The Challenge

For much of the 20th century, economic development – at least in Europe and north America – was predicated on the model of state-based social and economic security as embodied in the welfare state, the goal of full employment and related protective regulations and institutions [ILO 2004]. However, by the 1980s, a new economic model began to take shape: one that is centred on fiscal austerity, tight monetary policy focused on maintaining very low inflation rates, free markets, and the “rollback” of the state. Under this model, there are three main policy prescriptions for economic development and growth: trade and financial liberalisation, market deregulation and privatisation.

Unless properly managed, these policy prescriptions can have contradictory outcomes in terms of employment and poverty. Without an explicit focus on increasing the demand for labour, economic growth will not generate as many jobs as needed.

Moreover, without an explicit focus on the quality of employment, the jobs that are created may not be regulated or protected. Recent economic growth has been associated with flexible labour markets, outsourcing of production and growth of temporary and part-time jobs. For the poor to be able to work their way out of poverty, they need more and better employment opportunities.

This paper seeks to provide a context for the other papers in this special issue of the Economic and Political Weekly, by focusing attention on the challenge of decent work for the working poor in the informal economy and by providing a comparative international perspective on this challenge. The next section briefly discusses the definition and concept of the informal economy. The following – and main – section presents recent statistical and research findings on the links between informality, gender, and poverty from a cross-section of developing countries. The concluding section calls for a reorientation of economic policies to focus on creating more and better work; and, more specifically, for (a) improved national labour force statistics to capture all forms of informal employment; (b) a rethinking of labour market models to take into account the structure and dynamics of the labour force in developing countries; and

(c) representative voice of the working poor – both women and men – in the processes and institutions that determine economic policies and formulate the “rules of the (economic) game”.

Historical Debates

Since its “discovery” in the early 1970s, the informal economy and its role in economic development have been hotly debated. Some observers view the informal economy in positive terms, as a “pool” of entrepreneurial talent or a “cushion” during economic crises. Others see the informal economy as a source of livelihood for the working poor. Still others view it more

problematically, arguing that informal entrepreneurs deliberately avoid registration and taxation. Underlying these varying perspectives are three dominant schools of thought regarding the informal economy:

Although interest in the informal economy has waxed and waned since its “discovery” in 1972, it has continued to be useful as a concept to many policy-makers, activists and researchers. This is because the reality it seeks to capture – the large share of the global workforce that remains outside the world of fulltime, stable and protected employment – is so significant. At present, there is renewed interest in the informal economy worldwide. This renewal of interest stems from the fact that, contrary to the predictions of many economists, the informal sector has not only grown worldwide but also emerged in new guises and in unexpected places. It now represents a quite significant but largely overlooked share of the global economy and workforce.

Because it is both persistent and changing, this renewed interest in the informal economy has been accompanied by a rethinking of the concept. In recent years, a group of informed activists and researchers, including many of the contributors to this volume and other members of the global research policy network Women in Informal Employment: Globalising and Organising (WIEGO), have worked with the International Labour Office (ILO) and the International Expert Group on Informal Sector Statistics (called the Delhi Group) to broaden the earlier concept and definition of the “informal sector” (including the official international statistical definition) to incorporate certain types of “informal employment” that had not been included in the earlier concept and definition. They sought to include the whole of informality, as it is manifested in industrialised, transition and developing economies and the real world dynamics in labour markets today, particularly the employment arrangements of the working poor.

In brief, the expanded definition focuses on the nature of employment, in addition to the characteristics of enterprises, and includes all types of informal employment both inside and outside informal enterprises. This expanded definition has been endorsed at the International Labour Conference (ILC) in 2002 and the International Conference of Labour Statisticians (ICLS) in 2003. In 1993, the ICLS adopted an international statistical definition of the “informal sector” to refer to employment and production that takes place in small and/or unregistered enterprises. In 2003, the ICLS broadened the definition to include certain types of informal wage employment outside informal enterprises: statisticians refer to this larger concept as “informal employment”.

Causes: There are different causal theories of what gives rise to informality. Many economists subscribe to the notion that informal entrepreneurs choose – or volunteer – to work informally [Maloney 2004]. Yet many economists also recognise that informal employment tends to expand during economic crises or downturns, suggesting that necessity – in addition to choice – drives informality. Other observers point out that informalisation of employment relations is a feature of contemporary economic growth and the global economy. A worker focus helps to deepen our understanding of what gives rise to informal employment under different circumstances, including the following:

While informal work does offer positive opportunities and benefits, such as flexibility of work hours and convenience of work location, the costs are often quite high. Some of these are “out-of-pocket” direct expenses needed to run an informal business or otherwise work informally; others are indirect, reflecting the more general conditions under which the working poor live and work. Some of these can be rather high over the long-term, such as when a worker has to sacrifice access to health and education (or training) for herself or family members. Also, there are psychological and emotional costs – in terms of a worker’s selfesteem and dignity – associated with many forms of informal work.6

In brief, the benefits of informal employment are often not sufficient and the costs are often too high for those who work informally to achieve an adequate standard of living over their working lives. In general, only informal employers who hire others earn enough to predictably rise above the poverty threshold.

The employment-based definition of the informal economy can help support and promote a worker-centred approach to poverty reduction and economic development, if used by national statisticians in collecting employment data and by national policy makers in designing policies. The worker-centred approach to reducing poverty, which this paper calls for, is one that focuses on the needs and constraints of the working poor as workers, not only as citizens or as members of poor households and disadvantaged communities.

Size and Significance

Informal employment is particularly important in developing countries, where it comprises one half to three-quarters of nonagricultural employment: specifically, 48 per cent in northern Africa; 51 per cent in Latin America; 65 per cent in Asia; and 72 per cent in sub-Saharan Africa. If South Africa is excluded, the share of informal employment in non-agricultural employment rises to 78 per cent in sub-Saharan Africa.7 If comparable data were available for other countries in southern Asia, in addition to India, the regional average would likely be much higher. If informal employment in agriculture is included, as is done in some countries, the proportion of informal employment greatly increases: from 83 per cent of non-agricultural employment to 93 per cent of total employment in India; from 55 to 62 per cent in Mexico; and from 28 to 34 per cent in South Africa.

Throughout the developing world, informal employment is generally a larger source of employment for women than formal employment and generally a larger source of employment for women than for men. Other than in northern Africa, where 43 per cent of women workers are in informal employment, 60 per cent or more of women workers in the developing world are in informal employment (outside agriculture). In sub-Saharan Africa, 84 per cent of women non-agricultural workers are informally employed as compared to 63 per cent of men; and in Latin America the figures are 58 per cent of women in comparison to 48 per cent of men. In Asia, the proportion is 65 per cent for both women and men.

Composition and Segmentation

In developing countries, self-employment comprises a greater share of informal employment (outside of agriculture) than does wage employment, ranging from 60 to 70 per cent of informal employment, depending on the region. In most countries for which data are available, women (as well as men) in informal employment are more likely to be in self-employment than in wage employment. In northern Africa and Asia and at least half of the countries of sub-Saharan Africa and Latin America, more women in informal employment (outside agriculture) are in selfemployment than in wage employment. By contrast informal wage employment is more important for women in Kenya, South Africa and four countries in South America – Brazil, Chile, Columbia and Costa Rica. In these countries more than half of women in informal employment are wage workers. Moreover, in all but one of these countries – South Africa – women are more likely to be informal wage workers than are men. In explaining these patterns, it is important to recognise that paid domestic work is an important category of informal employment for women in all Latin American countries as well as in South Africa.

But the informal economy, especially in developing countries, is more highly segmented than the simple wage employment versus self-employment dichotomy would suggest. The main segments of informal employment, classified by employment status, are as follows:

A set of national data analyses in five developing countries commissioned for a 2005 UNIFEM publication (see below) found that, with respect to non-agricultural informal employment, women are more likely than men to work as own-account workers, domestic workers, and unpaid contributing workers in family enterprises [Chen et al 2005]. In contrast, men are more likely to work as employers and wage workers (ibid).

In the countries studied for the UNIFEM publication, men comprise the majority of informal agricultural workers, although exceptions exist.8 However, in many countries women still account for a large share of own-account agricultural workers and a majority of unpaid workers on family farms. Typically, few women are employed as informal agricultural wage workers. Informal agricultural employment tends to be more precarious than non-agricultural informal work, and it is characterised by very low earnings, uncertain incomes, and high risks of poverty.

To understand labour markets in developing countries, it is important to recognise the multi-segmented nature of the informal economy. To understand and address poverty, it is also important to understand the work arrangements, and associated costs and benefits, of different segments of the informal economy.

Making the link between informality, gender, and poverty means assessing the costs and benefits associated with different segments of informal employment against the location of the working poor, both women and men, within them. Statistical data on associated costs and benefits are limited: so testing these linkages statistically is very difficult. However, several recent sets of national data analyses have considered the average earnings and/or the poverty risk of different segments of the labour force, both formal and informal.

(1) The first set is the analysis of national data in five countries

– Egypt, El Salvador, India, Russia and South Africa9 – commissioned by the Economic Policy Institute-Global Policy Network (EPI-GPN) for a comparative workforce development project funded by the Ford Foundation. Following a common framework of questions, these EPI-GPN analyses all studied the links between macroeconomic processes and labour force development (though they varied in the measures used). Most importantly, for our purposes here, they also disaggregated the labour force by formal and informal employment, men and women.

(49 per cent) earn below the minimum wage [Lara 2005]. It should be noted that the minimum wage is set at a level that would not cover the cost of “basic goods”.

– South Africa: The income of formal and informal sector workers for 2001 was compared. While the majority of formal workers earn above 1,000 rand per month, the majority of informal workers earn less than 1,000 rand. The estimated minimum level of income needed for a family of five is set at 1,777 rand per month [Braude 2005].

In all five countries in the UNIFEM-WIEGO-ILO set of data analyses, average earnings in most forms of informal employment, particularly in agriculture, are well below earnings for formal employment. In Costa Rica and El Salvador, however, average earnings for informal employers are equal to or higher than earnings in formal employment; and in Ghana and South Africa, average earnings of informal public wage workers are higher than those of formal private-sector employment. In general, wage employment in the public sector, both formal and informal, has higher average earnings than wage employment in the private sector.12 Comparative earnings within informal employment: A second comparison is the difference in average earnings within informal employment. As noted earlier, the informal economy is diverse and segmented. The different segments are associated with different earning potentials that would be concealed by the average for the informal economy as a whole.

The national data from 14 countries compiled by Jacques Charmes (nd) show the disparities in earnings within informal employment. In every case, except Kenya, the average monthly income of micro-entrepreneurs is higher than the average monthly wages of the employees of micro-enterprises. Generally, the wages of employees tend to hover around the minimum wage

– which in itself may be less than the minimum needed for survival (ibid).

Another important comparison is between the average earnings of micro-entrepreneurs and of own account operators. Among the 14 countries studied by Charmes, only two – Colombia and India – report separate earnings data for employers and own account operators. In India, the lowest multiple of average monthly income to legal minimum wage (1.34) was for own account operators in India. In marked contrast, the average monthly income of employers in India was 5.4 times the legal minimum wage. A similar contrast was found in urban Colombia, where employers earn 4.2 times the legal minimum wage and own account operators earn only 1.6 times. In fact, in urban Colombia the employees of micro-enterprises earn nearly as much as own account operators: 1.5 times the legal minimum wage. In sum, in both Colombia and India, micro-entrepreneurs/informal employers earn higher monthly average income than own account operators, and own account operators have only slightly higher average earnings than employees of informal enterprises (ibid).

Similarly, an analysis of 1997 data on employment in the informal sector (small unregistered enterprises) in Tunisia found that the employers who hired others – the micro-entrepreneurs

– were not poor. Indeed, the average income of microentrepreneurs was found to be four times as high as the legal minimum salary and 2.2 times the average salary in the formal sector.

Although micro-entrepreneurs may have relatively high earnings in Tunisia – and elsewhere – most workers in informal employment do not fare so well. For example, the micro-entrepreneurs in Tunisia paid their employees on average roughly the legal minimum wage of 200 dinars per month. The Tunisian study also included information on earnings in jobs outside informal enterprises – notably for homeworkers. Homeworkers, who are paid by the piece, earned an average of 60 dinars per month, which is only 30 per cent of the minimum wage [Charmes and Lakehal 2003].

The UNIFEM-WIEGO-ILO set of five-country studies found a hierarchy of average earnings across the different segments of the informal economy. To begin with, average earnings in agricultural informal employment are lower than average earnings in non-agriculture informal employment. Among non-agricultural informal employment, in all five countries, informal employers have the highest average earnings followed by ownaccount workers, and then casual wage workers and domestic workers (ibid) [Chen et al 2005]. This UNIFEM-WIEGO-ILO set of country studies did not separate out industrial outworkers who, as noted above, tend to have the lowest average earnings of all. These studies also did not provide systematic evidence on where employees of informal enterprises belong in the hierarchy.13

In most of these country cases, separate data on employees of informal enterprises or informal employees more generally are not available. In Egypt, such data are available from an enterprise survey but these cannot be linked to the broader labour force analysis. In South Africa, such data was available from the labour force survey. Wage employees in informal (unregistered) enterprises earn somewhat less than own-account workers, while informal employees in registered enterprises earn more than own-account workers. Therefore, in South Africa, informal employees in unregistered enterprises would be more closely linked with casual wage workers than with regular wage workers [Chen et al 2005].

Within informal employment, in all five countries in the UNIFEM-WIEGO-ILO set of analyses, women’s hourly earnings uniformly fall below those of men in identical employment statuses. The gender gap in earnings is particularly pronounced among own-account workers – both agricultural and nonagricultural. This gender gap in earnings is compounded by the gendered segmentation of informal employment, as women are more likely to be own account workers than regular wage workers.

Employment and Poverty

Household poverty: Two recent labour force surveys – the 2002 Labour Force Survey in South Africa and the 1999-2000 National Sample Survey of India on employment and unemployment – provide unique data that begin to answer questions regarding the relationship between employment and poverty. Both surveys collected household expenditure data as well as data on employment, including informal employment; and both studies tried to link these variables in a meaningful way by classifying households by sources of income and by expenditure categories. Analyses of these data sets all found an overlap between depending on informal employment and being poor at the household level.14

South Africa was one of the three countries studied in both the EPI-GPN and UNIFEM-WIEGO-ILO sets of country cases. The EPI-GPN study looked at the relationship between monthly household expenditure categories and the sources of employment income in households: that is, by whether a household had one or more persons in permanent employment, in informal employment, in domestic work or unemployed [Braude 2005]. The higher the monthly expenditure category, the higher the percentage of households with persons in permanent employment. Moving down the expenditure categories, the percentage of households with persons in informal employment (including domestic services) increases. Not surprisingly, the lowest expenditure category had the highest percentage of households with an unemployed person or persons (using an expanded definition of unemployment). It should be noted that the unemployment rate is very high in South Africa (ibid).

The South Africa analysis in the UNIFEM-WIEGO-ILO set of country studies looked at the relationship of household income categories and whether the majority of household employment income is from formal or informal sources, as well the number of earners, the sex of the household head, and the sex of the primary earner [Chen et al 2005]. Households that depend primarily on informal employment income have significantly higher poverty rates than households with a majority of income coming from formal employment. Female-headed households have significantly higher poverty rates than male-headed households. Similarly, households whose primary earner is female have significantly higher poverty rates than households in which the primary earner is male. However, these gender differentials are much less pronounced when households have access to formal employment (ibid).

In marked contrast to South Africa, the unemployment rate in India is not high, and the vast majority of workers – 92 per cent

– are in informal employment (using the expanded definition of informal employment). A recent analyses of the 1999-2000 India data looked at poverty rates among urban Indian households that sustain themselves on informal employment income by broad industrial sector and employment type [Sastry 2004].15 Households that depend on “regular” (as opposed to casual) informal wage employment have lower poverty rates relative to households that rely on self-employment, and households that depend on casual labour as their primary source of income are the most likely to be poor. This hierarchy of poverty risk – households depending on “regular” informal wage employment having the lowest, selfemployment the next highest, and casual wage employment the highest risk – is robust across industrial sectors in urban India.

Another study in India, also using data from the National Sample Survey, but from two earlier surveys (1987-88 and 199394), found a similar relationship between poverty and the nature of employment income. Dubey et al analysed the probability of urban households being poor according to their main source of income – classified as regular salary, self-employment and casual wage labour – and by the size of the city or town in which they were located [Dubey et al 2001]. Their analysis shows that, for cities or towns of all sizes and both points in time, households with regular salaried employees (both formal and informal) have the lowest probability of being poor, while those that depend on casual day labour have the highest probability, and households that depend on self-employment falling roughly halfway in between.16 All employment groups fared better in larger cities. And, between the two rounds of the survey, the probability of being poor declined for all groups. Individual poverty: The UNIFEM-WIEGO-ILO set of country studies used an innovative technique for measuring the risk of poverty among employed persons. According to this technique, the “poverty risk” associated with different employment statuses is defined as the share of all persons employed in a given status who live in households whose incomes place them below the national poverty line. This technique connects the type of employment, measured at the individual level, to the risk of poverty, measured at the household level. As such, it is only feasible in those countries where national data on employment and household income are linked. The hierarchy of poverty risk so defined is the reverse of the hierarchy of earnings detailed above: informal agricultural workers have the highest risk of poverty and, among the non-agricultural informally employed, informal employers have the lowest risk of poverty, own account workers have a higher risk of poverty, while casual wage workers and domestic workers have the highest risk [Chen et al 2005]. Since the UNIFEM-WIEGO-ILO country studies did not separate out employees of informal enterprises or industrial outworkers it was not possible to measure the poverty risk of these groups.

In all five UNIFEM-WIEGO-ILO study countries, genderbased differences in poverty risk are associated with the multisegmented character of the labour force, as women are concentrated in forms of employment with low earnings and higher poverty rates. However, no systematic pattern emerged in the country case studies in terms of differences between men’s and women’s poverty rates within a particular employment status. One possible explanation is that households in which women are engaged in remunerative work might have lower poverty rates relative to households in which women do not allocate time to income-generating activities. If this is the case, a household’s poverty status can be determined by women’s access to paid employment, no matter how low their earnings.

Hierarchies of Earnings and Poverty Risk

In sum, the statistical evidence presented in this paper suggests a hierarchy of earnings and poverty risk across the various segments of the labour force, as illustrated in Figures 1-3. While average earnings are higher in formal employment than in informal, there is also a hierarchy of earnings within the informal economy. Employers have the highest average earnings followed by their employees and other “regular” informal employees, then own account workers, followed by casual wage workers and domestic workers, and finally industrial outworkers. Within this hierarchy, women are disproportionately represented in segments of the informal labour force with low earnings (Figure 1). The fact that women tend to be under-represented among informal employers and “regular” informal wage workers and overrepresented among industrial outworkers leads to a gender gap in average earnings and in poverty risk within the informal economy. Average earnings are lower and the risk of poverty is higher among all women workers in the informal economy compared to all men workers within the informal economy.

The hierarchy of poverty risk among households depends on whether households have some formal sources of employment income or only informal sources (Figure 2) and also on what type of employment is the primary source of employment income (Figure 3). Figure 2 illustrates that households which rely primarily on informal sources of employment income face higher poverty risk than those that rely on formal sources. Figure 3 illustrates that households which depend on the most precarious forms of informal employment as their primary source of income are likely to have substantially higher poverty risk than those that have access to more stable and better quality employment.

Figure 1: Segmentation of Informal Employment by AverageFigure 1: Segmentation of Informal Employment by AverageFigure 1: Segmentation of Informal Employment by AverageFigure 1: Segmentation of Informal Employment by AverageFigure 1: Segmentation of Informal Employment by Average

Earnings and SexEarnings and SexEarnings and SexEarnings and SexEarnings and Sex

Average Earnings Segmentation by Sex

High

Employers Mainly Men Regular Informal Wage Workers Own Account Operators Men and Women

Mainly Industrial Outworkers/Homeworkers Women Low

Figure 2: Poverty Risk of Households by Sources of IncomeFigure 2: Poverty Risk of Households by Sources of IncomeFigure 2: Poverty Risk of Households by Sources of IncomeFigure 2: Poverty Risk of Households by Sources of IncomeFigure 2: Poverty Risk of Households by Sources of Income

Poverty Risk Low

Only Formal Sources Both Formal and Informal Sources Only Informal Sources

High

These figures can be used as advocacy tools to underscore the critical importance of the intersection of gender, employment and poverty. They also provide a structure for framing further research on these interrelationships.

Among the poor, employment earnings are the main source of income. Therefore, the quantity and quality of employment available to women, men and households matter a great deal in determining who is poor and who is not – not only in terms of income poverty but also in terms of other dimensions of poverty. As this paper has illustrated, most of the working poor are engaged

Figure 3: Poverty Risk of Households by Primary SourceFigure 3: Poverty Risk of Households by Primary SourceFigure 3: Poverty Risk of Households by Primary SourceFigure 3: Poverty Risk of Households by Primary SourceFigure 3: Poverty Risk of Households by Primary Source

of Incomeof Incomeof Incomeof Incomeof Income

Poverty Risk Low

Formal Wage Employment Informal Self-Employment: Employers Regular Informal Wage Employment Informal Self-Employment: Own Account Casual Informal Wage Employment and Domestic Work

High

in informal employment. Efforts to combat poverty must, therefore, pay greater attention to needs and constraints faced by the working poor, both women and men, in the informal economy. In other words, promoting decent work for the working poor, both women and men, is a key pathway to reducing poverty. Specifically, it requires:

Reorienting economic policies towards creating more and better employment will not be possible unless several preconditions are met:

The visibility of workers – especially working poor women and men – in labour force statistics and other data used in formulating policies needs to be increased. More countries need to collect statistics on informal employment broadly defined, and countries that already do so need to improve the quality of the statistics that they collect. In addition, in order to undertake an analysis of employment poverty, attention needs to be given in national data collection to linking labour force and income/ expenditure surveys. Additional analyses such as those presented in this paper need to be undertaken and the results of these analyses need to be fully integrated into economic planning and policy-making.

All forms of informal employment need to be integrated into economic models of labour markets. Existing economic models of labour markets focus on the supply and demand of wage labour. These models tend to exclude the self-employed and to conflate the various types of waged workers (formal salaried workers in both private and public enterprises, employees of informal enterprises, contracted or subcontracted workers of various kinds, domestic workers and casual day labourers). They also fail to estimate or account for the extent of underemployment, including among the self-employed, which often more accurately captures the employment problem in developing countries than does unemployment.

The representative voice of workers – especially informal workers both women and men – in the processes and institutions that determine economic policies and formulate the “rules of the (economic) game” needs to be increased. This requires building and supporting organisations of informal workers and extending the coverage of existing trade unions, cooperatives, and other worker organisations to include informal workers. This also requires making rule-setting and policy-making institutions more inclusive to include representatives of the working poor.

In conclusion, poverty cannot be reduced by expecting economic policies to generate employment and social policies to compensate the losers. Economic growth often fails to generate sufficient employment or decent employment and compensation through social policies is seldom sufficient and often neglected altogether. Poverty reduction – not just economic development

– requires a major reorientation in economic priorities to focus on employment, not just growth and inflation. To be effective, strategies to reduce poverty and promote equality should be worker-centred: that is, they must focus on the needs and constraints of the working poor, especially women, as workers, not only as citizens, as members of a vulnerable group, or as members of poor households. This requires pursuing an inclusive development policy process that promotes the participation of the poor, both men and women, as workers: that is, a workercentred policy process. A worker focus will provide coherence and relevance to poverty reduction strategies because most poor people work, because employment earnings represent the main source of income in poor households, and because working conditions affect all dimensions of poverty, well-being, and human development.

m

Email: martha_chen@harvard.edu

NotesNotesNotesNotesNotes

[This paper is based on the evidence that the authors compiled and analysed for three recent publications:

Economic and Political Weekly,Economic and Political Weekly,Economic and Political Weekly,Economic and Political Weekly,Economic and Political Weekly,

Hitkari House, 6th Floor, 284, Shahid Bhagatsingh Road, Mumbai 400 001.

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