Over 2 billion workers globally are informal — what should we do about it?

Informality is a pervasive phenomenon in the labour markets of developing countries. Two billion workers, representing 61.2 per cent of the world’s employed population, are in informal employment. Emerging and developing countries account for more than 93 per cent of total global informal employment, with sub-Saharan Africa and South Asia containing the largest shares. The trend towards informalization is only expected to escalate further in the future, thanks to the rise of informal service sector activities in developing regions and challenges related to increasing formal manufacturing activities, such as increased competition from East Asia.

There is often a mistaken view that the informal economy is a ‘monolithic’ bloc where all those without access to the formal sector find themselves. However, more recent studies have highlighted the heterogeneous nature of the informal economy, recognising the inherent duality in both self-employment and wage employment. In informal self-employment, a distinction can be made between employers —that is, enterprises that employ hired workers and are relatively productive— and own account enterprises, who use family labour and are involved in subsistence activities.

In informal wage employment, workers may have better paid jobs with some de facto benefits, though not the same security of tenure and social security benefits as formal wage workers. Other informal workers have poorly paid jobs in manual work, such as on farms and construction sites. In the latter case, informal employment is a last resort job to avoid unemployment. A more accurate characterization of informal labour markets in developing countries is as two-tiered, with informal workers either being in ‘lower-tier’ or ‘upper-tier’ self/wage employment.

Climbing the job ladder

It is critical for policy makers to understand that the informal economy is not monolithic and account for its heterogeneity. While the goal of reducing informality is a desirable objective, it is also important to find ways to move workers right at the bottom of the heap  —the lower-tier informal workers— to the upper tier of the informal labour market. Lower-tier informal workers are the most vulnerable and make up the majority of the working poor. While upper-tier informal workers do not have labour law protection and may not have the generous health insurance and pension packages provided by employers that their counterparts in the formal labour market enjoy, they may have limited access to state funded social insurance and be entitled to some benefits, such as leave provisions. In contrast, lower-tier informal workers have no semblance of support from the state, and very little employer provided benefits.

A distinguishing feature of labour markets in sub-Saharan Africa and South Asia in particular is the high proportion of workers in lower-tier informal jobs. For example, 61 per cent of workers in Ghana are in lower-tier informal jobs. The corresponding numbers for Tanzania and Uganda are 72 and 69 per cent, respectively. In India, 38 per cent of all workers are in lower-tier informal wage employment and another 19 per cent in lower-tier self-employment.

The unfortunate reality for most of the workers in the lower-tier of the informal labour market is that they will remain in this work status for most of their working lives. Rarely do we see movement of workers from the lower-tier to the upper-tier of the informal labour market, and almost never do we see the final movement to the formal labour market. This is evident from the figure below, drawn from a dataset that follows a set of workers in India from 2005 to 2012, which shows the frequency that workers move from one work status to another. Strikingly, nearly 73 per cent of those who worked in lower-tier informal wage employment – the largest segment of the labour market in India – retain the same work status in 2012.

Figure 1: The persistence of lower-tier informality
Note: The figure displays the transition rates across work status groups between 2005 and 2012. SE stands for self-employment and WE stands for wage employment.
Source: Raj, Schotte and Sen (2020).

The finding of high persistence rates for lower-tier informal wage employment indicates that these workers face significant challenges in changing jobs due to limited human capital and skills and insufficient funds to start a business, especially for those desiring to move to self-employment.

Creating opportunity and mobility

What should policy makers do to make sure more workers in the informal labour market transition up the job ladder, from lower-tier to upper-tier informal jobs, and then on to formal jobs? First, they need to enact policies that increase the size of formal labour markets so that there are more formal jobs that informal workers can transition into. This, of course, is not easy, especially in sub-Saharan Africa and South Asia, where the size of the formal sector is miniscule and possibilities for growth remain limited. Second, policy makers need to provide skills training and quality education to workers at the bottom of the job ladder. Third, they also need to provide informal workers with more generous social insurance schemes and work with civil society organizations to enhance the collective rights of informal workers.

The COVID-19 pandemic has only exacerbated the inherent inequalities in labour markets and highlighted the wide gulf that exists between informal and formal workers. It is imperative that policy-makers use the current crisis as a moment of opportunity to address the chronic vulnerabilities that exist in the labour markets of developing countries.

The views expressed in this piece are those of the author(s), and do not necessarily reflect the views of the Institute or the United Nations University, nor the programme/project donors.