According to the Institute of Economic Affairs (IEA), the spike in growth on the informal sector has largely been as a result of the relocation of workers from formal sectors of the economy. The root cause of the dynamics of jobs in this sense has been due to the negative effects of Structural Adjustment Programs (SAPs) implemented in the 1980s, Liberalization policies in the 1990s as well as globalization. These had been seen to generate new jobs and open new markets. Sadly, many of the jobs that are created are not “good quality” jobs.
If hard economic times are accompanied by rising inflation, households often need to supplement formal sector incomes with informal earnings. This gives rise to instances whereby formally employed individuals are forced to open up informal businesses as a means to self-sustenance. A good example can be seen in the case of an office employee opening up a small scale kiosk and employing an attendant to watch over the business while the formally engaged individual is at work. The need to improve one’s living conditions has been the drive behind setting up of these sorts of informal enterprises.
There is increased recognition that much of the informal economy today is linked to the formal economy and contributes to the overall economy; and that supporting the working poor in the informal economy is a key pathway to reducing poverty and inequality. As highlighted in the above example, informal employment is widely recognized to include a range of formally employed persons, who set up businesses to supplement their formal wages. There also is a different group of workers who mainly work in unincorporated small or unregistered enterprises, who are informal entrepreneurs. This second group usually lack access to social benefits as they are employed or engaged on a casual wage basis.
As a way of trying to remain competitive by reducing operational costs, most multinational companies and businesses tend to hire all but a few core workers under informal arrangements. In the quest to remain competitive most of these multinationals break into highly dynamic markets at the expense of aspects like the provision of social benefits for their employees. This provides them with extra resources that they can redirect into business. This unequal platform of operation is further accentuated by the fact that informal firms and small producers often have insufficient market knowledge and skills to compete with these formal firms for export markets and often face competition from imported goods in the markets where they operate.
In summary, to be more competitive, or simply to reduce labour costs, many formal firms hire workers under informal employment relationships. In most such cases, it is the formal firm, not the informal worker that chooses to operate informally thus enjoying the “benefits” of informality. Focus should be placed on strengthening this new economic paradigm: a model of a hybrid economy that embraces the traditional and the modern, the small scale and the big scale, the informal and the formal. What is needed is an economic model that allows the smallest units and the workers at the bottom of the chain to operate alongside the largest units and most powerful economic players in a way that benefits both sectors.
Informal Economy Analyst