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Martha Chen,
Lecturer in Public Policy, Harvard Kennedy School
International Coordinator, WIEGO Network
 
Home-based pottery workers in India. © Martha Chen.
 
 
In the developing world, where the informal workforce is at least half of the total workforce, a major debate centers on how best to help these workers. The big problem is that informal sector work is associated with low incomes, high risks, no formal contracts or benefits, and limited economic rights and a representative voice. We recently spoke with Martha Chen, a Lecturer in Public Policy at the Harvard Kennedy School and the International Coordinator of the WIEGO Network — a global action-research-policy network that seeks to improve the status of the working poor in the informal economy, especially women.
 
In Part 2 of this two-part series, she asserts that the ambition to create more formal wage jobs is "desirable but not all that realistic." Thus a high priority should be improving informality by reducing the decent work deficits faced by informal workers along with increasing their productivity and making their earnings more secure. And doing so will involve pinpointing which laws and regulations affect which informal workers, including sector-specific laws and regulations such as those regulating agriculture, construction, transport, solid waste management, and the use of urban space. She also predicts that in developing countries — like India and Bangladesh — we're likely to see more informal employment in the cities — not less — in the near future, especially in cities which are de-industrializing.

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Martha Chen
Lecturer in Public Policy, Harvard Kennedy School
International Coordinator, WIEGO Network
 

Informal sector construction workers in India. © Martha Chen.
 
 
In the developing world, where the informal workforce is at least half of the total workforce, a major debate centers on how best to help these workers. The big problem is that informal sector work is associated with low incomes, high risks, no formal contracts or benefits, and limited economic rights and a representative voice. We recently spoke with Martha Chen, a Lecturer in Public Policy at the Harvard Kennedy School and the International Coordinator of the WIEGO Network — a global action-research-policy network that seeks to improve the status of the working poor in the informal economy, especially women.
 
In Part 1 of this two-part series, she argues that "informal is normal." This means that in developing countries not only are the majority of workers informally employed — with the highest levels in South Asia and Sub-Saharan Africa — but also that most jobs are created in the informal economy and most informal workers are trying to earn an honest living. She gives her thoughts on the challenge of accurately measuring the size of the informal sector and the types of workers in it to enable policy makers to better craft economic policies and labor laws that help lift the working poor out of poverty.
 
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Sean Blagsvedt is the CEO and Founder of Babajob.com
 

Jodphur, Rajasthan, India - Jan 29, 2009: Indian man sitting on motor bike talking into mobile phone. Jodhpur is blue city in north India, most buildings in old town area are painted in blue, even inside the rooms.
photo courtesy: ©2009 Tian Zhan
 
 
How can employers with low-skill job openings in the informal sector (such as for cooks, maids, security guards, and office helpers) efficiently connect with potential employees? In India, since 2007, there's been a Bangalore-based web and mobile start-up—babajob.com—trying to do that via the web, mobile apps, SMS, the mobile web, and voice services. We spoke with Sean Blagsvedt, the company's founder and Chief Executive Officer, who told us that Babajob now has a presence in every state in India, with about 500,000 registered job seekers and 70,000 employers using the platform. We asked how the government could help digital marketplaces? He said what's needed are less costly, standardized ways to secure accurate data on job seekers and verify their identities.
 
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Click here to watch the babajob.com intro video.
Gordon Betcherman is a Core Team Member of the 2013 World Development Report and Professor at University of Ottawa
 
IN054S13 World Bank
Classroom. India. Photo: © Ray Witlin / World Bank
 
Policy makers often think that the path to creating more jobs lies in improving labor policies (such as minimum wages, the role of unions, and employment insurance). But as the World Bank's team for the 2013 World Development Report on Jobs discovered, these policies often don't have a major impact on a country’s employment or productivity. Gordon Betcherman—a core member of the 2013 WDR team and a Professor at the University of Ottawa—tells us that the challenge is to set labor policies on a plateau, that is, a range where regulations and institutions can at least partially tackle labor market imperfections without reducing efficiency. That means avoiding the two cliffs: too strict (distortionary interventions that clog the creation of jobs) or too loose (lack of mechanisms for voice and protection for the most vulnerable workers, regardless of whether they are wage earners). As for the edges of the plateau, those will vary across countries and even within countries over time, as conditions change.
 

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This blog was originally posted on "Harvard Business Review" Nov. 8, 2012

By Klaus F. Zimmermann, Director of the Institute for the Study of Labor (IZA), Bonn

A new specter is haunting the world economy — the specter of informality. The term describes people working either in informal arrangements with employers or in irregular self-employment occupations, but in either case without employment security or social security. Until a few years ago, any mention of that word pretty much implied that one was talking about the developing world.

Juventud sin futuro
Youth job protests, Madrid, April 7, 2011


That is no longer the case. In light of the staggering increase in youth unemployment in the "rich" world of the West, the phenomenon of informality has gone global. Now, informality seems to arise as the social downside of the drive for more flexibility in the face of structural change and economic decline. Newspapers in France, Spain, and elsewhere are full of reports about the "new precariousness." With fewer job prospects in general, it also affects people in the middle and late stages of their working lives.

More informal jobs even in developed countries
Both developed and developing countries have long aimed to provide more inclusive economic growth. What is different now is that it is the developing countries that have an easier time realizing this long-elusive goal. Ever larger parts of their populations are shifting into middle-class status.

In contrast, from the indignados in Spain and the Occupy Wall Street movement in the United States to short-term contract holders even in economically successful countries such as Germany, there is a widening sense of exclusion and frustration. There also is a growing concern about whether the limits of growth have been reached for this part of the world.

Even in the ever-optimistic United States, young Americans move back home in increasing numbers because they can find no jobs after graduating from college. Reports in U.S. newspapers about such "boomerang" kids are nothing new — but they used to refer solely to economic dysfunction in far-away countries like Italy.

The fact that a serious element of Italian precariousness can now be found in the United States itself certainly gives Europe no reason to cheer. True, purely viewed in a jobs context, these countries may actually find some relief in declining birth numbers. As baby boomers retire in ever larger numbers, the odds are that young people will eventually find jobs. But some of these hopes may prove to be an illusion, given the low evidence of the transferability of jobs from the old to the young.

While that may or may not help combat the prevailing sense of informality and precariousness, it does not add up anyway to an economic growth strategy. Nor does it make the social security system any more stable. However, a smoothly functioning social security system is precisely what constitutes the difference between formality and informality.

Informality is becoming deeply ingrained
The toll that informality takes on young workers is high. Young workers who begin their working lives on temporary or short-term contracts start out at lower wages, which lowers their lifetime earning potential. While workers in their 20s do not tend to think about retirement, it is an undeniable fact that their retirement prospects are already being short-changed by informality. They are also less likely to receive the schooling and training opportunities that formal-sector employers provide.

The increasing level of informality in the West is driven, at least in part, by employers seeking to lower their costs by resorting to alternative but legal arrangements with employees. In other words, employers not surprisingly are doing what is best for the company but not the worker.

This is another manifestation of the short-termitis that afflicts Western, particularly American, companies these days. In order to reduce the cost of benefits and training and wages, many companies are inclined to systematically overlook the value (and value-added) of investing in their employees skills and loyalty.

Obviously, the prolonged recession of the late-2000s and early 2010s has hastened companies down this path. The question is: will informality have become too deeply ingrained in the system when better economic times return?

As dismal as the picture currently looks in the Western world, it is still a far cry away from the situation in many parts of the developing world. For all the excitement about rapid growth, moving the overall population beyond a precarious form of existence is, in all likelihood, a century-long project. For example, only around 6 percent of India's workforce is part of the formal economy.

Managing economic aspirations
Still, the important difference is in the direction of economic aspirations. For over two centuries, they worked almost exclusively in the West's favor. But now we find that the sense of optimism and growing personal economic security that long characterized the West is shifting south.

As was the case in the industrialized economies over the past century and a half, there now is a lot of optimism resulting from the economic dynamism that has caught much of the developing world. That kind of rebalancing of global labor market dynamics is only fair and long overdue.

While that ought to augur well for the effort to push back informality and precariousness in these economies, there are some clear risks. The often-dramatic increase in the size of the young population, especially in India and Africa, means that the potential benefits of this profound change can easily become dampened, if not lost.

The situation in China is quite the opposite. After a big wave of labor market entries, its working-age population has just passed its peak. Growing poverty among the aging is fast emerging as a big problem in China. That is a topic that is also discussed intensely in "rich" countries such as Germany and Japan.

All of which goes to show that informality and precariousness, rather than continuing to be a factor distinguishing life in the North from the South, is fast becoming a unifying criterion — a common condition of humanity.

That is not exactly a reason to cheer. Still, it is a potent symbol of global economic integration — and the shared need to find new solutions and create a more flexible and adaptable society.
Ravi Kanbur is T.H. Lee Professor of World Affairs, International Professor of Applied Economics and Management, and Professor of Economics at Cornell University.​

In recent years, there has been a strong interest in the informal economy, which is estimated to comprise 50-75 percent of the non-agricultural labor force in developing countries. It is seen as problematic by many observers, not least because of its association with poverty and low productivity. But little consensus exists on the diagnosis of the problem, let alone on policies to address it.

One view, held by many economists and policy analysts, is that the informal economy arises and flourishes because of regulations that are typically poorly designed (and if decently designed, poorly enforced). This viewpoint was well articulated by The Economist (PDF) in a 2010 survey of Latin America. “Thanks largely to baroque regulation,” said the magazine, “half the labour force toils in the informal economy, unable to reap the productivity gains that come from technology and greater scale.”


Local vendor. Yemen. Photo: Scott Wallace / World Bank

However, many civil society activists and non-economist analysts disagree. As argued by Chen and Doane (2008, PDF), “Economic stagnation and labour market rigidities alone cannot explain the extent of informal employment...” Rather, they point to credit constraints, poor education and training, and various infrastructure impediments as explanations for the persistence of the informal sector. This is notably the position taken by Women in Informal Employment: Globalizing and Organizing (WIEGO).

What would help bridge these divergent views and facilitate policy conclusions is a simple framework that clearly delineates what constitutes formal and informal activities. At this point, different types of informal activities are often lumped together, but the reality is that the type of informal activity may dictate how to improve productivity, boost incomes, and improve job safety and benefits (like pensions and health coverage).   

A Key Step to Bridging the Divide

We can begin by defining formality and informality of economic activity relative to a set of laws and regulations. For purposes of illustration, suppose that enterprises larger than nine workers must register for taxation, make social security contributions, and pay a minimum wage. Then four categories arise (Kanbur, 2009, PDF).

A.      Activities that come under the purview of regulation and comply. This would be an enterprise with more than nine workers that registers for taxation, makes social security contributions, and pays a minimum wage. This is the normal conceptualization of formality. By definition, everything else is informal.

B.      Activities that come under the purview of regulation but do not comply – “the evaders.” This would be an enterprise that has more than nine workers but does not register or meet the other requirements. This is straightforward evasion and illegality. The size of category B depends on the costs of the regulation and the effectiveness of enforcement.

C.      Activities that do not come under the purview of regulation but only because they have adjusted out of the ambit of controls – “the avoiders.” This would be an enterprise that would have employed 10 workers without the regulation, but is now employing only eight workers to avoid the costs (net of benefits) of the regulation. The size of category C depends on the relative costs and benefits of avoiding the regulation – the diseconomies of operating at lower scale than would be optimal without the regulation.

D.      Activities that would not come under the purview of the regulation at all – “the outsiders.” This would be an enterprise that employed three workers before the regulation, and continues to do so after. The size of category D depends on a range of constraints on enterprises, from growing in size to credit constraints and infrastructure impediments – but not on regulations.

In other words, the design of regulations and their enforcement matter for formal activities and for the evaders and avoiders, but not for the outsiders. Yet empirical studies largely fail to disaggregate the informal sector. Hence, we lack estimates of the sizes of the informal categories and solid evidence on how policies affect these categories. Rather, what we have are estimates for informal activities as a whole, which are interpreted as applying to evaders and avoiders by one group of analysts and advocates, and as applying to outsiders by another group.

Policy Implications: Key Questions

Thus, it is vital to disaggregate the categories if we want better research and a better consensus on policy priorities for informality.

Take the case of a country that wants to sharply reduce poverty. Should it use the limited financial, administrative, and political resources to raise productivity and incomes for the outsiders or should it reform regulations to discourage more evaders and avoiders? The answer depends on the size of the various informal categories, how laws and regulations affect the avoiders and evaders, how technological changes and global trading conditions shift the balance between the formal sector and the evaders and avoiders, the productivity differences between the formal sector and the evaders and the avoiders, the productivity differences between outsiders and the other informal groups, and what can increase productivity for the outsiders.

One scenario is that the outsiders are small relative to the avoiders plus evaders, regulations have a big impact on the size of the evaders plus avoiders, globalization and technical change increase this impact, and productivity losses from adjusting out of the formal sector into evaders and avoiders are large. In this situation, a policy focused on reforming regulations to reduce adjustment out of the formal sector into the evaders and avoiders (that is, the policy thrust of The Economist view) would seem advisable. However, if the answers are opposite to those above, the WIEGO view would have greater credence –the focus should be on direct interventions to provide credit, training, and support to the outsiders rather than on deregulation.

The World Bank’s spring meetings this year have been all about “Closing the Gap”. And one of the gaps the world certainly needs to close is the one on jobs – between those whose jobs are productive and those who scrape by in low-return work, and between those who have them and those who don’t. The recent crises have brought this gap into even sharper focus, if that’s possible – with growth slowdowns meaning that in many countries, many who had jobs joined the rolls of the unemployed, and many who don’t have jobs have found them hard to get. Indeed, some estimates put the number of jobs lost between 2007 and 2009 at 27 million – mainly in advanced economies, countries in Europe and Central Asia, and Latin America. In other regions, employment did not contract, but its growth slowed down significantly.

But governments across the world reacted in a major way, and in rich and developing countries alike, put in place a slew of public policy measures to try and redress the situation. But until now, we haven’t had a full understanding of what really happened in terms of the sweep of policies put in place by different countries, and how these differed among countries themselves.

For the first time, we have a new database that looks precisely at this. This is joint work by the International Labour Organization (ILO) and the World Bank -- an Inventory of Policy Responses to the Financial and Economic Crisis. Launched on April 20, at noon at a World Bank spring meeting event by the Minister of Economic Affairs from Switzerland, Johann N. Schneider-Ammann, it will be introduced by Jose Manuel Salazar-Xirinachs, ILO Executive Director, and Tamar Manuelyan Atinc, Vice President for Human Development at the Bank.

The database has an accompanying report. Available as part of “Open data” to everyone, including academics and policy analysts, they together provide an in-depth first-time look at how governments around the world responded to the 2008-2009 global financial crisis in terms of macroeconomic (fiscal and monetary), sectoral, and labor and social policies—such as public works, unemployment benefits, wage subsidies, and work-sharing. The inventory of policies took almost two years to complete; it was a truly collaborative effort between the two institutions. It sampled 77 countries significantly affected by the crisis (55 low- and middle-income and 22 high-income), representing 89% of global GDP and 86% of the global labor force.

What does the data show? Most importantly, that the degree of government intervention in both developed and developing countries was unprecedented – perhaps only to be expected in a crisis of historic proportions.

Close to half of the developing countries included in the sample made public interventions to increase labor demand, facilitate the matching between workers and jobs, and expand social insurance benefits. For them, the most popular policies were credit support to small and medium enterprises (SMEs), public works, and transfers (both in-cash and in-kind). In high-income countries, by far the most common policy was to expand unemployment benefits, followed by more training programs and support to SMEs.

Countries moved aggressively to expand income and social protection
(Percentage of Countries Implementing a Given Policy)

Source: Inventory of Policy Responses to the Financial and Economic Crisis


The report itself just reports on the data, and does not try to identify the most effective policies to contain jobs and income losses and facilitate the recovery--although it argues that fiscal and monetary policies did make a difference. It also contends that countries need to expand the coverage of social insurance and social assistance programs, given that even in middle high-income countries (such as Chile and Mexico), the social insurance system covers less than 60% of the labor force, and in Africa and most of Asia, the coverage is below 5%.

The challenge for analyzing the effectiveness of the policies based on this report is the absence of a counterfactual—what would have happened if governments had not intervened. But the report itself is perhaps less important than the database that underlies it. The hope and expectation is that this unprecedented database will be used by researchers and policy analysts, combined with other data and analysis, and help us all better understand how to devise more effective labor and social protection policies in response to an economic downturn.
 

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