The Law-Growth Nexus: A Mapping of Labour Law and Micro and Small Enterprise (MSE) Development

The overall objective of this project is to promote better business environments for workers and employers in MSEs. This will be achieved through realising the intermediate objective of developing good practice guidelines for labour and labour related laws for MSEs.

Problem statement

Institutions matter for growth and the rule of law plays a key role in economic development. Legal institutions and laws have a direct bearing on the formation and growth of enterprises and this project will explore in detail the effect of labour and labour related laws on micro and small enterprises in Africa. The legal structure and the body of laws on which the legal structure is based forms a bridge or nexus between unregulated, poor quality and ultimately unsustainable development and regulated, higher quality, rights based and sustainable development. The law-growth nexus is a vitally important topic both because the unregulated or informal economy is so large in all countries in Africa (and by extension most employment is in MSEs) and because the quality of growth is so important for sustainable development.

Labour law is an important component of the broader enabling environment for sustainable enterprise development but it typically presents a conundrum: striking a balance in terms of minimizing the cost of the regulatory burden on MSEs and thus enhancing the prospects for competitiveness and growth, without compromising the laws and regulations designed to protect those who work in MSEs. This is an issue of growing international debate and the ILO has a mandate and comparative advantage in this field.

Most countries in Africa have large informal economies and in practice, most MSEs in Africa operate in the informal economy, typically beyond the purview of laws and regulations. For many MSEs the decision to remain informal is deliberate because the costs and procedural burden of joining the formal economy outweigh the benefits of staying in the informal economy. In many countries, the informal economy accounts for a significant but hidden portion of GDP. In Burkina Faso, for example, a country of 12 million people, only about 50,000 are employed in the formal economy and the informal economy accounts for about 38 percent of GNP.

However, MSEs make large contributions to national economies in both human and financial terms but when they operate informally, they cannot easily be reached with business services and they will struggle to compete for business with larger companies. Workers in such MSEs typically lack job protection and benefits such as access to health and safety provisions, wage protection, insurances, pensions and to unions. Informal MSEs also have restricted access to investment and credit. By being outside the formal regulatory framework, informal activity cannot be taxed which represents lost revenue to governments. Thus, MSEs operating in the informal economy can be a barrier to broader and sustainable economic development.

Labour Law and MSEs

There is a continuum between formality and informality meaning that enterprises may operate formally in some senses (e.g. by paying certain taxes) but informally in other senses (e.g. by avoiding registration). However, the implementation of labour law among MSEs is likely to be poor and evasion and/or avoidance of laws and regulations is also likely to be particularly pronounced among MSEs.

The evasion of laws and regulations is obviously undesirable and so is the fact that those who work in informal units do not enjoy the protection and rights that are afforded to their counterparts in the formal sector. The challenge is to identify which approaches are best suited to both broaden and deepen the coverage of labour law to include MSEs. In particular, the challenge is to identify the “win-win territory” where it is possible to reduce MSE compliance and/or efficiency costs whilst not compromising the protections which should be afforded to workers through, for example, the implementation of international labour standards. It is important, of course, to bridge the theory of legal provision with the practice in terms of its implementation.

  • Labour and labour related laws are taken to include:
  • collective bargaining and freedom of association
  • anti-discrimination/equal employment opportunity
  • prohibitions on forced labour/child labour
  • minimum wage
  • overtime/working time limits
  • paid time off
  • social security (retirement, disability, death, sickness and health benefits)
  • unemployment insurance
  • workers’ compensation
  • protection against unjust dismissal
  • occupational health and safety standards
  • parental/family leave
  • employee consultation
  • protection of rights and entitlements on transfer of undertaking
  • type of employment contract.

In addition to non specific provision in labour codes, there are three broad approaches which can be adopted to embrace MSEs:

a) exemption of the MSEs from the labour and labour-related laws;

b) partial exemptions;

c) parallel labour law regimes or;

Exemption of MSEs from the labour and labour-related laws: In some countries all enterprises below a certain threshold size (generally ten workers) are excluded from the scope of application of all labour laws. In other countries, some categories of workers are excluded due to narrow definitions of the employment relationship concerning for example “daily workers”.

Partial exemptions from certain specific statutes: In some countries, labour legislation covers all workers but exempts MSEs from certain specific sections of the general statute, for example requirements to establish an occupational safety and health committee in the enterprise or the regulations concerning collective dismissal.

Parallel labour law regimes: A number of countries have adopted specific MSE laws, usually as stand-alone texts separate from the principal labour laws, but not always. Countries have created parallel labour regimes for MSEs with lower standards regarding matters such as hiring and firing, paid vacations, working hours and social security as well as in some cases simplified administrative procedures.

Objectives and outcomes

The overall objective of this project is to promote better business environments for workers and employers in MSEs. This will be achieved through realising the intermediate objective of developing good practice guidelines for labour and labour related laws for MSEs.

This work will help the ILO to develop training and capacity building tools and guidance on good practices. It will inform the ILO’s policy work in this area and build the capacity of constituents to participate in policymaking. Ultimately, by developing good practice guidance on labour law and MSEs, the project will help governments to develop a legal and regulatory environment conducive both to the formation and growth of enterprises and to the realisation of decent work objectives embodied in labour and labour related laws.

The project in context

This policy oriented research project forms part of a broader stream of work on labour laws and MSEs currently being undertaken by the Job Creation and Enterprise Development Department at the ILO at the request of the Employment and Social Policy Committee of the ILO’s Governing Body. It also builds on the 2007 International Labour Conference conclusions from the general discussion on the promotion of sustainable enterprises.

Other complementary action oriented research and policy activities currently underway cover aspects of labour and labour related laws and their impact on the formation and growth of MSEs in Asia and Latin America as well as other none country specific studies.

Management and institutional arrangements

The project will be divided into three interrelated but distinct phases covering a total period of approximately 24 months. A progress report will be issued at the end of phases 1 and 2 and a final report at the end of phase 3.

The project is a joint initiative between the Small Enterprise Team (SEED) at the ILO HQ in Geneva and enterprise specialists based in ILO Sub-regional Offices in the field. It will draw on specialist inputs and advice from labour lawyers at the ILO and will involve close collaboration with ILO constituents in each country. An international consultant will be engaged to provide expert oversight, quality control and coordination of national field based consultants. This will be done through regular contact via tele or video conference and occasional travel to support field based research if and when necessary. National consultants will be engaged to undertake the country level work, including organisation of the relevant workshops.