is informal normal?informal employment is pervasive in the developing world source: oecd, 2009 share...

Is Informal Normal?

Informal employment in times of Shifting Wealth

Juan R. de Laiglesia OECD Development Centre

Latin American and Caribbean Labour Markets and the Global Economy

Santiago de Chile, 14-15 June 2011

2

Overview

• Informal employment is: – pervasive, – persistent even in countries with adequate growth, and – hardly a hidden phenomenon.

• Global economy: two salient features for informality – Increased growth with structural change: role for trade in affecting informality? – Emerging middle class.

• Informal employment pervasive but heterogeneous differentiated approaches

3

1 Overview

Informality and middle income segments 3

2 Structural change and informality

Is Informal Normal? Towards more and better jobs in developing countries

4 A Policy Framework

4

Definition

Informal employment refers to jobs or activities in the production and sales of legal goods and services which are not regulated or protected by the

state

Statistical implementation (ILO), based on employment relationship (employer protection):

• Informal employment = employment in the informal sector + informal employment in the formal sector

– Informal sector: self-employed (employers, own account workers, family helpers) + wage

employees + employers in micro-enterprises (less than five workers) – Formal sector: Wage employees and paid domestic workers without social protection

5

Informal employment is pervasive in the developing world

Source: OECD, 2009

Share of informal employment in total non-agricultural employment (%)

0 20 40 60 80 100 Share of informal employment in total non-agricultural employment

Transition countries

Northern Africa

Western Asia

Latin America

Southern and Eastern Asia

Sub-Saharan Africa

6

Shifting Wealth: The four-speed world in the 1990s

Source: OECD Development Centre, Perspectives on Global Development 2010 Shifting Wealth

7

Shifting Wealth: The four-speed world in the 2000s

Source: OECD Development Centre, Perspectives on Global Development 2010 Shifting Wealth

8

Cross-country patterns suggest that the share of informal employment should decline with economic growth….

ARG

BEN

BFA

BOL

BRA

CHL COL

CRI DOM

DZA

ECU

EGY

GIN

GTM HND

HTI

IDN

IND

IRN

KEN

KGZ

LBN

MAR

MDA

MEX

MLI

MOZ

PAK

PAN

PER PHL

PRY

ROM

RUS

SLV

SYR

TCD

THA

TUN TUR

VEN YEM ZAF

ZMB

0 20

40

60

80

10

0

Sha

re o

f inf

orm

al e

mpl

oym

ent

in to

tal n

on-a

gric

ultu

ral e

mpl

oym

ent

500 1000 2000 4000 8000

PWT: Real GDP per capita (Constant Prices: Chain series, 2000)

9

yet despite growth, informal employment persists in many countries

85-89

95-99

2000-

80-84

90-94

95-99

85-89 90-94

95-99

80-84

95-99

2000-

40

50

60

70

80

90

Shar

e of

info

rmal

em

ploy

men

t

1000 2000 3000 4000 5000 GDP per capita, PPP (constant 2005 international USD)

Egypt Guinea India Morocco

10

Growth patterns accompanied by structural change -.3

-.2-.1

0.1

chan

ges

in s

hare

of V

A, a

gric

ultu

re %

-5 0 5 10Annualized GDP per capita 1990-2009

converging strugglingpoor

Agriculture

-.20

.2.4

chan

ges

in s

hare

of V

A, in

dust

ry %



Industry

-.20

.2.4

.6ch

ange

s in

sha

re o

f VA

, ser

vice

s %



Services

11

Structural change has a composition effect but it can be small Informality in Mexico, by agricultural/non-agricultural sector

Source: de Laiglesia et al (2009)

0%

5%

10%

15%

20%

25%

30%

35%

40%19

95

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Formal workers (except agricultural) Informal workers (except agricultural)

Self-employed (except agricultural) Agricultural workers (subordinated and self-employed)

12

Trade and informality

Theoretical mechanisms: – Competition cost saving in the form of informally produced inputs or labour:

increase in informality (e.g. Goldberg and Pavcnik, 2003) – Heterogenous firms more productive firms formalise, less productive firms exit:

fall in informality (Aleman-Castilla, 2006) – Tradable vs non-tradable change in relative profitability/price leading to fall in

informality

Empirical evidence – Country-specific effect of liberalisation: negative (Mexico, Aleman-Castilla, 2006), zero

(Brazil, Pavnik and Goldberg, 2003), positive (Colombia pre-labour reform, Pavnik and Goldberg, 2003).

– Macro evidence suggests that informal employment falls with trade but informal output share increases (Fugazza and Fiess, 2010)

13

Manufacturing trade liberalisation and informality

1

10

13

15 17

19

212324 25

26

27

2930

3234

-.2-.1

0.1

.2C

hang

e in

info

rmal

ity ra

te -

1990

s

0 .1 .2 .3 .4Change in tariff 1990-1998

111111101010101010 131313131313

151515151515

171717171717191919191919

212121212121

232323232323242424242424 252525252525

262626262626272727272727

292929292929

303030303030

323232323232343434343434

-.2-.1

0.1

.2C

hang

e in

info

rmal

ity 2

002-

2006

0 .1 .2 .3 .4 .5Nominal tariff - end 1990s

Tariff reduction in Brazil (1991-2001)

14

Between and within dimensions

1111111111111

555555555555510101010101010101010101010131313131313131313131313131414141414141414141414141415151515151515151515151515

1616161616161616161616161617171717171717171717171717191919191919191919191919192020202020202020202020202021212121212121212121212121222222222222222222222222222323232323232323232323232324242424242424242424242424252525252525252525252525252626262626262626262626262627272727272727272727272727 2929292929292929292929292930303030303030303030303030 323232323232323232323232323434343434343434343434343437373737374040404040404040404040404041414141414141414141414141

45454545454545454545454545

50505050505050505050505050

55555555555555555555555555

606060606060606060606060606464646464646464646464646465656565656565656565656565707070707070707070707070707171717171

72727272727272727272727272

73737373737373737373737373757575757575757575757575758080808080808080808080808085858585858585858585858585 909090909090909090909090909191919191919191919191919192929292929292929292929292

93939393939393939393939393

95959595959595959595959595

-.006

-.004

-.002

0.0

02

Betw

een

com

pone

nt 2

002/

6

-.004 -.003 -.002 -.001 0

Within component 2002/6

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5555555555555101010101010101010101010101313131313131313131313131314141414141414141414141414 1515151515151515151515151516161616161616161616161616 171717171717171717171717171919191919191919191919191920202020202020202020202020 212121212121212121212121212222222222222222222222222223232323232323232323232323242424242424242424242424242525252525252525252525252526262626262626262626262626 272727272727272727272727272929292929292929292929292930303030303030303030303030323232323232323232323232323434343434343434343434343437373737374040404040404040404040404041414141414141414141414141 45454545454545454545454545

50505050505050505050505050

55555555555555555555555555 6060606060606060606060606064646464646464646464646464 6565656565656565656565656570707070707070707070707070717171717172727272727272727272727272

73737373737373737373737373 75757575757575757575757575 80808080808080808080808080858585858585858585858585859090909090909090909090909091919191919191919191919191 92929292929292929292929292

93939393939393939393939393

95959595959595959595959595

-.06

-.04

-.02

0.0

2

Betw

een

com

pone

nt 1

990s

-.005 0 .005

Within component 1990s

15

Sector composition of informality (Brazil)

• Highly concentrated: 2/3 of informal workers in agriculture (30%), trade and repair activities, domestic service and construction.

Decomposition of changes over time

• In 1991/2001 increases in informality in manufacturing (food processing, metal goods manufacturing and textiles)

Dominant effects:

• Fall in agricultural employment dominates (-5.6% in 91/01)

• Changes in composition and informality in services

Between Within Total 1992-2001 -2.3% 1.4% -0.9% 2002-2006 -0.7% -2.0% -2.7%

16

Informal in what sector? Differences in outcomes

0 .2

.4

.6

.8

dens

ity

-2 0 2 4 6 8 average hourly wage (net)

formal informal Self-employed in agriculture

Wage distribution by formal/informal status (Mexico, 2007)

17

The changing face of the global middle class

Source: Kharas (2010) “The Emerging Middle Class in Developing Countries,” OECD Development Centre Working Paper No. 285, Projections based on data from the Wolfensohn Center for Development, Brookings Institution

Share of global middle class consumption

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

2032

2034

2036

2038

2040

2042

2044

2046

2048

2050

North America & Europe China India

Other Asia Latin America & Caribbean Africa & Middle East

18

0

5

10

15

20

25

30

35

40

45

Poor Middle Class Better off

Num

ber o

f in

divi

dual

s (i

n m

illio

n)

Brazil Bolivia

Chile Mexico

0

0.2

0.4

0.6

0.8

1

1.2

1.4


Num

ber

of in

divi

dual

s (i

n m

illio

n)

0.00

5.00

10.00

15.00

20.00

25.00

30.00


Num

ber o

f in

divi

dual

s (i

n m

illio

n)

0.00

1.00

2.00

3.00

4.00

5.00


Num

ber o

f in

divi

dual

s (i

n m

illio

n)

But middle segments are largely informal

19

Informality matters for coverage (example: pensions)

0

20

40

60

80

100

Poor Middle class Better off

BOL 2002 BRA 2006 CHL 2006 MEX 2006

0

10

20

30

40

Poor Middle class Better off

BOL 2002 BRA 2006 CHL 2006 MEX 2006

Formal workers Informal workers

20

Social Protection and Informality in LAC

• Informality is also an issue for the middle class: – Many middle class workers in LAC countries are informal – Heterogeneity matters for coverage outcomes

• Challenge of increasing coverage in social protection • pensions, health, unemployment insurance • Dual systems can leave a “missing middle” in coverage

• Not necessarily the source of duality, but should avoid reinforcing duality:

– Universal entitlements, means tests vs job or occupation links, – Incentives: Compulsory or opt out affiliation (self-employed), portability

21

From monolithic informal employment…

Informal Formal

Not Working

22

…to two (or multi)-tiered informal employment

Informal Upper-Tier

Informal Lower-Tier

Formal

Not Working

23

Key issues on multi-tiered informal employment

• Mobility: – High levels of mobility in both directions suggest not only queuing for jobs – But benefits from mobility and barriers even between types of informal jobs depend on

factors that make better jobs accessible (education, gender) • Barriers to physical mobility (portability, entitlement, migration, e.g. Hukou) • Access to capital, education, assets (Barret and Carter, 2007; Klasen and Woolard, 2005) • Cost of search (Rama, 2003; Bernabè and Stampini, 2008) • Social institutions and discrimination (gender, race, age)

• Gender – Women not necessarily more likely to be informal

(in LAC, difference in shares explained largely by domestic workers) – But often in worse jobs, with lower incomes – Much more likely to move out of the labour force

24

What can we do about it? A policy framework

• Beyond “business as usual” (growth concerns and poverty alleviation)

• Improving the quality also of informal jobs

• Addressing heterogeneity across and within countries (two-tiered informal employment)

• Three common ingredients: – More and better jobs – Incentives for choosing formality – Protecting and promoting informal workers

• Role of trade: – Limited role for trade to affect informality directly – New opportunities but also increased volatility, need to account in policy mix.

25

More and better jobs

• Macro-economic policies: – Crucial importance for employment outcomes – Objective setting: Employment creation versus inflation targeting; is there a trade-off

and what to do about it?

• Structural and sector policy – Employment elasticity of growth and driving sectors – Recognise gender differences across and within sectors – More policy coherence: social protection and business promotion agenda

• Labour market reform: better regulation and inclusive institutions

– Engaging informal workers and their representation

26

Providing incentives for the upper-tier

• Business climate reforms to lower the cost of formality – Reduce regulatory compliance costs, tax administration reform, public goods

plus

• Enforcement of labour, tax and social security regulations, including strengthening labour inspections

• Improving the benefits of formality – Better governance, public service, linking contributions and benefits

27

Promoting and protecting informal workers

• Inclusive education and training – adapted to informal workers, including women, and recognising experience in informal

work

• Social protection – Cash transfers are useful poverty alleviation tools – Social protection/assistance for workers (universal coverage programmes), including

childcare provision mechanisms – Public works, work guarantee programmes, unemployment insurance

• Seeing the shades of grey: – Lack of portability of benefits harms the most vulnerable

Thank you

30

Share of Self-Employment in Total Non-Agricultural Employment

31

The challenge of coverage: Pensions

0 10 20 30 40 50 60 70 80

Poor

Middle

Better off

2006 CHL 2006 BRA 2006 MEX 2002 BOL

Source: OECD Latin American Economic Outlook 2011, forthcoming

Note: Share of affiliates (Bolivia and Mexico) or contributors (Brazil and Chile), over working age population. Authors calculations based on national household surveys.

32

Policy recommendations

• Coverage: Protect through minimum pensions (protect)

• Affiliation: Compulsory or opt-out for self-employed workers (enforce)

– Better mobility – Funding of solidarity pillars

• Incentives for contribution through public cofinance (Matching defined contributions).

32

33

Heterogeneity in coverage among informal workers

0

10

20

30

40

Self Employed (with tertiary education

completed)

Non Agricultural Informal Employees

Non Agricultural Self-employed

Agricultural Self-employed

Agricultural informal employees

BOL 2002 BRA 2006 CHL 2006 MEX 2006

34

Why is persistent informality worrying?

Informal work is very diverse but, on average:

• The share of informal workers is strongly correlated with poverty rates (700 million informal poor workers)

• Substantially lower earnings for informal employees: – 1.1 of minimum wage in Morocco, India. – Less than half of average wage in Mexico, Brazil.

• Multiple social costs of informality: – Shortfall in pension, health and labour safety coverage, fiscal receipts – High vulnerability to idiosyncratic and aggregate shocks… the crisis!

35

Informal employment is strongly correlated with poverty

Source: Is Informal Normal? and World Bank Group (2007).

ARG

BEN

BFA

BOLBRA

CHL COLCRI DOM

DZA

ECU

EGY

GTMHND

HTI

IDN IND

IRN

KENMAR

MEX

MLI

MOZ

NERPAK

PAN

PERPHL

PRY

ROM

RUS

SLVTHA

TUN TUR

VEN YEMZAF

ZMB

0

20

40

60

80

100

0 10 20 30 40 50 60 70 80 90 100

Shar

e o

f Inf

orm

al E

mpl

oym

ent

in

Tota

l Non

-Agr

icul

tura

l Em

ploy

men

t

Share of Population Living Below 2 USD (PPP) a Day

36

Earnings in informal work: low and heterogeneous

0

1

2

3

4

5

6

Income and wages in small informal enterprises Multiples of minimum wage

Entrepreneurs' income Wages

Source: Is Informal Normal?, OECD Development Centre 2009 Notes: *Relative to average wages; definitions and years vary, see table 2.5 for details

37

The gender dimension of informal employment

• Economic research and policy focused on Labour Force Participation (LFP)

• Neglect of quality of jobs

• Working women are not systematically more likely to be informal… …but they are overrepresented in worse forms of informal employment and earn substantially less

• The causes largely overlap with causes of low LFP: – social institutions, limited entitlement to resources and assets,

limited freedom to move.

38

Women in informal employment

39

Gender (earnings) gaps in informal employment

Notes: (1) Years and coverage: Morocco (2002), Tunisia (1997 and 2002), Ethiopia (1996), Kenya (1999), Brazil (1997), Colombia (1996), Mexico (1994), Haiti (2004), Lebanon (2004), Turkey (2000). (2) Data for Ethiopia, Brazil, Colombia, Mexico and Turkey are for urban areas only. Source: Various sources, see OECD Development Centre (2009), Chapter 2 for details.

40

Job mobility and informality

• High mobility (at least in middle income countries) including between formal and informal in both directions

• Somewhat surprising labour dynamics: moves from formal to informal

not only queuing for the formal jobs.

• But: mobility depends on the same factors that make better jobs accessible (e.g. educational level and gender)

41

Transitions in and out of informal work (Mexico)

Transitions (in % of individuals aged 20 to 60)

in % 2005

2002 Formal Informal Without job Total

Formal 65.5 18.2 16.3 100

Informal 19.7 42.1 38.2 100

Without job 7.1 7.1 85.5 100

Total 23.9 18.8 57.3 100 Source: Mexican Family Life Survey. First and second waves (2002, 2005)

42

Transitions in Mexico (by gender)

Men

2005

2002 Informal salaried

Formal salaried

Self employed

Not working

Informal salaried 46.7 22.3 20.0 10.9 Formal salaried 18.9 61.8 9.6 9.7 Self-employed 18.6 9.7 62.9 8.9 Not working 15.1 23.6 20.4 41.0

Total 25.5 34.1 26.4 13.9 Source: Mexican Family Life Survey. First and second waves (2002, 2005)

42

Women

2005


Formal salaried

Self employed

Not working

Informal salaried 36.3 14.3 8.4 41.1 Formal salaried 14.3 55.3 7.1 23.3 Self-employed 10.6 2.3 44.5 42.7

Not working 5.6 4.5 7.4 82.5

Total 10.2 11.6 11.9 66.4

43

Transitions in Mexico (by education)

More than 6 years of education

2005


Formal salaried

Self employed

Not working

Informal salaried 41.1 23.4 14.9 20.7 Formal salaried 14.9 62.5 8.6 14.0 Self-employed 14.5 9.3 54.4 21.8 Not working 7.5 13.5 8.7 70.3

Total 16.0 30.1 16.5 37.4 Source: Mexican Family Life Survey. First and second waves (2002, 2005)

Less than 6 years of education

2005


Formal salaried

Self employed

Not working

Informal salaried 43.8 14.0 15.6 26.6 Formal salaried 26.0 45.7 8.7 19.7 Self-employed 14.7 2.8 53.2 29.3

Not working 5.8 1.2 8.5 84.5

Total 14.7 7.2 17.1 61.0

44

Mobility and welfare

• Multi-tiered informal employment as a useful framework: Relative size?

• Barriers to mobility: – Barriers to physical mobility (portability, entitlement, migration, e.g. Hukou) – Access to capital, education, assets (Barret and Carter, 2007; Klasen and Woolard,

2005) – Cost of search (Rama, 2003; Bernabè and Stampini, 2008) – Social institutions and discrimination (gender, race, age)

• Also barriers to better informal jobs

45

Determinants of contributing to the pension system

Brazil (2006) Chile (2006) I IV V I IV V

Income (log) [0.23***] [0.14***] [0.08***] [0.08***] Income * formal [-0.15***] [-0.01* ] Income * independent [0.19***] [0.14***] Income * independent (HE) [0.07***] [0.11***] Income * informal salaried [0.12***] [0.06***] Independents [-0.88***] [-0.99***] [-0.84***] [-0.99***] Independents (HE) [-0.64***] [-0.69***] [-0.69***] [-0.75***] Informal workers [-0.88***] [-0.99***] [-0.77***] [-0.92***] Controls for Educational attainment No Yes Yes No Yes Yes Sector No Yes Yes No Yes Yes Household composition Yes Yes Yes Yes Yes Yes Pseudo R² 0.12 0.69 0.69 0.03 0.55 0.55 N 163660 163652 163652 96748 96520 96520

is informal normal?informal employment is pervasive in the developing world source: oecd, 2009 share...

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