INFORMAL ECONOMY
Because of the current condition of the economy, finding a job has become a increasing pressure as unemployment rates continue to climb around the world. So, in order to survive, an increasing number of people have to enter the workforce by way of the ‘informal economy’.


Origins
'During the 1950’s and 1960’s, it was generally thought that the right economic policies could transform the traditional economies of the world into modern ones' (Carr, Chen, Vanek 15). And there fore, the traditional sector, which was mostly made up of small-scale producers and a wide range of informal jobs, would vanish as it was made a part of the modern capitalist - a.k.a. formal - economy. The 'rebuilding of Europe and Japan after World War II' (Carr, Chen, Vanek 15) strengthened this idea.
It was not until the early 1970’s that, when growing unemployment started to raise concerns, the notion of an informal part of already existing national economies emerged. Even the term ‘informal economy’ had not existed prior to this time. Then, in his study of economic activities in Ghana in 1971, economist Keith Hart coined the term ‘informal economy’, using it to describe a dualist model of income opportunities utilized by the urban labor force. He said the dualism was mainly based on the division between wage employment and self-employment. Hart then applied his concept to individuals participating in self-employment, basically renaming the urban poor as the ‘traditional’ population.
external image ilo-logo2.jpg After this concept was adopted by the International Labor Office (ILO) and elaborated on, it gave way to three main schools of thought* regarding the origin of the informal economy. (*The “Schools of Thought” were taken almost directly from the source. Carr, Chen, Vanek 17.)

  1. Dualist – This perspective was made popular by the ILO just after the term for ‘informal economy’ came out in the early 1970’s. These scholars believe that the informal economy is made up of activities that are not related to and distinct from the formal economy, providing the poor with an income and a safety net to fall into in times of crisis. The perseverance of these activities is because there aren’t enough job opportunities due to either a slow rate of economic growth and/or to a faster rate of population growth, resulting in a surplus of labor forces.
  2. Structuralist – This perspective became popular in the late 1970’s and early 1980’s and believes the informal economy should be seen as micro firms and that workers serve to decrease input and labor costs. In turn, this should increase the competitiveness of big capitalist firms. Different forms of production are seen as co-existent, connected, and interdependent to each other. The growth and determination of informal production relationships is a result of the nature of capitalist development. Structuralists also believe that informality is a normal process of capitalism and is not limited to only developing countries.
  3. Legalist – This perspective became popular in the 1980’s and 1990’s. These scholars believe that the informal economy is made up of micro-entrepreneurs who operate informally to steer clear of the costs, time, and effort associated with registration in the formal economy. As long as government procedures are costly and lengthy, the entrepreneurs will continue to operate. In short, difficult government procedures are oppressing private business.

Definitions
Because there are many different perspectives regarding the informal economy, it is difficult to give a precise definition. And also because there are many similar terms that are used in literature such as hidden, shadow, clandestine, parallel, subterranean, unreported, cash, and black economy or market.


Dualist thinkers have defined the informal economy as an ‘urban way of doing things’ (Portes, Schauffler), in which the businesses are identified by: family ownership of enterprises, small scale operations with low levels of productivity, unregulated and competitive markets, labor-intensive production with the use of outdated technology, and low entry barriers in regards to skill, capital, and organization. 'Employment in the informal economy is constantly referred to as ‘underemployment’, only having an effect on those people who fail to enter the formal workforce' (Portes, Schauffler). But who were these people? Dualists believe that these people make up the excess labor force, and that they are there because of ‘hyper-urbanization’ (Portes, Schauffler) or the consequences of increased rural to urban migration. Hyper-urbanization then led to ‘hyper-tertiarization’ (Portes, Schauffler), which is when the excluded labor force had to invent their own employment because the formal economy was unable to absorb all them into formal employment.

  • Because of 'the use of capital-intensive technologies during Latin America’s late industrialization, fewer jobs were created than earlier technologies had done at the same stages of industrialization of now developed, capitalist countries' (Portes, Schauffler). Though formal employment increased during this time, so did the urban labor force but at a more accelerated pace.
Structuralist thinkers have defined the informal economy as all of the income-earning activities that aren’t regulated by the state in contexts where similar activities are. Unregulated activities were defined as thoseexternal image herblady_brazil.jpg that sidestep the costs and are excluded from the benefits and rights that are incorporated into laws and administrative rules that cover property relationships, commercial licensing, labor contracts, financial credit, and social security systems. Unregistered labor utilization has had a long history in Latin America, and has created new dynamics in which informal businesses want to avoid any contact with state agencies and formal businesses want to bypass their regulations. This avoidance is achieved through the use of casual, off-the-books hiring and by subcontracting of production and services. These new dynamics can explain why informal entrepreneurs often collect earnings that are two or three times more than those collected by formal workers, on average. Also, structuralists believe that unregulated activities are cyclical in that they are linked with those in the regulated sector, so in a period of economic expansion there would be growth in both sectors, while during periods of reduction, both sectors would suffer. As well, during a severe economic downturn, as in the most recent market crash, open unemployment will increase since the informal sector is unable to supply employment for everyone.
  • During the 19th and early 20th centuries, 'the activities that are called ‘informal’ today were actually the standard' (Portes, Schauffler) since most enterprises, both industrial and service, were small and there was little regulation of the economy. But during the late 20th century, hurried industrialization, in some countries, was accompanied by increasing attempt to regulate the growing economy. The result was a distinct division between the regulated and unregulated sectors of the economy in both the now advanced and less developed countries.
Legalist thinkers have defined the informal economy as a sector that comprises all extra-legal economic activities, including market production and trade, and direct subsistence production. The '‘mercantilist’ Latin American state has persisted by granting opportunity of legal participation in the formal economy only to a small elite' (Portes, Schauffler) and that informality is the standard response that to this legal barrier. This disregard for the legalities of the formal economy leads 'to de facto deregulation of the economy' (Portes, Schauffler). To legalists, the informal economy is more than just a survival mechanism, it the increase of real market forces in economy that is restricted by ‘mercantilist’ regulation.
  • The base for the informal economy was provided when a huge shift in populations from the rural areas to the urban areas occurred between 1940 and 1980. The urban elites didn’t like the migrants because they were now competitors in, until recently, an uncompetitive market. Because of the legal barriers to their participation in the formal economy, the rural migrants were transformed into informal workers. At first, 'the informal economy was a survival mechanism used to secure money for food and housing' (Portes, Schauffler), but gradually it enlarged due to the limitations and restrictions of the mercantilist economy. The informal provision of services and food ended up being cheaper and more efficient, and this resulted in unregulated businesses becoming an essential part of the formal economy.

Size, Composition, Workforce, and the Costs

Size:
The size of the informal economy is hard to measure since most of the activities are unrecorded. Also, the division of workers into informal and formal may be inaccurate because many people may take part in both 'by dividing their time between them or alternating between both types' (Portes, Schauffler). But, the fact that that informal sector makes up a large portion of most Latin American economies and that is employs a large share of the urban population is true. Unregulated activities are not declining, but continue to rise as time goes on. In developing countries, 1/2 - 3/4 of all non-agricultural employment is informal, more specifically 51% in Latin America. But the estimates increase significantly when agriculture is included in informal employment. In Mexico, for example, estimates increase from 55% to 62% is agriculture is added to non-agricultural informal work.

Composition:
Employment status in the informal economy can be categorized into two major groups: self-employment (including employers, own-account workers, and unpaid family workers) and informal wageworkers (includes employees of informal businesses, casual workers without a fixed employer, domestic workers, and temporary, part-time, and contract workers who don’t receive employment benefits). Self-employment usually makes up a bigger portion of informal employment than wage employment does. Self-employment stands for about 60% of informal employment in Latin America. Informal wage employment stands for about 30%-40% of all informal employment in developing regions. Also, women are usually informally employed more than men and in Latin America, 58% of women are informally employed compared to 48% if men.

external image 045_Prison_street_stall.jpgWorkforce:
The most visible informal workers are those that are seen in the streets. In most developing countries, city streets are lined with people selling almost anything. These people include: barbers, garbage collectors, vendors of fruit, vegetables, meat, non-perishable items like clothing, sunglasses, souvenirs, etc. In many places, cart-pullers, rickshaw-pullers, and horse cart drivers travel the village lanes or try to make their way through city traffic. In rural areas, most people earn a living by being a farm worker, raising livestock, or making handicrafts for souvenirs. The less visible workers are those in factories and small workshops that repair bikes, recycle scrap metal, make furniture and metal parts, stitch shoes, weave and dye cloth, make clothing, sort and sell, clothing, paper, and metal waste, etc. The least visible workers are those people who produce and sell goods from their homes: weaving cloth, making crafts and shoes, processing food or assembling electronic and automobile parts. The conditions of work and level of earnings vary depending on what job you have. Despite the wide variety of informal jobs, the informal economy can still be classified into self-employment and informal wageworkers.

The Costs:
Because of the nature of informal employment, there are certain consequences that can have an effect on work hours and income earned, and therefore on the economic wellbeing of informal workers.

  • Underemployment: This is very common among informal workers. Many either work fewer hours than they wanted or than is normal, or they work longer hours in order to get a minimum wage. Also, formal workers get to enjoy the most days off work per year, but this is expected.
  • Seasonality of Work: Because of the varying geographical locations of certain countries or cities and the varying climates of regions, there are seasonal fluctuations in the supply and price of different kinds of fruits and vegetables that can be produced and sold. Also, demand for fruits increases during summer months, major festivals, and wedding season, while it decreases during the winter and monsoon months. The opposite thing happens with clothing demand. During the monsoon season, lack of sun and dry spells disrupts many jobs including outside construction work, laundry services, spice drying, etc.
  • Multiple Activities: In order to earn a living, it is often necessary to take on two or more jobs at the same time or from season to season. Having increased work hours, working multiple jobs, and having multiple sources of income is a way of protecting themselves from financial risk and a source of additional earnings.
  • Occupational Health Hazards: Informal workers are subject to a wide range of occupational health hazards. These are often the ‘hidden costs’ (Carr, Chen, Vanek 49) of working informally where there are no regulations or restrictions on working conditions and hours. The costs include: great insecurity of work and incomes, no health, disability, property, unemployment or life insurance, few (if any) worker rights and benefits, little (if any) employment-based social protection, uncertain legal status, lack of organization and stability, and limited (if any) access to formal sources of capital.

Key Features
Though there are a variety of definitions and jobs, there are common features seen in every informal economy. There is also a common debate about the legality of the informal economy.
  • Significance and Permanence: The recognition that the informal economy is growing and is a permanent phenomenon, and is a feature of modern capitalist development associated with growth and global integration. It needs to be seen as a basic component of a total economy.
  • Continuum of Economic/Employment Relations: The recognition that production, distribution, and employment relations are all on some point of 'a continuum between pure formal relations (a.k.a. protected and regulated) at one end, and pure informal relations (a.k.a. unprotected and unregulated) at the other' (Portes, Schauffler), with many points in between. Depending on the context, workers are known to move along the scale and/or to function at different points simultaneously.external image f0024-01.jpg
  • Segmentation: The recognition that the informal economy in made up of a wide range of informal enterprises and jobs and that there are ways to classify them. The chart on the right shows how self-employment and wageworkers make up the informal economy (the informal sector was the definition until it was expanded on by the ILO after they adopted it).
The debate of whether the informal economy is legal has been around since the term was invented. But there is a general belief that the informal economy is illegal or the same as the underground, or even criminal economy because the operators of unregulated and unregistered businesses chose to sidestep registration and therefore taxation. But there is a difference between illegal processes and arrangements and illegal goods and services. Most informal workers and businesses provide goods and services that are legal, while it is the production or employment arrangements that are often semi-legal or illegal. The criminal economy deals in illegal goods and services, while also operating illegally. Also, many informal business owners chose to operate semi-legally or illegally because the regulatory environment is too punitive, too difficult to deal with, or is non-existent. As well, most owners would be willing to register and pay the cost of it if they were to receive the benefits of formality. Overall, operating outside of the legal framework seems to have more disadvantages than advantages for most informal workers.

Connections Between the Informal and Formal Economies
Dualist perspective implies that there is no actual connection between the formal and informal economies. The formal is 'essentially ‘in’ and the informal is essentially ‘out’ of the real economy' (Portes, Schauffler). The informal economy’s main purpose is to serve as a ‘cushion to absorb workers expelled or unable to gain access to formal employment’ (Portes, Schauffler). There is also the belief that when there is a severe economic crisis, a huge increase in informal employment will occur. Dualist scholars say that an obvious reason for past unemployment rates that were low was that people who lived in countries with weak welfare systems didn’t have the funds to wait for a job opening, so they decided to ‘invent’ their own employment.
Structuralist perspective implies that regulated and unregulated activities are just substitute parts of the same economic system and that the connection between them can vary in size depending on the range of ‘state regulation, requirements of capitalist firms, and the size and characteristics’ (Portes, Schauffler) of the working force. Structuralist scholars distinguish between three types of subcontracting arrangements. First is a direct connection, in which a formal business directly contracts informal workers. Second is a mediated connection, in which a middleman makes the contract. Thirdly is a mixed connection, in which the formal-informal contract is made with the small business itself, as it will contain both formal and informal workers under the same roof. Also, the situation of informal entrepreneurs is very different from that of informal workers. The informal entrepreneurs are of a higher status and this status difference explains why there is often an overlooked fact in measuring the informal economy incomes: while the wage of the informal worker is usually much less than that of a formal worker, the income of an informal, small entrepreneur can be three times higher than that of a formal worker. This accounts for' why many formal workers with skills go back to the informal economy later in their lives, becoming entrepreneurs looking for a higher income' (Portes, Schauffler).
Legalist perspective implies that the connection between the two economies should be seen as a ‘takeover ‘from-below'’ (Portes, Schauffler) of the formal economy. That the informal economy 'is not precise, but is a sort of grey area that is parallel to the formal area, and that each area is in disagreement with the other' (Portes, Schauffler) and that ‘the relationship between informality and the elite formal economy is mainly political' (Portes, Schauffler).


Sources
Pictures:
http://ilomissiontophils.files.wordpress.com/2009/09/ilo-logo2.jpg [First Picture]
http://melodyguitars.us/wp/wp-content/uploads/2009/06/herblady_brazil.jpg [Second Picture]
http://www.markvirtue.com/trip/set8/045_Prison_street_stall.jpg [Third Picture]
http://www.idrc.ca/openebooks/173-6/f0024-01.jpg [Fourth Picture]
http://www.ilo.org/dyn/infoecon/iebrowse.page?p_lang=en&p_ieresource_id=594 [Extra Pictures]
Research:
Carr, Marilyn; Chen, Martha Alter; Vanek, Joann. "Mainstreaming Informal Employment and Gender in Poverty Reduction". 25 Mar. 2010. <http://www.idrc.ca/en/ev-66028-201-1-DO_TOPIC.html>

  • This is not the format that I used, but it is mostly the same. The format that I used was in an article PDF format. See article discussion page for article for more information.
Portes, Alejandro; Schauffler, Richard. "The Informal Economy in Latin America: Definition, Measurement, and Policies". Dec. 1992. 25 Mar. 2010 <http://ladark.lib.utsa.edu/5/1/ladark5.txt>
News Item:
"Brazil Economy Adds Record Number of Jobs in February." Reuters 17 Mar. 2010. 28 Mar. 2010. Brazil Economy Adds Record Number of Jobs in February