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Is Informal Normal? Towards More and Better Jobs in Developing Countries. Johannes Jütting and Juan R. de Laiglesia OECD Development Centre. Washington. 29 April 2009. Overview. Informal employment is: pervasive, persistent even in countries with adequate growth, and

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Washington

Is Informal Normal?

Towards More and Better Jobs in Developing Countries

Johannes Jütting and Juan R. de LaiglesiaOECD Development Centre

Washington

29 April 2009


Overview

Overview

  • Informal employment is:

    • pervasive,

    • persistent even in countries with adequate growth, and

    • hardly a hidden phenomenon.

  • Informal employment is linked to poverty on average

    but it encompasses very heterogeneous realities

     differentiated approaches

  • The crisis makes policies to deal with informal employment all the more urgent and relevant


Is informal normal towards more and better jobs in developing countries

1

Overview

2

4

Informal Employment: Size and Trends

Dealing with Informal Employment

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

3

Welfare implications of job quality

3


Is informal normal towards more and better jobs in developing countries1

1

Overview

2

4

Informal Employment: Size and Trends

Dealing with Informal Employment

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

3

Welfare implications of job quality

4


What s new on informal employment motivation

What’s new on informal employment? Motivation

Old Agenda

New Agenda

  • Informal employment to gradually disappear with development

  • Being informal = Being poor

  • Informal employment = immobility

  • Policy agenda:

  • Policies to “formalise” the informal

  • Growth is not sufficient

  • Informal employment is heterogeneous

  • People move between employment states

  • Policy agenda:

  • Multi-tiered approach to policy

5


Definition

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 social 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

6


Is informal normal towards more and better jobs in developing countries2

1

Overview

2

4

Informal Employment: Size and Trends

Dealing with Informal Employment

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

3

Welfare implications of job quality

7


Informal employment is pervasive in the developing world

Sub-Saharan Africa

Southern and Eastern Asia

Latin America

Western Asia

Northern Africa

Transition countries

0

20

40

60

80

100

Share of informal employment in total non-agricultural employment

Informal employment is pervasive in the developing world

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

8

Source: OECD, 2009


Washington

100

TCD

BEN

HTI

GIN

IND

MLI

80

IDN

BFA

ECU

MOZ

PHL

KEN

PER

MAR

PRY

PAK

BOL

60

ZMB

HND

SLV

GTM

ARG

Share of informal employment in total non-agricultural employment

LBN

THA

YEM

BRA

ZAF

MEX

VEN

PAN

IRN

DOM

EGY

KGZ

CRI

DZA

40

COL

CHL

TUN

TUR

SYR

ROM

MDA

20

RUS

0

500

1000

2000

4000

8000

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

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


Yet in many countries informal employment has persisted

…yet in many countries, informal employment has persisted

90

95-99

95-99

80

85-89

90-94

90-94

Egypt

70

2000-

Guinea

Share of informal employment

80-84

India

60

80-84

Morocco

95-99

50

2000-

95-99

40

85-89

1000

2000

3000

4000

5000

GDP per capita, PPP (constant 2005 international USD)

10


Is informal normal towards more and better jobs in developing countries3

1

Overview

2

4

Informal Employment: Size and Trends

Dealing with Informal Employment

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

3

Welfare implications of job quality

11


Why is persistent informality worrying

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!


Poverty and the prevalence of informal work

Poverty and the prevalence of informal work

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


Informal workers have significantly lower earnings

Informal workers have significantly lower earnings

Source: Is Informal Normal?, OECD Development Centre 2009

Notes: *Relative to average wages; definitions and years vary, see table 2.5 for details


Informal employment and the crisis

Informal employment and the crisis

  • Recent crises suggest: Informal Employment ↑

  • Models of cyclical behaviour of Informal Employment: dualist, entrepreneurship for non-tradable sectors: IE ↑

  • Return migrants: Informal Employment ↑

    • 20 million people in China return to rural areas, 95 % unskilled

    • Reduced remittances

15


Washington

GDP Growth and Informal Employment in Argentina (Argentine Economic Crisis)

16

Source: ILO, World Bank, OECD


The gender dimension of informal employment

The gender dimension of informal employment

  • Economic research and policy focused on Labour Force Participation

  • Neglect of quality of jobs

  • Working women are not overall more likely to be informal…

    …but they are overrepresented in worse forms of informal employment and earn substantially less

17


Gender earnings gaps in informal employment

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.

18


Composition of non agricultural employment

Composition of non-agricultural employment

Source: OECD Development Centre, 2009

19


Job mobility and informality

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)

20


Who gains from mobility mexico

Who gains from mobility? (Mexico)

Wage employment

67% of the labour force

Formal

Self-employed

13 %

19 %

17%

18%

13 %

Informal

18 %

Not Working

21


Who gains from mobility education mexico

Who gains from mobility? Education (Mexico)

Wage employment

67% of the labour force

Formal

Self-employed

13 %

19 %

More than 6: 15%

6 and less: 26%

More than 6: 23%

6 and less: 14%

More than 6: 21%

6 and less: 7%

Informal

Not Working

More than 6: 17%

6 and less: 21%

22


From monolithic informal employment

Informal

Formal

Not Working

From monolithic informal employment…

23


To two tiered informal employment

Informal Upper-Tier

Formal

Informal Lower-Tier

Not Working

…to two-tiered informal employment

24


Is informal normal towards more and better jobs in developing countries4

1

Overview

2

4

Informal Employment: Size and Trends

Dealing with Informal Employment

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

3

Welfare implications of job quality

25


A policy framework

A policy framework

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

  • 3 core objectives

    • Increase the number of good, formal jobs

    • Protect and promote workers in the lower tier of informal employment

    • Provide incentives for more jobs to become formal

26


What can we do about it

What can we do about it?

  • Improving the quality also of informal jobs

  • Three common ingredients

    • More and better jobs

    • Incentives for choosing formality

    • Protecting and promoting informal workers


Providing incentives for the upper tier

Providing incentives for the upper-tier

  • Business climate reforms to lower the cost of formality

    • regulatory 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

28


More and better jobs

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

29


Promoting and protecting informal workers

Promoting and protecting informal workers

  • Inclusive education and training

    • adapted to informal workers and recognising experience in informal work

  • Social protection

    • Cash transfers are useful poverty alleviation tools

    • Social protection/assistance for workers (universal coverage programmes)

    • Public works/work guarantee programmes

    • Unemployment insurance

30


Discussion

Discussion

  • How do these findings relate to structural change of an economy? (sectors, productivity,…)

  • How do we protect informal workers while not providing disincentives for formalization?

  • How to promote employment intensive growth that leads to more and better jobs?

31


Washington

Thank you


Earnings in informal work low and heterogeneous

Earnings in informal work: low and heterogeneous

Source: Is Informal Normal?, OECD Development Centre 2009

Notes: *Relative to average wages; definitions and years vary, see table 2.5 for details


Women in informal employment

Women in informal employment

34


The case of india

The case of India


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