Informal employment revisited: theories, data & policies.

Chen, Martha Alter ; Vanek, Joann

Introduction

Informal employment is back on the policy agenda. (1) It represents a major share of the workforce in most developing countries and is on the rise in developed countries. Across the developing world, the majority of informal workers are poor; and the majority of working poor are informally employed. Adding to these policy concerns are the lingering impacts of the Great Recession on employment and the global crisis of youth unemployment.

This paper seeks to provide a summary overview of recent rethinking and recent data on informal employment, particularly in developing countries. Section I details two international statistical definitions--of "informal sector" and "informal employment"--and presents recent data on non-agricultural informal employment. Section II discusses to "formalize the informal economy" debate and presents a comprehensive framework for responding to informal enterprises and informal employment. Section III analyzes why existing labor market models and regulations need to be re-examined in light of the reality and complexity of informal employment today. The paper concludes that employment should be the cornerstone of the development agenda and that economic diversity should be the cornerstone of the future economy.

I. Statistical Definitions & Data

International Statistical Definitions: In 1993, the International Conference of Labour Statisticians adopted an international statistical definition of the "informal sector" to refer to employment and production that takes place in unincorporated small and/or unregistered enterprises. But soon thereafter, beginning in 1997, the International Labor Office (ILO), the international Expert Group on Informal Sector Statistics (called the Delhi Group), and the global network Women in Informal Employment: Globalizing and Organizing (WIEGO) began working together to broaden the concept and definition to incorporate certain types of informal employment that had not been included in the enterprise-based concept and definition of the informal sector. They sought to include the whole of work-related informality, as it is manifested in industrialized, transition and developing economies and the real world dynamics in labor markets today, particularly the employment arrangements of the working poor.

The expanded definition focuses on the nature of employment in addition to the characteristics of enterprises and includes all types of informal employment both inside and outside informal enterprises. This expanded definition was endorsed by the International Labor Conference (ILC) in 2002 and the International Conference of Labor Statisticians (ICLS) in 2003: statisticians refer to this expanded notion as "informal employment."

Informal employment is, by design, a large and heterogeneous category. For purposes of analysis and policymaking it is useful to, first, sub-divide informal employment into self-employment and wage employment, and then within these broad categories, into more homogeneous sub-categories according to status in employment, as follows: (2)

Informal self-employment including:

* employers in informal enterprises

* own account workers in informal enterprises

* contributing family workers (in informal and formal enterprises)

* members of informal producers' cooperatives (where these exist)

Informal wage employment: employees hired without social protection contributions by formal or informal enterprises or as paid domestic workers by households. Certain types of wage work are more likely than others to be informal. These include:

* employees of informal enterprises

* casual or day labourers

* temporary or part-time workers

* paid domestic workers

* contract workers

* unregistered or undeclared workers

* industrial outworkers (also called home workers)

This expanded definition extends the focus from enterprises that are not legally regulated to include employment relationships that are not legally regulated or socially protected. It also serves to focus attention on informal workers: i.e., those who are informally employed. (3) This employment-centered focus has been accompanied by significant rethinking of the composition, causes, and consequences of informal employment. Today, informal employment is widely recognized to include a range of self-employed persons, who mainly work in unincorporated small or unregistered enterprises, as well as a range of wage workers who are employed without employer contributions to social protection.

To sum up, there are three related official statistical terms and definitions which are often used imprecisely and interchangeably: the informal sector refers to the production and employment that takes place in unincorporated small or unregistered enterprises (1993 ICLS); informal employment refers to employment without legal and social protection --both inside and outside the informal sector (2003 ICLS); and the informal economy refers to all units, activities, and workers so defined and the output from them. Together, they form the broad base of the workforce and economy, both nationally and globally.

Recent National Data & Regional Estimates: Since the expanded definition of "informal employment" was adopted by the 2002 International Labor Conference and the 2003 International Conference of Labor Statisticians, many countries have begun using this definition of informal employment in the collection and tabulation of national labor force data. What follows is a summary of recent analyses of available data on the size and significance of non-agricultural informal employment compiled by the ILO and the WIEGO Network for an update of a 2002 statistical publication called Women and Men in the Informal Economy: A Statistical Picture. (4)

Analysis of the data compiled by the ILO and WIEGO suggests that informal employment represents a significant share of non-agricultural employment in developing regions: ranging from 45 per cent in the Middle East and North Africa (5) to 51 per cent in Latin America to 65 per cent in East and Southeast Asia to 66 per cent in sub-Saharan Africa (excluding South Africa and other countries in Southern Africa with a relatively low prevalence of informal employment) to 82 per cent in South Asia (Vanek et al 2012).

There is significant variation by country within the regions: from 31 per cent (Turkey) to 57 per cent (West Bank and Gaza) in the Middle East and North Africa; from 40 per cent (Uruguay) to 75 per cent (Bolivia) in Latin America; from 33 per cent (urban China) to 42 per cent (Thailand) to 73 per cent (Indonesia) in East and Southeast Asia; from 33 per cent (South Africa) to 82 per cent (Mali) in sub-Saharan Africa; from 62 per cent (Sri Lanka) to 83 per cent (India) in South Asia.

In those countries and regions where agriculture still employs a large share of the workforce, the share of total informal employment in total employment is likely to be higher still (Ibid). In some countries which measure informal employment in agriculture, for example India, informal employment represents more than 90 percent of total employment.

Non-agricultural informal employment is about equally split between wage employment and self-employment in urban China, Latin America and the Caribbean, East and South East Asia, and South Asia; but dominated by self-employment in sub-Saharan Africa (Vanek et al, 2012).

In many regions and in urban China informal employment is a more important source of employment for women than for men. In sub-Saharan Africa 74 per cent of women's employment (non-agricultural) is informal in contrast to 61 per cent of men's; in Latin America and the Caribbean, (6) 54 per cent in contrast to 48 per cent; in South Asia, 83 per cent in contrast to 82 per cent; and, in urban China, 36 per cent in contrast to 30 per cent. However in all regions men comprise a greater share of the informal workforce because women's labour force participation rates are lower than men's.

II. Policy Responses

The Formalization Debate: At the heart of the policy debates on the informal economy is the question of whether and how to formalize the informal economy. Different observers have different notions of what formalization of the informal economy means. To some, it means shifting informal workers to formal wage jobs--but this requires creating more formal wage jobs. To others, it means registering and taxing informal enterprises. For informal workers, many of whom already pay taxes (such as VAT) or fees of various kinds (e.g. license fees to operate and/or site fees to operate in specific locations) or are willing to pay taxes or fees in return for benefits, it means gaining access to legal and social protection as well as support services (e.g. skills or business training) and being allowed to organize and to be represented in relevant rule-setting, policymaking, and collective bargaining processes.

Further, it is important to ensure that formalization offers the benefits and protection that come with being formal and does not simply impose the costs of becoming formal. For the self-employed, formalization should not mean just obtaining a license, registering their accounts, and paying taxes: these represent, to them, the costs of entry into the formal economy. What they would like is to receive the benefits of operating formally in return for paying these costs, including: enforceable commercial contracts; legal ownership of their place of business and means of production; tax breaks and incentive packages to increase their competitiveness; membership in trade associations; protection against creditors and clear bankruptcy rules; and social protection.

What about informal wage workers? To them, formalization means obtaining a formal wage job--or formalizing their current job- with a secure contract, worker benefits, membership in a formal trade union, and employer contributions to their social protection. It is important to highlight that formalizing wage work requires a focus on employers, as employers are more likely than employees to avoid compliance with labor regulations. In this context, it should be noted that many informal wage workers work for formal firms and households, not just for informal enterprises.

Finally, therefore, it is important to note that formalization has different dimensions beyond just registering and paying taxes, including: receiving the legal and social protection enjoyed by formal firms and formal workers; receiving the tax holidays and incentive packages enjoyed by formal firms; being allowed to organize and to have representative voice in rule-setting and policymaking processes; and more. Policymakers should recognize these various dimensions of formalization and the fact that formalization is not, therefore, a one-step process but rather an ongoing process of extending benefits of formalization incrementally to informal workers. In asking informal workers to register and pay taxes, they should offer informal workers one or more benefits of formalization: asking each group of workers which benefit/s of formalization would be most important to securing their livelihoods. In short, policymakers should consider the optimal dimensions and sequence of formalization from the perspective of different categories of informal workers.

In sum, what is required is an approach to formalization of the informal economy which is comprehensive in approach but context-specific in design and practice. A comprehensive approach for formalizing the informal economy is outlined in Box 1:

Box 1 Formalization of the Informal Economy: A Comprehensive
Approach

1. Formalization of Informal Enterprises
* registration and taxation:
** simplified registration procedures
** progressive registration fees

* appropriate legal and regulatory frameworks, including:
** enforceable commercial contracts
** private property rights
** use of public space
** occupational health and safety regulation

* benefits of operating formally:
** access to finance and market information
** access to public infrastructure and services
** enforceable commercial contracts
** limited liability
** clear bankruptcy and default rules
** access to government subsidies and incentives,
including procurement bids and export
promotion packages
** membership in formal business associations
** access to a formal system of social security

2. Formalization of Informal Jobs
* legal recognition and protection as workers
* rights and benefits of being formally employed:
** freedom from discrimination
** minimum wage
** occupational health and safety measures
** employer contributions to health and pensions
** right to organize and bargain collectively
** membership in formal trade unions

As outlined above, formalization of the informal economy can and should take different forms, including: shifting informal workers to formal jobs; registering and taxing informal enterprises; providing business incentives and support services to informal enterprises; securing legal and social protection for the informal workforce; recognizing the organizations of informal workers; and allowing their representatives to take part in rule-setting, policymaking, and collective bargaining processes.

However, the limits to formalization need to be understood. First, it should be recognized that formalization is not a one-time process involving a specified set of steps. Rather, formalization should be seen as a gradual on-going process involving incremental steps and different dimensions leading towards varying degrees and types of formality. Second, it should be recognized that formalization will not proceed quickly or automatically for all those who choose to formalize. The bureaucratic procedures and incentives for registered informal businesses need to be retooled and streamlined. Labor standards and benefits for informal workers need to be carefully negotiated by employers, workers, and government. Third, it should be recognized that formalization will not be feasible or desirable for all informal enterprises or all informal wage workers. Rather, it should be assumed that many informal enterprises and informal wage workers will continue to do what they do and remain informal or semi-formal (at least in some dimensions) for the foreseeable future.

A Comprehensive Policy Framework

Clearly, no single, overarching policy goal or prescription can address the concerns of all categories of informal enterprises and informal workers. What is needed is a comprehensive policy framework to address informality with the following broad goals:

1. Create more formal jobs--through employment-centered growth

2. Regulate informal enterprises and informal jobs--through appropriate regulations and incentives

3. Extend state protection to the informal workforce, especially the working poor--including both social protection (health, pensions, and disability) and legal protection (property rights, commercial rights, and labor rights)

4. Increase the productivity of informal enterprises and the income of the informal workforce, especially the working poor--through financial services, enterprises support, and basic infrastructure services but also through a favourable policy and regulatory environment and more equitable terms of trade

5. Promote participatory policy-making, rule-setting, and collective bargaining processes- involving representatives of organizations of informal workers, especially the working poor

There is growing consensus worldwide around these five broad goals, especially in support of the working poor in the informal economy. These five goals are depicted as a "3 by 3" framework in Box 2: with the first two goals as # 1 and 2 and the last three goals under # 3.

Box 2 "3 x 3" Policy Framework

# 1 - Expand formal employment opportunities

# 2 - Regulate as many informal enterprises
and informal jobs as desirable and feasible:n

* Create incentives for informal enterprises
to formalizen

* Create incentives for employers, both for
mal & informal, to hire workers with for
mal contracts, protections, and benefits

# 3 - Increase returns to labor of the informal
workforce through...n

* Protection of the informal workforce: lagal
and social protectionn

* Promotion of the informal workforce:fair
policy and regulatory environment & sup
portive infrastructure and servicesn

* Participation of the informal workforce:
participatory policy-making, rule-setting,
and collective bargaining institutions and
processes that include representatives of
informal workers

To illustrate how this framework should be implemented in practice, consider the urban informal workforce. In most cities around the world, there is an acute shortage of jobs due to various factors, including increased population but also investment decisions that favor relocation of industries outside cities and/or use of capital-intensive technologies. Government and the private sector need to rethink their investment decisions and place a priority on generating urban jobs. Meanwhile, in most cities around the world, existing employment opportunities in the informal economy are being undermined or destroyed due to urban renewal schemes that demolish the places of work of the urban informal workforce; urban planning that fails to incorporate urban informal livelihoods in city plans; and municipal procurement policies that exclude urban informal operators from bidding for contracts for goods and services.

In this context, most of the urban informal workforce pays taxes, fees, or bribes of various kinds to various local authorities simply to be able to pursue their livelihoods. What they receive in return is negligible--often negative. Most home-based producers do not receive the basic infrastructure that would make their home-cum-workplace more productive; they pay residential (rather than commercial) rates for utilities, and are subject to zoning regulations that restrict commercial activities in residential areas. Most street vendors are treated as criminals subject to evictions, confiscations, and harassments. Few waste pickers are recognized for their contributions to waste management and recycling, many are denied access to waste, and most are not allowed to bid for solid waste management contracts. All three groups would be willing to register and pay appropriate taxes to the city, if they would receive benefits in return--including the right to pursue their livelihoods.

Urban planners and local authorities need to embrace the informal economy--it is the main generator of jobs and livelihoods in most cities in the developing world. They need to include urban informal livelihoods, not just urban informal settlements, in their urban plans and local economic development. This will require urban planners and city officials to develop an approach to urban policies, planning, and practices that includes rather than excludes--urban informal livelihoods and the urban informal workforce. To begin with, they need to stop doing harm to urban informal livelihoods.

III. Rethinking Labor

Historically, neo-classical economists have assumed that labor markets include the employed (thought to be employees) and the unemployed and functioned through the interaction of employees and employers. However, development economists pointed out that labor markets in developing countries are dualistic: consisting of a traditional/informal and a modern/formal sector (Lewis, 1954). Some development economists, notably the Nobel Laureate W. Arthur Lewis, predicted that economic development in developing countries would, in the long-term, generate enough modern jobs to absorb surplus labor from the traditional economy. By the mid-1960s, however, this optimism began to give way to concerns about persistent widespread unemployment and under-employment, even in countries that were growing economically (Singer, 1970; ILO, 1972).

These concerns persist even today. Informal employment appears to be on the rise in both developed and developing countries. In most developing countries today, the self-employed constitute a large share of the labor force; the informal wage employed another large share: and formal wage workers a relatively small share. This reality calls for a fundamental rethinking of labor markets.

Self-employed workers behave in fundamentally different ways than dependent wage workers: they both supply and demand labor. They compete in markets for goods and services, not in labor markets. Their employment--and productivity --is driven by a demand for their goods and services, not their labor. Labor regulations and labor market policies have limited salience for the self-employed: as the vast majority of them are own account operators who do not hire others. What matters to the self-employed are macropolicies that help shape the demand for their goods and services and sector-specific policies that regulate who can do what, and where, as well as who receives government support and protection.

Even for informal wage workers, existing labor laws and regulations have limited salience. This is because historically, around the world, the "employment relationship" has represented the cornerstone - the central legal concept--around which labor law and collective bargaining agreements have sought to recognize and protect the rights of workers. Whatever its precise definition in different national contexts, it has represented "a universal notion which creates a link between a person, called the 'employee' (frequently referred to as 'the worker') with another person, called the 'employer' to whom she or he provides labor or services under certain conditions in return for remuneration" (ILO, 2003: 2).

The concept of employment relationship has always excluded those workers who are self-employed. But also an increasing share of wage workers has no legal recognition or protection because their employment relationship is either:

* Disguised: The employment relationship is deliberately disguised by giving it the appearance of a relationship of a different legal nature. For example, the lead firm in a subcontracting chain may claim that it has a "sales-purchase"--or commercial relationship with those who produce goods for it, rather than a subcontracted employment relationship.

* Ambiguous: The employment relationship is objectively ambiguous so there is doubt about whether or not an employment relationship really exists. This is the case, for instance, with street vendors who depend on a single supplier for goods or sell goods on commission for a distributor.

* Not clearly defined: The employment relationship clearly exists but it is not clear who the employer is, what rights the worker has, and who is responsible for securing these rights.

For example, in value chain production, it is not clear who the real employer is: the lead firm, the supply firm, or the subcontractor. Similarly, in the case of temporary work, it is not clear who the real employer is: the agency that supplies temporary workers or the firms that hire them on a temporary basis (Ibid.).

It is important to note that, in some cases, the worker colludes with the employer to avoid regulation. But it is also important to note that, in many cases, it is the employer who seeks to disguise the employment relationship or otherwise avoid regulations; and that many such employers operate formal firms, not informal enterprises.

In sum, it is important to recognize that the relevance of existing labor market models and labor regulations is decreasing around the world. What is needed is a new model of the labor market that takes into account different types of self-employment and different types of wage employment. What is also needed is a thorough re-examination of which laws, regulations, and policies impinge on which categories of informal and formal employment in today's world, and with what impact. In addition to labor laws and regulations, these are likely to include laws, regulations, and policies that govern markets for goods and services; specific sectors (e.g. agriculture, manufacturing, trade and other services); urban planning; value chain dynamics and relationships; government taxation, expenditure and procurement.

IV. Moving Forward

Moving Employment Center Stage: In 2000, 189 nations made a promise to free people from extreme poverty and multiple deprivations. This pledge was translated into eight Millennium Development Goals. Surprisingly, more and better employment was not among the original goals: it was not even a target under Goal # 1 to eradicate extreme poverty and hunger. Yet the key pathway to reducing poverty and hunger is to help people secure more and better employment opportunities. Recognizing this lacuna, at the 2005 United Nations World Summit, the member nations requested that "full and productive employment and decent work for all" be added as a central objective of the development strategies to meet the MDGs. Subsequently, "the achievement of full and productive employment and decent work for all, including women and young people", was added as a target under MDG Goal # 1.

Today, employment is very much on the development agenda. For instance, the World Development Report 2013 on "Jobs'" calls for moving jobs center stage. It argues that employment--or jobs--drive development and should not be considered an afterthought of growth: that "(j)obs are the cornerstone of economic and social development. Indeed, development happens through jobs. People work their way out of poverty and hardship through better livelihoods" (World Bank, 2012: 2). The WDR 2013 considers all types of jobs not just formal wage employment--and highlights that a large share of the workforce is self-employed. It concludes that three layers of policies are needed to promote more and better jobs: policy fundamentals (e.g. macroeconomic stability; enabling business environment; human capital; and rule of law); labor policies which avoid misguided interventions, provide voice, and extend protection; and development policies to address context-specific employment challenges and constraints. But it also concludes that that the appropriate policy responses will vary across countries, depending on their levels of development, endowments, demography, and institutions.

Hopefully, going forward, this recognition and validation of employment as a driver of development will be reflected in the post-2015 Millennium Development Goals and in development policy more generally.

Re-Imagining the Economy: What is needed, most fundamentally, is a new economic paradigm: a model of a hybrid economy that embraces the traditional and the modern, the small scale and the big scale, the informal and the formal. What is needed is an economic model that allows the smallest units and the least powerful workers to operate alongside the largest units and most powerful economic players. What is needed, more specifically, is an economic model that allows:

* Home-based producers in global value chains to be able to bargain with dominant players in those chains for their rightful share of value added.

* Street vendors to operate alongside retailers and wholesalers--alongside shops, wholesale markets, and malls - in central business districts.

* Waste pickers to access waste and to bid for solid waste management contracts alongside large corporations.

* Informal construction workers to gain some of the protections and benefits of formal construction workers.

* Informal transport workers to be integrated on equitable terms in public and private transport systems.

* Small holders and agricultural day laborers to compete on equitable terms with large holders and corporate farms; and

* Small-scale producers to compete in export markets on fair terms alongside large-scale commercial farms.

Some years ago, the world embraced bio diversity--and still does. Today, the world also needs to embrace economic diversity. Both are needed for sustainable and inclusive development.

References

International Labor Organization (2003), Scope of the Employment Relationship: Report IV, International Labor Conference, 91st Session, Geneva: ILO.

International Labor Organization (2002), Women and Men in the Informal Economy: A Statistical Picture. Geneva, Switzerland: ILO. Written by Marty Chen and Joann Vanek using multi-country data analyzed by Jacques Charmes and country studies by Debbie Budlender, Peter Buwembo, Nozipho Shabala, Jeemol Unni, Marge Guerrero, Rodrigo Negrete, Francoise Carre, and Joaquin Herranz, Jr.

International Labor Organization (1993), Resolution Concerning the International Classification of Status in Employment (ICSE), adopted by the Fifteenth International Conference of Labor Statisticians. Geneva, Switzerland: ILO

International Labor Organization (1993, 2003), Reports of the International Conference of Labor Statisticians., Geneva: ILO.

International Labor Organization (1972), Employment, Incomes and Equality: A Strategy for Increasing Productive Employment in Kenya, Geneva: ILO.

ILO-WIEGO database on informal employment http://www.ilo.org/global/statistics-anddatabases/WCMS_179795/lang-en/ index.htm

Lewis, W.A. (1954), "Economic Development with Unlimited Supplies of Labor", Manchester School of Economic and Social Studies, 23(2)

Singer, H.W. (1970), "Dualism Revisited: A New Approach to the Problems of Dual Society in Developing Countries", Journal of Development Studies, 7(1 January)

Vanek, J, M. Chen, R. Hussmanns, J. Heintz, & F. Carre (2012), Women and Men in the Informal Economy: A Statistical Picture, Geneva: ILO & WIEGO.

World Bank (2012), World Development Report 2013 on Jobs, Washington, D.C: World Bank.

Martha Alter Chen is International Coordinator, WIEGO Network &Lecturer in Public Policy, Harvard Kennedy School, Cambridge, MA 02138. E-Mail: Martha_Chen@harvard.edu. Joann Vanek is Statistics Program Director, WIEGO Network.

(1) In this paper, following international statistical practice, we use the term "informal sector", rather than "unorganized sector", to refer to unincorporated small or unregistered enterprises. And we use the term "informal employment" to refer to work without legal or social protection both inside and outside informal enterprises. In India, the term "unorganized sector" generally refers to enterprises having fewer than 10 workers, operating on a proprietary or partnership basis. So defined, it closely approximates the international statistical definition of the "informal sector".

(2) Status in employment is used to delineate two key aspects of labour contractual arrangements: the allocation of authority over the work process and the outcome of the work done; and the allocation of economic risks involved (ILO 1993).

(3) The term "informal workers" is used here in a broad inclusive sense to include informal wage workers as well as the informal self-employed.

(4) The ILO-WIEGO database on informal employment now contains data for nearly 50 countries: see http://www.ilo.org/global/statisticsand-databases/WCMS_179795/lang-en/ index.htm

(5) Public sector employment as a share of total employment is still quite high, although decreasing, in the MENA region: as high as 20-25 per cent of total employment in some countries. When public sector employment is excluded, informal employment represents around 80 per cent of private sector employment (Ragui Assaad, personal communication).

(6) No direct estimates of informal employment were available for the Caribbean countries; however indirect estimates were included for some of the countries of the sub-region.