INFORMAL

EMPLOYMENT
WILFREDA MONETTE B. MORAN, MAN
Professor – NCM 120
Informal Employment

► The term “informal employment” refers to

the basic characteristics of a job and not
the enterprises or organizations per se in
which the employees work.

► Informal employment exists in both the

formal and informal economy
Informal Employment
► The term “informal employment” denotes a
very wide range of heterogeneous activities.
► Alongside a vast majority of informal
producers who struggle to earn a living at
the subsistence level (“survivalists”), there
is a relatively small group of top performers,
who are very productive and have significant
growth potential (“constrained gazelles”)
Informal Employment

► Despite the great heterogeneity, informal

employment is largely characterized by low wage
levels, precarious working conditions, and a high
proportion of poor people among the workers
(working poor) – with women being
disproportionately affected.
 Reasons for Participating in the Informal
Sector
► Pure survival strategies undertaken by individuals facing a lack of
(adequate) jobs,
► Unemployment insurance or other forms of income maintenance,
► The desire for independence and flexible work arrangements
► The prospect of quite profitable income-earning opportunities,
► The continuation of traditional activities
► Informal sector was treated as a residual due to the insufficient
absorptive capacity of the formal economy
Characteristics of Informal Employment

► Informal
employment is
characterized by
great heterogeneity
(see Figure 1) and
marked by two
essential features.
Characteristics of Informal Employment
► First, there are major differences in income.
✔ Comparatively, the highest incomes are earned by
informal employers and informally employed workers
who pursue their work on a “regular” basis.

✔ At the base of the pyramid are family workers, who

usually contribute their labor without monetary
compensation and therefore face an especially high
risk of poverty.
Characteristics of Informal Employment
✔ It should be noted that people cannot always be
assigned to one specific category because they either
perform several activities at the same time or change
their activities regularly.
✔ Informal employment in the middle and at the base of
the pyramid is often openly visible when people work,
e. g. along the roadside, in small workshops, in their
own homes, in markets, or in fields where they
produce their goods and offer their services. These
people can only generate the income they need to
survive by being informally employed.
Characteristics of Informal Employment
► In most informal employment situations:
✔ The workers have no employment contract or
only a verbal agreement that usually applies for
a short period and can be terminated immediately
at any time. People who work under these
conditions are not registered with relevant
governmental agencies.
✔ As a result, informal workers are also not
entitled to benefits of public social security
systems and have no formal legal protection.
Characteristics of Informal Employment
✔ Inhumane working conditions, a lack of safety standards
and a (compared to the formal economy) low income
characterize the majority of informal employment
situations. Because they are neither registered nor
subject to contractual regulations, informal workers have
few opportunities to defend themselves against the
precarious conditions of their employment.

✔ The low wages they receive is also related to informal

workers’ generally low qualifications and productivity.
Characteristics of Informal Employment
► The second significant feature is gender and age-based
segmentation of the forms and conditions of
employment.
✔ Women suffer from structural discrimination and are thus
disproportionately engaged in informal employment
characterized by particularly insecure and precarious
working conditions.
✔ In informal employment, the wage gap between men and
women tends to be larger – to women’s disadvantage – and
is even higher than in the formal economy.
✔ As a result, women are in a worse economic position.
Characteristics of Informal Employment
► There are many reasons for this discrimination against
women:
✔ There are cultural social values and norms that
discriminate against girls and women in many different
ways.
o These steer the distribution of jobs along stereotypical
gender roles and contribute to limiting girls’ and women’s
employment mobility.
o As a result, women work more frequently in the vicinity of
their homes, in jobs that involve providing assistance, in
jobs that demand less independence, or in simple
service-oriented jobs.
 Characteristics of Informal Employment
► The very fact that girls’ access to education is
limited reduces their future employability.
✔ There has been a fundamental, dramatic rise in girls’
school enrolment at the primary, secondary, and
especially the tertiary level in recent decades, which
reflects a general shift towards a positive appraisal of
their education.
✔ Worldwide, there are indicators of a positive
correlation between parents’ educational level and
income and the acceptance of girls’ schooling.
Characteristics of Informal Employment

✔ Therefore, they attend school less frequently and

regularly, receive a lower-level or stereotyped
education, and rarely have a formal
school-leaving degree.
✔ The majority of illiterate people are still women.
Characteristics of Informal Employment
► Due to structural discrimination, the
benefits women derive from education and
training measures are reduced, which
makes a successful start in professional life
difficult.
✔ Even women who have attained a
comparatively high educational level are not
as well represented in the labor market as
men, especially in decision-making and
leadership positions.
 Characteristics of Informal Employment
✔ Discrimination on the job (salary, working hours,
career opportunities), unequal distribution of power,
and a paucity of opportunities to exert influence in
politics and the law constitute significant
employment-related hurdles for women because of
their gender.

✔ As a result, even (highly) educated women often end

up in jobs in which they cannot use their full
potential and skills or make them available to the
employer (cf. UNESCO 2012, pp. 77, 85).
Characteristics of Informal Employment

► Limited access to resources (goods,

information, land, credit, etc.) constrains many
women, especially when it comes to taking
advantage of their professional opportunities.
✔ They often have no formal entitlement to land, which
renders them legally incompetent and they cannot borrow
money independently.
✔ A lack of information about potential areas of business,
promotional measures, quality standards, and rights and
obligations reduces their productivity.
 Characteristics of Informal Employment
► Multiple roles at work and home can lead to working
women becoming overworked.
✔ The care of children and other family members, running the
household, and social obligations often leave girls and women
with little time for further training or to pursue employment.

✔ A lack of focus on their own micro and small enterprises and

social conventions, e. g. in dealing with men (bank employees,
government officials, etc.) can limit their productivity while
raising their frustration level and the risk of failure in their
economic endeavors.
Costs and Potential of Informal
Employment
► Informal employment is an ambivalent
phenomenon comprising facets that are both
negative (costs) and positive (potential) for the
state, the society, and the individual.
Costs of Informal Employment
► The characteristic wage and labor conditions that
accompany informal employment increase a country’s
poverty (working poverty).
✔ Due to the lack of social safeguards, in cases of illness or
death, workers and their families can hardly afford the
high expenses, e. g. for doctors and hospital stays, and
then have to survive with a lower income or none
whatsoever.
✔ Currently, 1.2 billion informal workers live below the
poverty line of two US Dollar per day / person (of which
700 million are under the absolute poverty limit of 1.25 US
Dollar per person / day) (cf. OECD 2009b).
 Costs of Informal Employment
► When enterprises operate in the informal economy
voluntarily, the state loses tax revenue and the possibility to
exert influence, e. g. on precarious working conditions.
✔ Social security systems suffer due to the small number of
contributors and become ineffective.
✔ As a result, informal workers neither receive financial
support nor have the possibility to earn (further) professional
qualifications in periods of underemployment and high
unemployment.
✔ Since they do not contribute to a pension scheme, poor
people without access to social security usually have to work
until an advanced age in order to survive; they simply cannot
afford to be unemployed.
 Costs of Informal Employment
► The government’s investment in the education of
children and youth – the potential of human capital –
is used only to a limited extent when they work at
unproductive informal jobs.

✔ In terms of the country’s economic and social

development, this means the financial expenditure is
largely wasted (cf. Jütting / de Laiglesias 2009, p. 28
ff.).
 Costs of Informal Employment
► In addition, competitive pressure, especially due to
globalization, creates incentives to preserve a large, agile
informal economy through the outsourcing of production
steps.
✔ The integration of informal enterprises into global value
chains increases the demand for informal workers to fulfil
orders flexibly and at low prices.
✔ Thus, the cost pressure on large and medium-sized
enterprises is passed on to the weaker players.
✔ They can only offer the lowest prices if they continue to avoid
the costs of unemployment, health, and retirement insurance
and pay their employees the minimum wage.
 Potential of Informal Employment
► Integrating informal businesses and employees into global
value chains can also have positive effects.
✔ Even if enterprises or employees are not registered, they
usually produce legal goods and commodities.
✔ Companies can earn profits and employees (continuous)
income.
✔ When there is a lack of formal employment, the informal
economy serves as a “catch basin” and helps maintain the
integrity of a country’s economic and social systems.
Furthermore, informal employment is often counter cyclical:
In periods of upswing after a crisis, informal workers can
switch (back) to formal employment.
Potential of Informal Employment
► Informal businesses can also help mitigate the
development deficits of ineffective governmental
structures.
✔ Entrepreneurs can take advantage of the greater
flexibility of action to implement innovative ideas, to
delve into new business areas, and to accelerate growth
processes.
✔ Shortcomings in the informal economy and specific
obstacles to formalization (economic, institutional, and
social) force people to find creative alternatives for the
limited resources available, frequently encouraging them
to act intuitively in accordance with entrepreneurial
principles.
 Potential of Informal Employment
► The informal economy encompasses, e. g. up to 80
percent of non-agricultural employment in
Sub-Saharan Africa and thus offers training, work,
and an income to a great number of people (cf. OECD
2009a, p. 2).
✔ A large group of informal entrepreneurs and
self-employed people thus function as survivalists,
producing at merely the subsistence level.
✔ In contrast, the relatively small group of top
performers are able to produce goods and services
that are competitive with products of formal
businesses in terms of quality and scope.
Further Challenges to Development Policy
► Informal employment includes a major reservoir of
economic potentials that have not been made adequately
usable for development.
► The effectiveness of special DC programs rises
significantly when the heterogeneity of the groups of
informal workers is taken into account in approaches that
are tailor made for the various target groups (cf. OECD,
2009a, p. 5):
❑ To provide an alternative for people in informal
employment, a greater number of productive jobs have to
be created in the formal economy. Economic policy and
promotion of the private sector must be explicitly
directed toward the goal of creating employment.
Further Challenges to Development Policy

❑ The great shortage of formal jobs also requires an

active government that purposefully creates
incentives for the formalization of informal
enterprises. In addition to shorter and simplified
registration procedures, this includes the
establishment of infrastructure and framework
conditions that are conducive to job creation (see
Box 4).
Further Challenges to Development Policy

► Approaches to increasing the productivity of

informal producers (e. g. through appropriate
courses in business development services or other
types of qualifications) create important
requirements for higher incomes and better
working conditions.
❑ Targeted labor market oriented non-formal
training courses and consultation improve
informal workers’ employability.
Further Challenges to Development Policy
► In general, improving working conditions for informal
workers should be an important concern of any type of DC
support.
❑ In this context, the upgrading of social welfare and the
development of special programs for the personal and
occupational risk protection of workers in the informal
economy are necessary.
❑ Finally, measures to increase informal workers’ mobility
can also facilitate their access to good jobs.