On 7th January 2019, KRI invited Professor Martha Chen to the seventh KRI Brown Bag Seminar to present on the topic ‘The informal economy: Is formalisation the answer?’.

1. KRI SEMINAR JAN. 7, 2019
THE FUTURE OF INFORMAL WORK:
IS FORMALIZATION THE ANSWER?
MARTY CHEN
WIEGO NETWORK
HARVARD UNIVERSITY

2. REMARKS
 Informal Economy
 definitions
 first-ever global estimates
 links with poverty
 future trends
 Formalization
 standard approach & debates (mainstream
economics)
 alternative approaches (ILO)
 Decent Work and the Informal Economy (ILC
2002)
 Recommendation 204 (ILC 2014-15)
 perspective of informal workers (WIEGO)
 Future of Informal Economy & Formalization

3. OFFICIAL INTERNATIONAL
STATISTICAL TERMS & DEFINITIONS
 Informal Sector = narrowest concept: production and
employment in unincorporated enterprises that are also
unregistered (with national authorities) or small (ICLS 1993)
 Informal Employment = broader concept: employment without
social protection (OR paid annual and sick leave) through work -
both inside & outside the informal sector (ICLS 2003)
 Informal Economy = broadest concept: all units, activities, and
workers so defined + output from them
ICLS = International Conference of Labour Statisticians

4. INFORMAL WORKERS:
WHO ARE THEY? WHAT DO THEY DO?
 Informal Workers include…
 self-employed in informal enterprises
 wage employed in informal enterprises, formal firms or households
 dependent contractors in supply chains + for on-line platforms
 Informal Workers are in multiple trades or occupations
 rural: smallholder farmers + agricultural day labourers +
shepherds/livestock rearers + artisans + fisher-folk + forest gatherers +
agro-processors + self-employed & informal wage workers in non-
agricultural enterprises
 urban: construction workers + domestic workers + home-based
producers + street vendors + waste pickers + service providers (laundry,
beautician) + transport workers + informal wage workers in factories,
hotels, offices, restaurants

5. INFORMAL WORK TODAY: SIGNIFICANCE
% of Total, Rural & Urban Employment
Globally & by Country Income Group & Geographic Region
Country Income Groups * Total Rural Urban
World 61 80 44
Developing 90 90 79
Emerging 67 83 51
Developed 18 22 17
*2018 World Bank classification based on country levels of gross income per capita
Geographic Regions (excluding developed countries) Total
Sub-Saharan Africa (excluding Southern Africa) 92
Sub-Saharan Africa as a whole 89
South Asia 88
Southeast & East Asia (excluding China) 77
Middle East and North Africa 68
Latin America and the Caribbean 54
Eastern Europe and Central Asia 37
Source: ILO 2018

6. INFORMAL WORK TODAY: COMPOSITION
By Status in Employment & Branch of Industry
Globally & Country Income Group (%)
Country
Income
Groups
Wage
Workers
Self-
Employed
Employers
Own
Account
Workers
Contributing
Family
Workers
World 36 64 3 45 16
Developing 21 79 2 54 22
Emerging 37 63 3 44 16
Developed 51 49 6 36 6
Source: ILO 2018
Country Income
Groups
Agriculture Services Manufacturing
World 38 44 18
Developing 69 21 10
Emerging 36 46 19
Developed 10 71 19

7. INFORMAL EMPLOYMENT:
LINKS WITH POVERTY
 At the country per capita income level: informal employment is
 highest in developing (low-income) countries: 90%
 lowest in developed (high-income) countries: 18%
 in the middle in emerging countries: 67%
 At the household per capita income level:
 in all country income groups: higher % of informal workers than of
formal workers are from poor households
 In all developing and emerging countries, well over half of all workers
from poor households are informally employed; and in two-thirds of
developing and emerging countries half or more of all workers from
non-poor households are informally employed.
 in developed countries, 14 to 62% of workers from poor households
compared to 4 to 34% of workers from non-poor households are
informally employed.
Source: ILO 2018

8. SEGMENTATION OF THE INFORMAL ECONOMY:
BY STATUS IN EMPLOYMENT, SEX,
AVERAGE EARNINGS & POVERTY RISK

9. THE FUTURE OF INFORMAL WORK
 existing informal employment: likely to persist – with some shifts across
branches of industry, unless significant increase in formal jobs
 informalization of once-formal wage jobs: likely to continue – in current
climate of de-regulation & flexibilization of labour, unless labour markets
are regulated or re-regulated
 new forms of informal wage jobs and/or dependent contractors: likely to
emerge & increase – with growth of outsourcing, offshoring and digital
platforms/gig economy, unless new forms of work are regulated
 workers displaced by technology and trade: likely to resort to self-
employment in the informal economy – in absence of unemployment
insurance, employment guarantee schemes and safety nets, unless they
acquire skills for new technology jobs and occupations
In sum, the future of work is informal.
Is formalization the answer?

10. FORMALIZING THE
INFORMAL ECONOMY
Formalization is the most commonly-cited
policy response to informality - but what does
it mean?
What does formalization of the informal
economy mean to you?

11. FORMALIZATION:
STANDARD APPROACH
 Formalization: most common understandings of the term
 shifting informal workers into formal jobs
 regulating & taxing informal enterprises
 Much of the formalization debate centers on # 2 above –
including whether and how to reduce the costs associated
with registration procedures and fees for informal
enterprises (a la Hernando de Soto)
But in the last decade or so, significant rethinking of
formalization among development economists and other
observers

12. DEBATES AND RETHINKING
REGARDING THE
INFORMAL ECONOMY &
FORMALIZATION
WITHIN
DEVELOPMENT ECONOMICS

13. REDUCING INFORMALITY
(KANBUR & KEEN 2015)
• Challenge common slogan of tax reforms: i.e. reduce informality by taxing
informal enterprises
• Argue that there are different types of firms:
o Smallest Firms, such as microenterprises, whose maximum sales are
below the tax threshold: they declare truthfully and pay no tax;
o Adjusters, firms which are a bit larger and whose maximum sales would
be above the threshold but choose, legally, to operate just below the tax
threshold to avoid tax and compliance costs;
o Ghosts & Cheats: firms whose true sales are above the tax threshold but
choose to either falsely declare below the tax threshold or not declare at
all; or declare some, but not all, of their sales;
o Large Compliant Firms which declare truthfully and pay full amount of
tax.
• Conclude that tax policy…
o should be based on social objectives & understanding of the different
types of enterprises and different responses to tax instruments and
thresholds

14. INFORMALITY: EXIT AND EXCLUSION
(World Bank 2007)
 Important to increase benefits as well as reduce costs of
regulatory compliance
 Benefits of Formalization = access to…
 financial + business development services
 product markets through public procurement
opportunities
 formal firms through supplier development programs
 legal services + advisory services on taxes and
regulations
 In other words, need to offer “carrots” (not just “sticks”)

15. FORMALIZATION OF
INFORMAL JOBS
 What about the formalization of informal wage jobs and
regulation of informal employment relationships?
 Many economists who favor regulation & taxation of
informal enterprises are against regulation of labour
markets - arguing that labour regulations are an
important cause of informality.
 There is, therefore, an on-going policy debate on
regulation vs. deregulation vs. appropriate regulation of
labour markets.

16. MINDSETS, TRENDS & THE INFORMAL ECONOMY
(Kanbur 2014)
• Challenges common argument that excessive labour
regulations create incentives for enterprises to operate
outside the purview of regulation
• Argues that
o presence of regulation can only explain the level of
informality
o increases in the regulatory burden would be needed to
explain increases in informality
• Points out that, in the last two decades of liberalization,
the regulatory burden has if anything decreased
• Concludes that the regulation-based explanation of
increasing informality is thus weak at best.

17. ALTERNATIVE PERSPECTIVES ON
THE INFORMAL ECONOMY &
FORMALIZATION
ILO & WIEGO & INFORMAL WORKERS

18. DECENT WORK & THE INFORMAL ECONOMY:
INTERNATIONAL LABOUR CONFERENCE 2002
 Decent Work Agenda – 4 pillars
 economic opportunities
 rights at work
 social protection
 social dialogue
 Decent Work Deficits: informal workers are more likely than formal
workers to have…
 low quality + unprotected jobs
 few (if any) rights at work
 little (if any) social protection
 limited (if any) representation in social dialogue

19. DECENT WORK & THE INFORMAL ECONOMY
ILC 2002 (cont.)
Decent Work for All - Integrated Comprehensive Strategy:
 immediate term: reduce decent work deficits in the informal
economy through
 short and medium term: enable those currently in the
informal economy to move upwards along the continuum +
ensure new jobseekers and potential entrepreneurs are able to
enter the more formal, protected, and decent parts of the
continuum
 longer term: create enough formal, protected and decent
employment opportunities for all workers and employees

20. RECOMMENDATION 204:
TRIPARTITE PERSPECTIVES & PROCESS
• Starting Positions:
o Employers: informal enterprises represent illegality & unfair
competition – but also pool of future entrepreneurs
o Workers: informal workers should be represented by formal
trade unions
o Governments: mixed stances
• Standard-Setting Discussions: involve
o expert group meetings
o draft documents prepared by ILO Office & circulated to
tripartite constituencies for their feed-back
o tripartite discussions during 2 consecutive annual International
Labour Conferences (2014 + 2015)

21. RECOMMENDATION 204:
INFORMAL WORKER INPUTS
WIEGO convened & facilitated:
• 3 Regional Workshops ► Platform of Common Demands
o Africa, Asia and Latin America
o 54 organizations from 24 countries
• Informal Worker Delegations: to 2014 & 2015
International Labour Conferences at which informal worker
leaders
o provided inputs into Workers’ Working Group
o invited to speak in plenary sessions
http://wiego.org/content/international-labour-conference-2015

22. INFORMAL WORKERS:
PLATFORM OF DEMANDS
 Common demands – all groups of informal workers
 organization & representation
 legal recognition & protection
 social protection
 public services, including basic infrastructure services at
workplace + public transport
 Specific demands – different groups of informal workers
 domestic workers: same rights as formal wage workers
 home-based workers: housing + basic infrastructure
 street vendors: access to public space in central locations
 waste pickers: access to waste + right to bid for solid waste
management contracts
http://wiego.org/sites/wiego.org/files/resources/files/WIEGO-
Platform-ILO-2014.pdf

23. RECOMMENDATION 204:
KEY PROVISIONS FOR INFORMAL WORKERS
 Most informal workers are from poor households trying to
earn a living against great odds and, therefore, need
protection and promotion in return for regulation and taxation.
 Most informal economic units are single person or family
operations run by own account workers who do not hire
others.
 Informal livelihoods should not be destroyed in the process
of formalization.
 Regulated use of public space is essential to the livelihoods
of informal workers, especially in cities.
 Regulated access to natural resources is also essential to the
livelihoods of informal workers, especially in rural areas.

24. ASSESSING FORMALIZATION SCHEMES:
WIEGO GUIDELINES
 does the scheme focus only on the self-employed and their enterprises? or
also on wage workers?
 what problem is the formalization scheme designed to address? limited tax
revenue; poverty; inequality; decent work deficits of informal workers?
 what is being formalized? the informal activity, business or place of work?
the terms and conditions of work of the informal worker?
 does the scheme focus only on compliance with formal regulations and
taxation? or also on the benefits and protections of being formal?
 who are the winners and losers of the formalization scheme? whose
interests are being served by the formalization scheme? the interests of
informal workers? formal workers? government? big business? the general
public?
 have informal workers been consulted during the design and/or
implementation of the formalization scheme? are informal worker
organizations engaged in the initiative? what is their “end goal”?

25. RESEARCH ON INFORMAL WORK:
FUTURE DIRECTIONS
 Analysis of official labour force and other economic data
 size, composition & contribution of the informal workforce
 share of informal employment in different branches of industry
 share of informal enterprises in total enterprises: by size, location and branch of
industry
 Field research – in-depth case studies of old and new forms of informal employment
 topics
 constraints & opportunities, costs & benefits
 links to formal firms: commercial & employment relationships
 impact of policies, laws & regulations
 impact of technology & trade
 impact of macro-economic & political environment
 mix of methods
 focus group tools
 mapping of relevant policies/laws, institutions & stakeholders
 key informant interviews
 questionnaire survey – to test prevalence of findings from qualitative research

26. STATISTICS ON INFORMAL WORK:
FUTURE DIRECTIONS
 improved guidelines & standards for measurement of informal
employment - being discussed at 2018 ICLS
 city-level data – for an urbanized world
 data on specific groups of informal workers – to inform policies –
see WIEGO guide http://www.wiego.org/publications/guide-obtaining-
data-types-informal-workers-official-statistics
 data on informal enterprises (as share of all enterprises across
different branches of industry + by size, ownership & place of work) –
to inform enterprise development policies & schemes
 data on GDP contribution of informal workers inside and outside
informal enterprises - to convince policy makers that they contribute to
economic growth
 more & better data on informal employment in developed
countries: using common framework for measuring informal
employment in developed & developing countries

27. WAY FORWARD
 Future of Informal Work
 informal employment is likely to remain the norm
 informal workers should not be ignored or stigmatized - but
recognized & supported
 Future of Formalization Schemes - should focus on reducing
poverty & inequality by…
 decreasing costs & risks + increasing earnings, benefits &
productivity of working poor in the informal economy
 reducing decent work deficits of the working poor in the
informal economy

28. THANK YOU!