is informal normal?informal employment is pervasive in the developing world source: oecd, 2009 share...
TRANSCRIPT
Is Informal Normal?
Informal employment in times of Shifting Wealth
Juan R. de Laiglesia OECD Development Centre
Latin American and Caribbean Labour Markets and the Global Economy
Santiago de Chile, 14-15 June 2011
2
Overview
• Informal employment is: – pervasive, – persistent even in countries with adequate growth, and – hardly a hidden phenomenon.
• Global economy: two salient features for informality – Increased growth with structural change: role for trade in affecting informality? – Emerging middle class.
• Informal employment pervasive but heterogeneous differentiated approaches
3
1 Overview
Informality and middle income segments 3
2 Structural change and informality
Is Informal Normal? Towards more and better jobs in developing countries
4 A Policy Framework
4
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 employment relationship (employer 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
5
Informal employment is pervasive in the developing world
Source: OECD, 2009
Share of informal employment in total non-agricultural employment (%)
0 20 40 60 80 100 Share of informal employment in total non-agricultural employment
Transition countries
Northern Africa
Western Asia
Latin America
Southern and Eastern Asia
Sub-Saharan Africa
6
Shifting Wealth: The four-speed world in the 1990s
Source: OECD Development Centre, Perspectives on Global Development 2010 Shifting Wealth
7
Shifting Wealth: The four-speed world in the 2000s
Source: OECD Development Centre, Perspectives on Global Development 2010 Shifting Wealth
8
Cross-country patterns suggest that the share of informal employment should decline with economic growth….
ARG
BEN
BFA
BOL
BRA
CHL COL
CRI DOM
DZA
ECU
EGY
GIN
GTM HND
HTI
IDN
IND
IRN
KEN
KGZ
LBN
MAR
MDA
MEX
MLI
MOZ
PAK
PAN
PER PHL
PRY
ROM
RUS
SLV
SYR
TCD
THA
TUN TUR
VEN YEM ZAF
ZMB
0 20
40
60
80
10
0
Sha
re o
f inf
orm
al e
mpl
oym
ent
in to
tal n
on-a
gric
ultu
ral e
mpl
oym
ent
500 1000 2000 4000 8000
PWT: Real GDP per capita (Constant Prices: Chain series, 2000)
9
yet despite growth, informal employment persists in many countries
85-89
95-99
2000-
80-84
90-94
95-99
85-89 90-94
95-99
80-84
95-99
2000-
40
50
60
70
80
90
Shar
e of
info
rmal
em
ploy
men
t
1000 2000 3000 4000 5000 GDP per capita, PPP (constant 2005 international USD)
Egypt Guinea India Morocco
10
Growth patterns accompanied by structural change -.3
-.2-.1
0.1
chan
ges
in s
hare
of V
A, a
gric
ultu
re %
-5 0 5 10Annualized GDP per capita 1990-2009
converging strugglingpoor
Agriculture
-.20
.2.4
chan
ges
in s
hare
of V
A, in
dust
ry %
-5 0 5 10Annualized GDP per capita 1990-2009
converging strugglingpoor
Industry
-.20
.2.4
.6ch
ange
s in
sha
re o
f VA
, ser
vice
s %
-5 0 5 10Annualized GDP per capita 1990-2009
converging strugglingpoor
Services
11
Structural change has a composition effect but it can be small Informality in Mexico, by agricultural/non-agricultural sector
Source: de Laiglesia et al (2009)
0%
5%
10%
15%
20%
25%
30%
35%
40%19
95
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Formal workers (except agricultural) Informal workers (except agricultural)
Self-employed (except agricultural) Agricultural workers (subordinated and self-employed)
12
Trade and informality
Theoretical mechanisms: – Competition cost saving in the form of informally produced inputs or labour:
increase in informality (e.g. Goldberg and Pavcnik, 2003) – Heterogenous firms more productive firms formalise, less productive firms exit:
fall in informality (Aleman-Castilla, 2006) – Tradable vs non-tradable change in relative profitability/price leading to fall in
informality
Empirical evidence – Country-specific effect of liberalisation: negative (Mexico, Aleman-Castilla, 2006), zero
(Brazil, Pavnik and Goldberg, 2003), positive (Colombia pre-labour reform, Pavnik and Goldberg, 2003).
– Macro evidence suggests that informal employment falls with trade but informal output share increases (Fugazza and Fiess, 2010)
13
Manufacturing trade liberalisation and informality
1
10
13
15 17
19
212324 25
26
27
2930
3234
-.2-.1
0.1
.2C
hang
e in
info
rmal
ity ra
te -
1990
s
0 .1 .2 .3 .4Change in tariff 1990-1998
111111101010101010 131313131313
151515151515
171717171717191919191919
212121212121
232323232323242424242424 252525252525
262626262626272727272727
292929292929
303030303030
323232323232343434343434
-.2-.1
0.1
.2C
hang
e in
info
rmal
ity 2
002-
2006
0 .1 .2 .3 .4 .5Nominal tariff - end 1990s
Tariff reduction in Brazil (1991-2001)
14
Between and within dimensions
1111111111111
555555555555510101010101010101010101010131313131313131313131313131414141414141414141414141415151515151515151515151515
1616161616161616161616161617171717171717171717171717191919191919191919191919192020202020202020202020202021212121212121212121212121222222222222222222222222222323232323232323232323232324242424242424242424242424252525252525252525252525252626262626262626262626262627272727272727272727272727 2929292929292929292929292930303030303030303030303030 323232323232323232323232323434343434343434343434343437373737374040404040404040404040404041414141414141414141414141
45454545454545454545454545
50505050505050505050505050
55555555555555555555555555
606060606060606060606060606464646464646464646464646465656565656565656565656565707070707070707070707070707171717171
72727272727272727272727272
73737373737373737373737373757575757575757575757575758080808080808080808080808085858585858585858585858585 909090909090909090909090909191919191919191919191919192929292929292929292929292
93939393939393939393939393
95959595959595959595959595
-.006
-.004
-.002
0.0
02
Betw
een
com
pone
nt 2
002/
6
-.004 -.003 -.002 -.001 0
Within component 2002/6
1111111111111
5555555555555101010101010101010101010101313131313131313131313131314141414141414141414141414 1515151515151515151515151516161616161616161616161616 171717171717171717171717171919191919191919191919191920202020202020202020202020 212121212121212121212121212222222222222222222222222223232323232323232323232323242424242424242424242424242525252525252525252525252526262626262626262626262626 272727272727272727272727272929292929292929292929292930303030303030303030303030323232323232323232323232323434343434343434343434343437373737374040404040404040404040404041414141414141414141414141 45454545454545454545454545
50505050505050505050505050
55555555555555555555555555 6060606060606060606060606064646464646464646464646464 6565656565656565656565656570707070707070707070707070717171717172727272727272727272727272
73737373737373737373737373 75757575757575757575757575 80808080808080808080808080858585858585858585858585859090909090909090909090909091919191919191919191919191 92929292929292929292929292
93939393939393939393939393
95959595959595959595959595
-.06
-.04
-.02
0.0
2
Betw
een
com
pone
nt 1
990s
-.005 0 .005
Within component 1990s
15
Sector composition of informality (Brazil)
• Highly concentrated: 2/3 of informal workers in agriculture (30%), trade and repair activities, domestic service and construction.
Decomposition of changes over time
• In 1991/2001 increases in informality in manufacturing (food processing, metal goods manufacturing and textiles)
Dominant effects:
• Fall in agricultural employment dominates (-5.6% in 91/01)
• Changes in composition and informality in services
Between Within Total 1992-2001 -2.3% 1.4% -0.9% 2002-2006 -0.7% -2.0% -2.7%
16
Informal in what sector? Differences in outcomes
0 .2
.4
.6
.8
dens
ity
-2 0 2 4 6 8 average hourly wage (net)
formal informal Self-employed in agriculture
Wage distribution by formal/informal status (Mexico, 2007)
17
The changing face of the global middle class
Source: Kharas (2010) “The Emerging Middle Class in Developing Countries,” OECD Development Centre Working Paper No. 285, Projections based on data from the Wolfensohn Center for Development, Brookings Institution
Share of global middle class consumption
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
2026
2028
2030
2032
2034
2036
2038
2040
2042
2044
2046
2048
2050
North America & Europe China India
Other Asia Latin America & Caribbean Africa & Middle East
18
0
5
10
15
20
25
30
35
40
45
Poor Middle Class Better off
Num
ber o
f in
divi
dual
s (i
n m
illio
n)
Brazil Bolivia
Chile Mexico
0
0.2
0.4
0.6
0.8
1
1.2
1.4
Poor Middle Class Better off
Num
ber
of in
divi
dual
s (i
n m
illio
n)
0.00
5.00
10.00
15.00
20.00
25.00
30.00
Poor Middle Class Better off
Num
ber o
f in
divi
dual
s (i
n m
illio
n)
0.00
1.00
2.00
3.00
4.00
5.00
Poor Middle Class Better off
Num
ber o
f in
divi
dual
s (i
n m
illio
n)
But middle segments are largely informal
19
Informality matters for coverage (example: pensions)
0
20
40
60
80
100
Poor Middle class Better off
BOL 2002 BRA 2006 CHL 2006 MEX 2006
0
10
20
30
40
Poor Middle class Better off
BOL 2002 BRA 2006 CHL 2006 MEX 2006
Formal workers Informal workers
20
Social Protection and Informality in LAC
• Informality is also an issue for the middle class: – Many middle class workers in LAC countries are informal – Heterogeneity matters for coverage outcomes
• Challenge of increasing coverage in social protection • pensions, health, unemployment insurance • Dual systems can leave a “missing middle” in coverage
• Not necessarily the source of duality, but should avoid reinforcing duality:
– Universal entitlements, means tests vs job or occupation links, – Incentives: Compulsory or opt out affiliation (self-employed), portability
21
From monolithic informal employment…
Informal Formal
Not Working
22
…to two (or multi)-tiered informal employment
Informal Upper-Tier
Informal Lower-Tier
Formal
Not Working
23
Key issues on multi-tiered informal employment
• Mobility: – High levels of mobility in both directions suggest not only queuing for jobs – But benefits from mobility and barriers even between types of informal jobs depend on
factors that make better jobs accessible (education, gender) • Barriers to physical mobility (portability, entitlement, migration, e.g. Hukou) • Access to capital, education, assets (Barret and Carter, 2007; Klasen and Woolard, 2005) • Cost of search (Rama, 2003; Bernabè and Stampini, 2008) • Social institutions and discrimination (gender, race, age)
• Gender – Women not necessarily more likely to be informal
(in LAC, difference in shares explained largely by domestic workers) – But often in worse jobs, with lower incomes – Much more likely to move out of the labour force
24
What can we do about it? A policy framework
• Beyond “business as usual” (growth concerns and poverty alleviation)
• Improving the quality also of informal jobs
• Addressing heterogeneity across and within countries (two-tiered informal employment)
• Three common ingredients: – More and better jobs – Incentives for choosing formality – Protecting and promoting informal workers
• Role of trade: – Limited role for trade to affect informality directly – New opportunities but also increased volatility, need to account in policy mix.
25
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
26
Providing incentives for the upper-tier
• Business climate reforms to lower the cost of formality – Reduce regulatory compliance 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
27
Promoting and protecting informal workers
• Inclusive education and training – adapted to informal workers, including women, and recognising experience in informal
work
• Social protection – Cash transfers are useful poverty alleviation tools – Social protection/assistance for workers (universal coverage programmes), including
childcare provision mechanisms – Public works, work guarantee programmes, unemployment insurance
• Seeing the shades of grey: – Lack of portability of benefits harms the most vulnerable
Thank you
Annex
30
Share of Self-Employment in Total Non-Agricultural Employment
31
The challenge of coverage: Pensions
0 10 20 30 40 50 60 70 80
Poor
Middle
Better off
2006 CHL 2006 BRA 2006 MEX 2002 BOL
Source: OECD Latin American Economic Outlook 2011, forthcoming
Note: Share of affiliates (Bolivia and Mexico) or contributors (Brazil and Chile), over working age population. Authors calculations based on national household surveys.
32
Policy recommendations
• Coverage: Protect through minimum pensions (protect)
• Affiliation: Compulsory or opt-out for self-employed workers (enforce)
– Better mobility – Funding of solidarity pillars
• Incentives for contribution through public cofinance (Matching defined contributions).
32
33
Heterogeneity in coverage among informal workers
0
10
20
30
40
Self Employed (with tertiary education
completed)
Non Agricultural Informal Employees
Non Agricultural Self-employed
Agricultural Self-employed
Agricultural informal employees
BOL 2002 BRA 2006 CHL 2006 MEX 2006
34
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!
35
Informal employment is strongly correlated with poverty
Source: Is Informal Normal? and World Bank Group (2007).
ARG
BEN
BFA
BOLBRA
CHL COLCRI DOM
DZA
ECU
EGY
GTMHND
HTI
IDN IND
IRN
KENMAR
MEX
MLI
MOZ
NERPAK
PAN
PERPHL
PRY
ROM
RUS
SLVTHA
TUN TUR
VEN YEMZAF
ZMB
0
20
40
60
80
100
0 10 20 30 40 50 60 70 80 90 100
Shar
e o
f Inf
orm
al E
mpl
oym
ent
in
Tota
l Non
-Agr
icul
tura
l Em
ploy
men
t
Share of Population Living Below 2 USD (PPP) a Day
36
Earnings in informal work: low and heterogeneous
0
1
2
3
4
5
6
Income and wages in small informal enterprises Multiples of minimum wage
Entrepreneurs' income Wages
Source: Is Informal Normal?, OECD Development Centre 2009 Notes: *Relative to average wages; definitions and years vary, see table 2.5 for details
37
The gender dimension of informal employment
• Economic research and policy focused on Labour Force Participation (LFP)
• Neglect of quality of jobs
• Working women are not systematically more likely to be informal… …but they are overrepresented in worse forms of informal employment and earn substantially less
• The causes largely overlap with causes of low LFP: – social institutions, limited entitlement to resources and assets,
limited freedom to move.
38
Women in informal employment
39
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.
40
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)
41
Transitions in and out of informal work (Mexico)
Transitions (in % of individuals aged 20 to 60)
in % 2005
2002 Formal Informal Without job Total
Formal 65.5 18.2 16.3 100
Informal 19.7 42.1 38.2 100
Without job 7.1 7.1 85.5 100
Total 23.9 18.8 57.3 100 Source: Mexican Family Life Survey. First and second waves (2002, 2005)
42
Transitions in Mexico (by gender)
Men
2005
2002 Informal salaried
Formal salaried
Self employed
Not working
Informal salaried 46.7 22.3 20.0 10.9 Formal salaried 18.9 61.8 9.6 9.7 Self-employed 18.6 9.7 62.9 8.9 Not working 15.1 23.6 20.4 41.0
Total 25.5 34.1 26.4 13.9 Source: Mexican Family Life Survey. First and second waves (2002, 2005)
42
Women
2005
2002 Informal salaried
Formal salaried
Self employed
Not working
Informal salaried 36.3 14.3 8.4 41.1 Formal salaried 14.3 55.3 7.1 23.3 Self-employed 10.6 2.3 44.5 42.7
Not working 5.6 4.5 7.4 82.5
Total 10.2 11.6 11.9 66.4
43
Transitions in Mexico (by education)
More than 6 years of education
2005
2002 Informal salaried
Formal salaried
Self employed
Not working
Informal salaried 41.1 23.4 14.9 20.7 Formal salaried 14.9 62.5 8.6 14.0 Self-employed 14.5 9.3 54.4 21.8 Not working 7.5 13.5 8.7 70.3
Total 16.0 30.1 16.5 37.4 Source: Mexican Family Life Survey. First and second waves (2002, 2005)
Less than 6 years of education
2005
2002 Informal salaried
Formal salaried
Self employed
Not working
Informal salaried 43.8 14.0 15.6 26.6 Formal salaried 26.0 45.7 8.7 19.7 Self-employed 14.7 2.8 53.2 29.3
Not working 5.8 1.2 8.5 84.5
Total 14.7 7.2 17.1 61.0
44
Mobility and welfare
• Multi-tiered informal employment as a useful framework: Relative size?
• Barriers to mobility: – Barriers to physical mobility (portability, entitlement, migration, e.g. Hukou) – Access to capital, education, assets (Barret and Carter, 2007; Klasen and Woolard,
2005) – Cost of search (Rama, 2003; Bernabè and Stampini, 2008) – Social institutions and discrimination (gender, race, age)
• Also barriers to better informal jobs
45
Determinants of contributing to the pension system
Brazil (2006) Chile (2006) I IV V I IV V
Income (log) [0.23***] [0.14***] [0.08***] [0.08***] Income * formal [-0.15***] [-0.01* ] Income * independent [0.19***] [0.14***] Income * independent (HE) [0.07***] [0.11***] Income * informal salaried [0.12***] [0.06***] Independents [-0.88***] [-0.99***] [-0.84***] [-0.99***] Independents (HE) [-0.64***] [-0.69***] [-0.69***] [-0.75***] Informal workers [-0.88***] [-0.99***] [-0.77***] [-0.92***] Controls for Educational attainment No Yes Yes No Yes Yes Sector No Yes Yes No Yes Yes Household composition Yes Yes Yes Yes Yes Yes Pseudo R² 0.12 0.69 0.69 0.03 0.55 0.55 N 163660 163652 163652 96748 96520 96520