspective, would mean reducing the taxes and state regulations that apparently force up labour costs and prevent flexibility, and which thus act as a disincentive to formalization. However, there is little evidence that reducing taxes and deregulating the formal economy reduces the informal economy (Kus, 2010; Williams and Renooy, 2013). As Gilbert (1994, p. 616) argues: “The hope that … micro-entrepreneurs can go it alone, with a bit of credit and some deregulation, seems to be hopelessly optimistic.” Conversely, if deregulation led to shrinking formal, regulated employment and growing informality, the outcome would likely be greater social polarization and poorer quality working conditions: “the hidden hand of the market is not an even hand” (Peck, 1996, p. 2). The result of shifting work from the formal to the informal economy would indeed be a widening of inequalities and levelling down – rather than up – of working conditions (Williams, 2006).
Promoting formalization
Given the problems that informality poses for formal and informal businesses, informal workers, customers and governments, a policy to eliminate the informal economy altogether would seem to be the obvious first choice. However, while this would already be a daunting challenge in developed economies where the “underground economy” accounts for a small share of employment, it would simply be unrealistic in, say, India, where over 90 per cent of the labour force works informally – mostly for a subsistence-level livelihood and for want of alternative employment (see Oviedo, Thomas and Karakurum-Özdemir, 2009). Even in Latin America and the Caribbean, which experienced average annual growth of 3.5 per cent between 2000 and 2012, informal employment only declined from 49.9 to 47.7 per cent between 2009 and 2011. At this rate, if the region’s exceptionally strong economic growth could be sustained, it would take up to 55 years to halve its informal employment rates (ILO, 2013a, p. 8, and 2011).
However, the point of a policy aimed at reducing informality is not so much to eradicate it per se as to bring informal workers and enterprises within the sphere of formality. The ultimate objectives are indeed growth of the formal economy, decent work, fuller employment and increased tax revenue in support of wider societal objectives. Hence the international consensus on facilitating formalization, which means not only shifting informal workers into formal jobs, but also registering and taxing formalized enterprises, providing informal workers and operators with benefits such as access to legal and social protection as well as support services (e.g. skills or business training), and enabling them to be represented in relevant rule-setting, policy-making and collective bargaining processes (Chen, 2012). Furthermore, in order to preserve the vibrant entrepreneurship and active citizenship that characterize some segments of the informal economy, the challenge for governments is also to “join up” their policies on informal employment with their wider policies in those two areas – and perhaps also with their wider policies on employment creation.
Table 1 lists the various policy measures available for promoting formalization. It distinguishes between a “hard” compliance approach which seeks to use deterrence measures and/or make formalization beneficial and easier, on the one hand, and a “soft” approach that seeks to foster a culture of commitment to acting lawfully, including through the pursuit of broader development objectives, on the other.
The “hard” approach: Sticks and carrots
In the “hard” compliance approach, deterrence measures and/or making formalization beneficial and easier are thus used both to prevent businesses and people from entering the informal economy and to facilitate the formalization
Table 1. Policies for employment formalization
Approach Method Measures (examples)
“Hard”: compliance through deterrence Improved detection Data matching and sharing
“Joined-up” strategy
Joint operations
Increased penalties Increased penalties for evasion
Increase perception of risk Advertising the penalties for informal working
Advertising the effectiveness of detection procedures
“Hard”: compliance through incentives to formalize Prevention Simplification of compliance
Direct and indirect tax incentives
Smooth transition to self-employment
Introducing new categories of work
Micro-enterprise development
Remedial Demand-side incentives (e.g. service vouchers; targeted direct taxes; targeted indirect taxes)
Supply-side incentives (e.g. society-wide amnesties; voluntary disclosure; formalization services)
“Soft”: Fostering commitment Fostering culture of commitment Promoting benefits of formal work
Education
Tax fairness
Procedural justice
Redistributive justice
“Soft”: Development Policy integration Growth strategies for quality employment
Regulatory environment
Representation/collective bargaining
Equality/non-discrimination
Entrepreneurship support
Social protection
Local development strategies
of businesses and people already in the informal economy. The intention is to change the terms of the cost/benefit trade-off confronting those engaged in – or contemplating – informal employment. The deterrence approach concentrates on the cost side of the trade-off by increasing the perceived or actual likelihood of detection (not least by improving the coordination of strategy, operations and data sharing) and penalties and sanctions for those who are caught (e.g. Grabiner, 2000; Richardson and Sawyer, 2001). Policy measures might include enforcing the obligation to register all new workers with a social security agency prior to their first day at work, increasing labour inspections, strengthening or creating new monitoring agencies, improving cooperation between agencies and increasing the penalties for offenders. This, therefore, constitutes a “negative reinforcement” approach, using punitive measures to elicit behaviour change among those not in compliance. The evidence on whether this approach works is mixed. Although some find that improving detection and/or penalties does reduce informal employment (De Juan, Lasheras and Mayo, 1994), others find that informal employment actually grows in the face of such policies (Bergman and Nevarez, 2006; Murphy, 2005). Indeed, some conclude that “it is not sensible to penalize illicit work with intensified controls and higher fines” (Schneider and Enste, 2002, p. 192).
Rather than increase the costs side of the trade-off, recent years have seen more attention paid to making it beneficial and easier to formalize (OECD, 2012; Williams and Renooy, 2013). Firstly, preventive action can be taken against non-compliance, notably by simplifying regulatory compliance, introducing new categories of legitimate work, providing business support and advice, providing direct and indirect tax incentives, and developing initiatives to smooth the transition to formal self-employment. Secondly, measures can be taken to facilitate the formalization of those already in informal employment. Such “remedial” action can include amnesties (either general or on a case-by-case basis), business advisory and support services to those seeking to formalize their endeavours, and a variety of targeted direct or indirect tax incentives encouraging customers to use declared rather than undeclared work.
Overall, however, this “hard” approach assumes that participants in the informal economy are “rational economic agents” and that it is simply a case of changing the cost/benefit ratio confronting them. Yet, the problem is that this fails to explain why so many businesses and workers are compliant even in the absence of a more attractive cost/benefit ratio (see Bischoff and Wood, 2013, in this Special Issue). In other words, it ignores that ethics and morality also have a role to play. Besides, in developing countries whose labour force is extensively engaged in subsistence-level self-employment, farming and other family-based work, an approach based on such “rational” assumptions would be largely irrelevant (see, for example, Sharif, 2000; Harriss-White, 2003; Sylla, 2013; Taiwo, 2013, in this issue).
The “soft” approach: Facilitation and development
Recognizing this, a “soft” approach has emerged. This focuses upon developing a culture of commitment to being lawful so that “sticks” and “carrots” are no longer required. In other words, it shifts the policy focus from direct to indirect controls. Specific policy measures include educating people into the benefits of formality and not evading labour laws, running awareness campaigns about the benefits of formality, and promoting procedural justice and fairness among tax and social security offices and labour inspectorates (Braithwaite and Reinhart, 2000; Williams and Renooy, 2013; Pires, 2008).
Evaluating the impacts of these policy measures on the scale of informal employment, Ciccarone, Giuli and Marchetti (2012) use sanctions as a measure of deterrence, active labour market policies as a measure of prevention, cuts in the labour tax rate as a measure of remedial action and the social stigma attached to informal employment as a measure of commitment measures. They find that all of these variables reduce informal employment but that deterrence and commitment measures produce a negative effect on output and employment. The preventive approach, they conclude, is prefer- able because it reduces informal employment by the greatest amount and also increases output and employment.
In the development literature as well, a new line of reasoning has emerged among researchers who reject the simplistic traditional view that there are just two groups: a few good performers and many survivalists. They argue that there exists another category of entrepreneurs who operate with very small capital endowments but achieve very high productivity because their manager- ial skills are similar to those of the top performers (Grimm, Knorringa and Lay, 2012). The case they make is that formalization should not be enforced on them and that such entrepreneurs should instead be provided with high quality public services (export subsidies, tax holidays, training) and be encouraged to grow their businesses (ibid.). In support of their argument, they also provide empirical evidence suggesting that firms have a higher propensity to formalize if the quality of public services is good (Gelb et al., 2009).
A broad approach is that embodied in the ILO’s proposed strategy for facilitating “transition to formality”, also with particular regard to huge challenges confronting developing countries. Based on wider policy integration, this emphasizes the need for action in the following seven policy areas: growth strategies and quality employment generation; the regulatory environment, including enforcement of international labour standards and core rights; organization, representation and social dialogue; equality (gender, HIV status, ethnicity, race, caste, age, disability); entrepreneurship, skills, finance, management, access to markets; extension of social protection (building social protection floors and social security systems); and local (rural and urban) development strategies (see ILO, 2013a, pp. 13 et seq.).
The above policies for facilitating formalization, however, are not mutually exclusive and can be temporally sequenced and combined in different ways. For example, governments might simplify regulatory compliance as well as introduce incentives to encourage formalization (e.g. amnesties, facilitated registration and access to social protection) and tougher sanctions for those failing to comply, while also conducting campaigns to elicit greater morality among the population. At present, measures to improve detection through inspections are indeed often combined with campaigns aimed at raising awareness or warnings that inspections are imminent, while amnesty and voluntary disclosure schemes are frequently followed by tougher sanctions. Which combinations are the most effective, however, has so far not been evaluated empirically.
Meanwhile, country experiences globally confirm that there is no universal policy framework but rather a very diverse array of possible responses that can be combined into integrated policy frameworks and adapted to each specific country context. In most cases, particularly across the developing world, these simultaneously promote formal employment through macroeconomic and industrial policies targeting micro-to-medium-sized enterprise development, regulatory adjustments that reduce barriers to formalization and enhance its benefits, and better employment conditions, including minimum wages, safety and health, social protection and worker organization (ILO, 2013a, p. 35).
Contributions to this Special Issue and concluding remarks
Based on the above overview, the intention here is to outline how each of the remaining ten articles in this Special Issue contributes to a better understanding of informal employment. The first three articles illustrate the diversity of patterns of non-compliance or evasion in regard to the payment of wages (and other labour standards) across a wide range of developing and developed countries. While continuing to illustrate the global diversity of patterns of informality, the main contribution of the next five articles is to offer insights into its dynamics or drivers in very different institutional settings. The last two articles provide examples of policies that have proved successful in addressing informal self-employment – arguably the most widespread category of informality in developing countries.
In the first article, Rani et al. (2013) examine gaps in minimum wage coverage and compliance in 11 developing countries across Africa, Asia and Latin America. Compliance is found to range from 95 per cent in Viet Nam to 49 per cent in Indonesia, with an overall 11-country average of 28 per cent of wage workers paid less than the statutory minimum. The authors’ analysis tests the incidence and depth of non-compliance against median and average wages at the country level in order to correlate the effectiveness of legislated industry-specific or economy-wide minimum wages with the relative level at which they are set. In this light, the article concludes with emphasis on the crucial importance of setting minimum wages at an appropriate level if they are effectively to raise the incomes of the poorest segments of the labour force.
In the second article, on under-declared wages in the European Union, Williams and Padmore (2013) challenge the conventional formal/informal dualism by showing how formal employers sometimes pay their formal employees not only a declared wage but also an additional undeclared (“envelope”) wage. Reporting on a 27-country European survey, they find that one in 18 formal employees receives such envelope wages from their formal employer, which on average amount to a quarter of their gross pay. In doing so, the authors reinforce the political economy view of informality as an integral component of late capitalism by showing that flexible production, profit and cost reduction are being achieved by formal businesses using informality not only in their external production networks but also within the framework of the employment contracts of their own internal workforce.
Focusing on Chile, Kanbur, Ronconi and Wedenoja (2013) document further patterns of labour law violation, using micro survey data to analyse compliance with four dimensions of labour law, namely: minimum wages, hours worked, having a contract, and having a pension. On average, over the period 1990–2009, they find that labour laws were violated in at least one of these dimensions for one-third of all workers. However, there are large and significant variations over time, across laws and by worker and firm characteristics.
Compliance rates are found to be lower for female, foreign-born, indigenous and less educated workers; among smaller firms; and in agricultural regions.
Next, in the first of two articles offering innovative analytical models of labour market interactions between formality and informality, Commander, Isachenkova and Rodionova (2013) investigate the issue of multiple job holding in the institutional context of Ukraine. Using a panel data set from the Ukraine Longitudinal Monitoring Surveys (ULMS) for 2003 and 2004, they empirically test a model of worker choice between full-time and/or part-time employment across formal, informal and mixed formal/informal sectors. With 16–24 per cent of Ukraine’s employment estimated to be informal, the authors find that if formal-sector wages are high enough, the non-monetary benefits provided by (formal) state-owned and privatized enterprises play an “attaching” role vis-à-vis the latter, incentivizing workers to combine formal and informal employment rather than turn to informal employment alone. These dynamics, in turn, influence the relative shares of purely informal and purely formal employment. The major contribution of this article, therefore, lies in the insights it provides into those dynamics, which ultimately determine workers’ employment trajectories over time. This could be fruitfully explored more widely, since the authors’ model of employment choice is expected to apply to the other post-Soviet economies as well. By implication, it also suggests possible policy responses – most notably facilitated access to social protection – that might usefully be considered when seeking to encourage formalization in these economies.
Taiwo (2013) then also explores a three-sector model of formal/informal employment mobility and worker choice, albeit in a radically different institutional setting: the labour market of Ghana, where the three stylized sectors are (largely formal) wage employment and (largely informal) self-employment and family-based employment. The model incorporates capital market failure, which drives credit-constrained individuals to draw self-employment capital from family assets. Using household survey data spanning the 1990s to estimate his model, the author generally finds very low rates of mobility across the three sectors, particularly into the wage employment sector, as access to the country’s limited formal employment is subject to intense competition. The least mobile are found to be the self-employed, and the most mobile, familybased workers, thus confirming that the latter status is the last resort for those unable to find wage employment or raise capital for self-employment in an environment where unemployment is simply not an option. The very low mobility observed among the self-employed is imputed to lack of skill transferability. In either case, here too, the policy challenges are made clear.
In contrast to the selective combinations of formality/informality studied by Commander et al. among workers in Ukraine, the following article, by Bischoff and Wood (2013), examines the dynamics of selective informality among small-scale employers in the manufacturing sector in South Africa. Reporting in-depth interviews with business owners and representatives of stakeholder interests, these authors show how employers comply with the law when it comes to legislated provisions on issues such as health and safety, despite rarely if ever being visited by inspectors, but defy binding regulations agreed by industry-level Bargaining Councils on minimum wages, working time and, particularly, contributions to the welfare benefits funds administered by the Councils. Many choose to under-report the size of their workforce so as to evade payment of such contributions and avoid attracting the attention trade union inspectors who are more inclined to visit larger firms. Employers are thus shown to operate in partial violation of formal regulations. The authors attribute this to employer hostility to trade unions in the context of South Africa’s post-Apartheid industrial relations, arguing that debates about whether deregulation should take place are irrelevant.
Reporting on a direct survey of 2,104 workers in Germany in 2010, the next article, by Haigner et al. (2013), finds that the unemployed (and those who have experienced unemployment) are more likely to engage in informal employment themselves and/or to make use of informal labour. This pattern is correlated with both the perceived degree of government bureaucracy and the perceived risk of being audited. Among men (but not women), the feeling of disadvantage relative to others is also a strong driver of informal labour supply. The authors argue that although increasing the perceived risk of being caught and simplifying regulation might reduce informal employment, the most effective means of doing so would be to reduce unemployment. In line with the idea that formalization should be encouraged through the greater use of commitment measures, they suggest that a useful way forward would be to target annoyance about government inefficiencies and inform people about income distribution and how tax revenue is used.
Turning from labour law and tax evasion by workers to avoidance of employment law by employers, Perraudin, Thèvenot and Valentin (2013) empirically study outsourcing in France over the period 1984–2003, arguing that the main driving force behind the growth of outsourcing and atypical employment has been employers’ deliberate strategy of avoiding costly employment relationships governed by labour law and reconfiguring them as business relationships, consultancy contracts and so forth. Such technically lawful “avoidance”, rather than outright informality or violation, reveals the fine line between respect for the letter of the law and respect for its spirit. Indeed, the authors show that some employers are avoiding responsibility and costs by substituting outsourced labour for their own employees. Just as tax avoidance is an alternative to tax evasion, a similar process is here shown to be apparent with regard to avoidance rather than evasion of labour law. This process opens up a promising avenue for future research from the conceptual perspective of “informalization” (Hussmanns, 2004, p. 1).
The closing articles of this Special Issue describe two schemes that have been successfully implemented in Latin America to encourage formalization of the self-employed. In the first of these case studies, Nagamine Costanzi, Duarte Barbosa and Da Silva Bichara (2013) report on programmes legislated in the 2000s to extend social protection to Brazil’s millions of self-employed, who have to work informally for want of alternative employment opportunities. In particular, the authors focus on a programme launched in 2008 to facilitate these workers’ formal registration as “self-employed micro-entrepreneurs” through simplified registration, greatly reduced social security contributions, tax exemptions, access to credit and other business support measures. By the end of 2012, some 2.6 million micro-entrepreneurs were registered under the programme. The authors conclude with a discussion of the policy challenges posed by the scheme’s funding and actuarial sustainability.
Another Latin American country pursuing this type of approach is Uruguay, where self-employed workers – mostly informal and without social protec- tion – account for 21 per cent of total employment. The extension of social protection to these workers thus constitutes a major policy challenge in this country as well. In the closing contribution to this Special Issue, Amarante and Perazzo (2013) provide a detailed analysis of self-employed workers’ characteristics and labour conditions in Uruguay over the period 2000–10, arguing that the countercyclical behaviour of the most vulnerable (majority) of them clearly correlates with the lack of formal employment opportunities. Despite the introduction of new schemes to facilitate these workers’ access to social protection, which have achieved some success, the authors conclude that improving the reach and effectiveness of social protection remains an unfinished business. Whether the approaches taken by Uruguay and Brazil would be replicable in other Latin American countries and beyond, is something that could usefully be investigated.
In sum, each of the following articles in this Special Issue offers a particular analytical perspective on informality and/or possible policy responses to its pervasiveness in the global economy. Together, they highlight the diversity of the “informal economy” and its multiple dynamics across a wide range of institutional and societal settings, thereby contributing to a better understanding of informal employment in the global economy. Also, in keeping with the fundamental editorial aims of the International Labour Review, each of the articles considers the policy implications of the particular perspective it explores. If these contributions can inspire further research into patterns of informality, their workings and policy remedies to their socially undesirable effects, then, this Special Issue will have achieved its objective.
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