Poverty reduction and social development

Informal Employment and the Economic Crisis


The financial and economic crisis that started in 2008 has deep implications for employment across the planet. While the precise consequences cannot be predicted, it appears certain that both jobs and wage levels will suffer in many developing countries. The crisis brings to an end a period of relatively strong and sustained growth, which was accompanied by the creation of many new jobs. World employment in 2007 was almost one third higher compared with 1990.


Effects on informal employment

Economic crises typically lead to a slowdown in economic activity and critically affect poverty levels and income distribution. As a consequence, the current crisis can be expected to increase unemployment and reduce international labour mobility. Well-established patterns of migration may disappear as workers are forced to return to their countries of origin, and new migrants are discouraged or hindered from pursuing their migration projects.

What will be the impact of the crisis on informal employment, including jobs or activities in the production and sales of legal goods and services that are not regulated or protected by the state? Already today, most of the world’s workers are employed informally. According to the latest data available, over 55 percent of non-agricultural employment can be considered informal. Moreover, in sub-Saharan Africa or South Asia, proportions are even higher and sometimes close to 80 percent. For example, 83 percent in the case of India and even 90 percent in the case of Chad. There are good reasons to believe that these already high figures of informality will increase even further.


What are the drivers of informality?

Labour market theory suggests an increase in informal activities as a result of economic turmoil, since informal employment can act as a buffer when people are laid off in the formal sector and need to find new job opportunities. Furthermore, an economy going into recession might experience a shift from the tradable to the non-tradable sectors, which again would strengthen informality.

Empirical evidence supports the predicted shift towards more informal employment. Using the example of Argentina (see chart), the level of informality tends to increase in times of economic downturn. Similar observations hold true for many Asian countries.


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Is “going informal” a solution to overcoming the crisis?

Despite the fact that informal employment can act as a shock absorber in times of economic crisis, "going informal" should not be considered an option to overcoming this recession. While informal employment can offer temporary job prospects, the potential increase of informal employment is overall not good news for developing countries. Informality is closely linked with jobs of bad quality, high risks and insufficient social protection. As a consequence, growing informal employment might substantially increase poverty levels, making it impossible for many countries to achieve the Millennium Development Goals by 2015.


What should be done?

Two points can be highlighted:

  • First, neither “striving for growth” alone nor a formalisation campaign will do the trick. What is required instead is an urgent improvement of social protection and empowerment for those in the informal sector, e.g. by extending existing formal mechanisms to the informal sector or supporting informal mechanisms – this would provide a buffer to prevent people from falling into the poverty trap. Examples include the scaling up of conditional cash transfer programmes, fostering public works and giving a boost to (micro)-insurance schemes that protect against basic risks like health shocks.
  • Second, there is also an urgent need to value informal employment more highly, e.g. by providing better infrastructure and access to resources to informal businesses in order to increase their productivity. As regards to business establishment, this policy implies legal means to separate business assets and providing them with protection comparable to that received by corporate property. Simplified methods that allow the recognition of economic rights would generate the conditions to mobilise assets and, ultimately, to be subject to the benefits of formal labour regulation.


Informal is normal? Towards more and better jobs

More and better jobs are needed to cope with the current crisis. Above all policies should try to prevent people from falling into poverty as a result of the economic downturn. While we do not know the magic bullet that can solve all problems, we do have a fairly good understanding of what policies might work and which ones risk to fail.

The forthcoming Development Centre Study on “Informal is Normal: Towards More and Better Jobs in Developing Countries” will offer an in-depth review of the current knowledge on informal employment in the development process. Drawing on numerous country examples, the report will outline a strategy towards a more nuanced approach of dealing with informal employment, to win back those who have voluntarily opted out of the formal sector and offer genuine prospects to those who have no choice but to work informally. The report will be presented on 8 April 2009 in the framework of the ELS/DEV Seminar on “Employment and Inequality Outcomes: New Evidence, Links and Policy Responses in Brazil, China and India."


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