Transitioning from informality to the formal economy: realizing decent work for all
The informal economy thrives in a context of high unemployment, underemployment, poverty, gender inequality and precarious work. How can we get to decent work from here?
The weak global economic recovery has failed to improve global labour markets and is resulting in an increase in unemployment in the formal economy over the foreseeable future. As many countries struggle to set the right policy mix to stimulate economic growth and job creation, attention is increasingly turning towards the role and implication of the informal economy and how to effectively transition to formality.
The term informal economy refers to all economic activities by workers and economic units that are not covered or insufficiently covered by formal arrangements. Their activities normally operate outside the formal reach of the law or where the law is neither applied nor enforced. Some contend that the law at times can discourage compliance because it is inappropriate, burdensome, or imposes excessive costs.
The informal economy thrives in a context of high unemployment, underemployment, poverty, gender inequality and precarious work. It plays a significant role, especially in income generation, because of the relative ease of entry and low requirements for education, skills, technology and capital. But most people enter the informal economy not by choice, but out of a need to survive and to have access to basic income-generating activities.
According to the most recent estimates, non-agricultural employment in the informal economy represents 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.
Ample empirical research has shown that workers in the informal economy face higher risks of poverty than those in the formal economy. As a result of these and other factors, there is a significant overlap between working informally and being poor and vulnerable. While some activities offer reasonable livelihoods and incomes, most people engaged in the informal economy are exposed to inadequate and unsafe working conditions, and have high illiteracy levels, low skill levels and inadequate training opportunities.
By its very nature, the characteristics of the informal economy are largely negative. It can trap individuals and enterprises in a spiral of low productivity and poverty. A coherent national strategy to facilitate transitions to formality needs to recognize that the costs of working informally are high for businesses, workers and the community.
From the perspective of unprotected workers, the negative aspects of work in the informal economy far outweigh its positive aspects. They are not recognized, registered, regulated or protected under labour and social protection legislation, and are not therefore able to enjoy, exercise or defend their fundamental rights. Since they are not normally organized, they have little or no collective representation in relation to employers or the public authorities.
Women, young persons, migrants and older workers are especially vulnerable to the most serious decent work deficits in the informal economy. They are vulnerable to violence, including sexual harassment, and other forms of exploitation and abuse, including corruption and bribery. Child workers and bonded labourers are largely found in the informal economy.
Most people working in the informal economy do not enjoy secure property rights, which deprives them of access to both capital and credit. They have difficulty accessing the legal and judicial system to enforce contracts, and have limited or no access to public infrastructure and public markets. Informality may also inhibit investment in bigger businesses and impede trade because informal firms often lack the necessary size to exploit economies of scale fully.
Micro and small enterprises (MSEs) in the informal economy lack the capacity to generate sufficient profits to reward innovation and risk taking, which are two essential ingredients for longterm economic success. Studies show that high rates of informality drive countries towards the lower, more vulnerable end of global production chains and attract capital flows related to the existence of a large low-wage labour pool.
Many new entrants to the labour market, and many of those who lose their jobs in the formal economy, have increasing problems in accessing formal employment. In many parts of the world, they have no choice but to move into informal activities, leading to a rise in informal employment in both the informal and formal sectors.
For the international community, breaking out of informality is increasingly seen as the principal development challenge across regions and as being central to realizing decent work as a global development goal. The debate concerning the informal economy and possible strategies towards formalization is therefore gaining new momentum at all levels and in various circles.
In recent years, many countries have devoted considerable attention to informal employment, and attempts have been made to understand the mechanisms through which the benefits of growth may or may not be transmitted to the poor. A new consensus has emerged around the belief that if economic growth is not associated with formal job creation, a shift towards better employment opportunities in the formal economy and an improvement in the conditions of employment in informal activities, it will continue to generate inequality, poverty and vulnerability.
The “Arab Spring” showed the failure to link economic growth and investment with appropriate labour and social policies which ensure a fair redistribution of the gains of growth. As a response to strong demands for social justice, including decent work, mainly from young people, facilitating transitions to formality is now increasingly considered as a core component of national development strategies, and also a major issue for social cohesion and peace building.
Bringing the millions of workers and enterprises within the informal economy under the protection of the law and out of informality would be a major step towards decent work for all.
Decent Work provides a coherent framework for identifying which aspects of informality need to be looked at and also which types of policy and institutional instruments can foster or hinder greater inclusion with the mainstream economy. This process of moving out of informality is a comprehensive and progressive one rather than a simplistic one-off approach. The goal of decent work must be pursued progressively by:
• giving priority to reducing decent work deficits in the informal economy in the immediate term, by ensuring those found in it are recognised by law, have rights, legal and social protection and representation;
• ensuring, in the short and medium term, that job seekers and potential entrepreneurs are able to enter the formal, protected and mainstream economy, and;
• in the longer term, creating enough employment opportunities that are formal, protected and decent for all workers and employers.
While the goal and the challenge remains to move out of informality, the path is depicted not in terms of a one-dimensional remedy but rather as a gradual approach that can catalyse transition through comprehensive and integrated strategies that addresses the multi-dimensional problems rooted in the informal economy.
The term informal economy refers to all economic activities by workers and economic units that are not covered or insufficiently covered by formal arrangements. Their activities normally operate outside the formal reach of the law or where the law is neither applied nor enforced. Some contend that the law at times can discourage compliance because it is inappropriate, burdensome, or imposes excessive costs.
The informal economy thrives in a context of high unemployment, underemployment, poverty, gender inequality and precarious work. It plays a significant role, especially in income generation, because of the relative ease of entry and low requirements for education, skills, technology and capital. But most people enter the informal economy not by choice, but out of a need to survive and to have access to basic income-generating activities.
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Ample empirical research has shown that workers in the informal economy face higher risks of poverty than those in the formal economy. As a result of these and other factors, there is a significant overlap between working informally and being poor and vulnerable. While some activities offer reasonable livelihoods and incomes, most people engaged in the informal economy are exposed to inadequate and unsafe working conditions, and have high illiteracy levels, low skill levels and inadequate training opportunities.
By its very nature, the characteristics of the informal economy are largely negative. It can trap individuals and enterprises in a spiral of low productivity and poverty. A coherent national strategy to facilitate transitions to formality needs to recognize that the costs of working informally are high for businesses, workers and the community.
From the perspective of unprotected workers, the negative aspects of work in the informal economy far outweigh its positive aspects. They are not recognized, registered, regulated or protected under labour and social protection legislation, and are not therefore able to enjoy, exercise or defend their fundamental rights. Since they are not normally organized, they have little or no collective representation in relation to employers or the public authorities.
Women, young persons, migrants and older workers are especially vulnerable to the most serious decent work deficits in the informal economy. They are vulnerable to violence, including sexual harassment, and other forms of exploitation and abuse, including corruption and bribery. Child workers and bonded labourers are largely found in the informal economy.
Most people working in the informal economy do not enjoy secure property rights, which deprives them of access to both capital and credit. They have difficulty accessing the legal and judicial system to enforce contracts, and have limited or no access to public infrastructure and public markets. Informality may also inhibit investment in bigger businesses and impede trade because informal firms often lack the necessary size to exploit economies of scale fully.
Micro and small enterprises (MSEs) in the informal economy lack the capacity to generate sufficient profits to reward innovation and risk taking, which are two essential ingredients for longterm economic success. Studies show that high rates of informality drive countries towards the lower, more vulnerable end of global production chains and attract capital flows related to the existence of a large low-wage labour pool.
Many new entrants to the labour market, and many of those who lose their jobs in the formal economy, have increasing problems in accessing formal employment. In many parts of the world, they have no choice but to move into informal activities, leading to a rise in informal employment in both the informal and formal sectors.
For the international community, breaking out of informality is increasingly seen as the principal development challenge across regions and as being central to realizing decent work as a global development goal. The debate concerning the informal economy and possible strategies towards formalization is therefore gaining new momentum at all levels and in various circles.
In recent years, many countries have devoted considerable attention to informal employment, and attempts have been made to understand the mechanisms through which the benefits of growth may or may not be transmitted to the poor. A new consensus has emerged around the belief that if economic growth is not associated with formal job creation, a shift towards better employment opportunities in the formal economy and an improvement in the conditions of employment in informal activities, it will continue to generate inequality, poverty and vulnerability.
The “Arab Spring” showed the failure to link economic growth and investment with appropriate labour and social policies which ensure a fair redistribution of the gains of growth. As a response to strong demands for social justice, including decent work, mainly from young people, facilitating transitions to formality is now increasingly considered as a core component of national development strategies, and also a major issue for social cohesion and peace building.
Bringing the millions of workers and enterprises within the informal economy under the protection of the law and out of informality would be a major step towards decent work for all.
Decent Work provides a coherent framework for identifying which aspects of informality need to be looked at and also which types of policy and institutional instruments can foster or hinder greater inclusion with the mainstream economy. This process of moving out of informality is a comprehensive and progressive one rather than a simplistic one-off approach. The goal of decent work must be pursued progressively by:
• giving priority to reducing decent work deficits in the informal economy in the immediate term, by ensuring those found in it are recognised by law, have rights, legal and social protection and representation;
• ensuring, in the short and medium term, that job seekers and potential entrepreneurs are able to enter the formal, protected and mainstream economy, and;
• in the longer term, creating enough employment opportunities that are formal, protected and decent for all workers and employers.
While the goal and the challenge remains to move out of informality, the path is depicted not in terms of a one-dimensional remedy but rather as a gradual approach that can catalyse transition through comprehensive and integrated strategies that addresses the multi-dimensional problems rooted in the informal economy.