By Nadia Khan
The Informal Sector makes up a third of GDP and 70% of employment in emerging markets worldwide. Yet, more than likely, you’ve never even heard of it. While global regulatory bodies like the UN and International Labour Organization (ILO) have been trying to make amends for years, details of the injustices faced by laborers in the informal sector, particularly women, are hardly front-page news.
The ILO officially defines the informal sector as having two parts. Firstly, as the individuals who are without a formal work contract and are not protected by a federal safety net. Second, as businesses that are not registered with the government and thus do not pay taxes. More than 60% of the world’s employed earn their living in the informal economy. In parts of Asia and Africa, it constitutes as much as 80% of employment.
Part of the reason for the informal sector’s obscurity is its constituents: women from developing nations, without access to large amounts of capital or in many cases quality education, are overrepresented in the informal workforce by all estimates. Starting in the 1980s, a large portion of goods and services production for advanced market economies was subcontracted to smaller-scale informal units.
Since then, most of the informal economy’s output in the form of individual transactions and subcontracted relationships have been channeled into inputs for the smaller and yet far more prominent formal industries like footwear and electronics. Furthermore, with its ample government support and legal power, the formal sector is able to negotiate one-sided contracts with its informal partners. As a result, the informal economy has become a permanent, yet subordinate, part of the global economy.
On a macro level, high levels of informality are correlated with lower worker productivity and poorer development outcomes due to the precarious nature of informal work environments and the poor compensation they provide. On a more personal level, high levels of informality can also have profound impacts on the future prospects and quality of life of those employed.
The informal sector is the sole source of income for low-skilled laborers whose wages would otherwise fall below subsistence. Following the 2008 global downturn, informal workers and their families were particularly hard hit. Despite being forced to overwork, take on additional risks, and cut back on food and health care expenses, incomes still declined, pushing millions further into poverty.
Gender disparities are apparent, and often exemplified, in the informal economy. Despite being overrepresented, women earn lower wages on average than men, with a wage gap even more significant than in the formal sector. This is due to a multitude of factors. Firstly, more than 30% of women in informal employment, specifically in low and middle-income countries, are unpaid. In addition, women are more exposed to informal employment, and thus higher job instability and poorer compensation, in more than 90% of sub-Saharan African countries, 89% South Asian countries, and almost 75% of Latin American countries.
Generally, women tend to be employees rather than employers, lack access to capital and credit lines, and do not possess higher levels of education. They also face significant structural and social barriers, including limited access to childcare services and limited mobility outside the home. Interestingly, despite being the most invisible of the informal workforce, female homemakers are one of the biggest contributors to global trade. For instance, women constitute 75% of all street vendors, which represent a very high proportion of employment and anywhere from 50 to 90% of trade GDP in many developing countries. Despite this, according to many international regulatory authorities including the OECD and ILO, women do not receive a proportionate level of economic return. Instead, they routinely work for lower wages than their male counterparts and are often put in unsafe conditions and at risk of sexual exploitation.
Ingrained social biases also play a large role in perpetuating the issue. Increasing levels of economic development do not automatically translate to greater gender equality. Most of the literature on improving conditions in the informal economy for women offers little advice on what policies could prove effective. Instead, the focus is on historical factors like unequal access to capital and societal and cultural norms, with women’s roles in reproduction and child-rearing commonly cited as key drivers of inequality.
However, policy that aims to make a difference in the short term should attempt to focus on the present and encourage investment in female education and empowerment instead of dwelling on the past. In the long-run, real reform will also involve starting a dialogue to counter deeply rooted biases and structural constraints from the bottom-up. While combating social inequality is undoubtedly critical for progress in the long haul, more targeted policies are an important first step.
Employees of the informal sector aren’t just in need of help. As what essentially constitutes the backbone of many developing economies, they need to be fairly compensated. And even before that, they need to be guaranteed a safe working environment and potential for upward mobility. Therefore, policy attempting to alleviate informal inequality must focus on how best to deliver infrastructure, services, and social benefits to workers. Other factors, including sector-based differences, a global increase in outsourcing and subcontracting, and the privatization of public enterprises in many countries must also be considered.
Overall, however, the formalization of the informal sector could help improve quality of life, working conditions, and economic well-being for the nearly 2 billion laborers worldwide. It could mean comparable wages, enforceable labor contracts, health benefits, and pensions. On a grander scheme, it could boost developing economies, decrease income inequality, and help domestic industries navigate the rapid shifts in market demand and consumer expectations brought about by globalization.
General regulatory solutions aiming to further develop infrastructure while integrating key incentives to workers and their employers alike could help achieve this. From an organizational standpoint, developing country governments could work to simplify official registration and tie in benefits. Lower registration costs could encourage the entry of younger, more productive firms into the market. Easier access to lines of credit would allow closer monitoring of informal organizations and encourage development.
Governments should also implement women-specific solutions within the informal economic space. Different demand drivers require different solutions for the best outcomes. First, the passage of regulations that improve women’s access to land and capital could improve their financial standing and credit worthiness. Secondly, government-funded training programs to increase female financial literacy could facilitate upward mobility and passage into the formal sector workforce. Lastly, incentivizing companies to further involve women in key decision-making and leadership roles could help narrow the wage gap.
On the other hand, formalization could potentially translate into stunted economic growth. The formal sector, which has become increasingly reliant on the practice of subcontracting to smaller informal units, would likely take a hit as a result of rising labor costs and more equitable contract negotiation. Furthermore, with the informal sector playing such a major role in developing economies, initiating any major regulatory disruptions could prove risky. However, in reality, research shows little correlation between informal and formal output and employment.
The informal sector has also historically served as a sink for the formal economy during recessions, absorbing labor and thereby diminishing capacity and lengthening recovery time. It is worth noting however that for the workers, more regulation will undoubtedly mean a greater financial burden in terms of taxes. Thus, effective regulation will have to offset the implicit cost of taxes with benefits such as pensions, healthcare, and rights to unionize. It must also harmonize with grassroots efforts to foster female empowerment. Formalization, if done correctly, can lead to real strides in terms of standards of living and gender equality globally.