Washington

1. Is Informal Normal? Towards More and Better Jobs in Developing Countries Johannes Jütting and Juan R. de LaiglesiaOECD Development Centre Washington 29 April 2009

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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…

10. …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

11. 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

12. 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!

13. Poverty and the prevalence of informal work Source: Is Informal Normal? and World Bank Group (2007).

14. 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

15. 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

16. GDP Growth and Informal Employment in Argentina (Argentine Economic Crisis) 16 Source: ILO, World Bank, OECD

17. 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

18. 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

19. Composition of non-agricultural employment Source: OECD Development Centre, 2009 19

20. 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

21. 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

22. 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

23. Informal Formal Not Working From monolithic informal employment… 23

24. Informal Upper-Tier Formal Informal Lower-Tier Not Working …to two-tiered informal employment 24

25. 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

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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

32. Thank you

33. 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

34. Women in informal employment 34

35. The case of India