Informal Economy

Promoting Decent Work: Confronting the challenge of Informality through Dialogue Joni Musabayana Deputy Director ILO Pretoria

SALGA Gauteng Informal Trade Workshop 20 Setpember 2012

What is Decent Work “Decent work sums up the aspirations of people in their working lives. It involves opportunities for work that is productive and delivers a fair income; it involves security in the workplace and social protection for families; better prospects for personal development and social integration; freedom for people to express their concerns, to organize and to participate in the decisions that affect their lives and equality of opportunity and treatment for all women and men”. ILO DG 1999

The four Pillars of Decent Work •

Respects the fundamental principles and rights at work and International labour standards;

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Provides better opportunities for women and men to secure decent employment and income;

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Extends coverage and effectiveness of social protection –social security and labour protectionfor all

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Strengthens tripartism and social dialogue

The Four Pillars of Decent Work

All four strategic objectives are recognized by the ILO as inseparable, interrelated and mutually supportive. Failure to promote any one of them would harm progress towards the other. (Declaration on Social Justice 2008)

Decent Work Deficits Decent Work Deficits are: gaps and exclusions in the form of unemployment and underemployment,

indecent wages, insecure income unsafe work, poor quality and unproductive jobs,

rights that are denied at work; gender inequality; pay differentials between women and men

Decent Work Deficits Decent Work Deficits are: lack of representation and voice; shortcomings in social dialogue; inadequate protection of the worker in the face of job loss, disease, disability and old age;

discrimination at the workplace on the basis of sex, age, perceived or real HIV/AIDS status; minority status; child labour;

Decent Work Deficits The informal sector, where the labour market is largely unregulated is characterized by gross decent work deficits. Women are more likely than men to work in the informal economy with little or no social protection and high degree of insecurity.

Implementation of DWA Decent Work Country Programmes (DWCP) are the tools through which the pursuit of the DWA is implemented at the country level.

Overview of the South Africa DWCP • The formulation of the SA DWCP involved a series of consultative meetings between the ILO and the NEDLAC constituents. • During these consultations, key decent work deficits were identified and country priorities defined.

• The priorities for the SA DWCP give effect to the protection of fundamental rights and freedoms guaranteed to all citizens under the Constitution of the Republic of South Africa in the bill of rights. • South Africa’s first DWCP was launched on 29 September 2010. 9

Overview of the South Africa DWCP South Africa DWCP Priorities:

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Priority 1:

• Strengthening Fundamental Principles and rights at work

Priority 2:

• Employment Promotion

Priority 3:

• Strengthening and Broadening Social Protection

Priority 4:

• Strengthening Tri-partism plus and Social Dialogue

Key Outcomes Priority 1: Principles and Rights Priority 2: Employment Promotion

• Up-to-date International Labour Standards are ratified, complied with and reported on. • Labour Administrations apply up-to-date ILO conventions, both ratified and those earmarked for ratification.

•More women and men, especially youth and persons with disabilities, have access to productive and decent employment through inclusive job rich growth •Sustainable and competitive enterprises (including cooperatives) create productive and decent jobs especially among women, youth and persons with disabilities •Skills development increases the employability of workers and the inclusiveness of growth

Priority 3: Social Protection

• More people have access to better managed and more gender equitable social security and health benefits • Workers and enterprises benefit from improved safety and healthy conditions at work • The World of Work responds effectively to the HIV&AIDS epidemic

Priority 4: Social Dialogue

• Strengthened labour market institutions and capacitated social partners (tripartite –plus) contribute to effective social dialogue and sound industrial relations

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Tackling the Informal Economy in the SA DWCP: BackgroundAnalysis • Against the challenge of increasing, the ILO will do the following; • support on-going national initiatives to ensure the application of labour standards to protect the rights of workers in the informal economy; • • provide policy advisory support towards the adoption and application of labour standards to address decent work deficit • • Mitigating the impact of the crisis in the informal sector requires the involvement of local government authorities in the economic recovery plan.

Tackling the Informal Economy in the SA DWCP: Outcome and Outputs • PRIORITY 2: Employment Promotion • OUTCOME 3: More women and men, especially youth and persons with disabilities, have access to productive and decent employment through inclusive job rich growth • Output 3.5: Policy options identified to improve working conditions for the most vulnerable workers, with particular focus on the informal economy. • OUTCOME 4: Sustainable and competitive enterprises (including cooperatives) create productive and decent jobs especially among women, youth and persons with disabilities. • Output 4.3: Support for the upgrading and promotion of Social Economy enterprises (including cooperatives).

Informal is not normal … Growing concern as informal employment is: • •

• • •

A mass phenomena in Africa The only access to employment for most new entrants (Youth issue but also a peace building and social cohesion priority) Persistent even in countries with good growth performance Associated with working poverty and high vulnerability Preventing households from increasing productivity and income to escape poverty.

=> The recent global financial crisis have made policies to deal with informal employment all the more urgent and relevant

Share of informal employment in total non‐agricultural employment (%)

Source: OECD, 2009, Is informal normal? (Paris: OECD), based on data from the latest available period in each region

Why is persistent informality worrying?

1. Employment growth in the formal segment of the economy in most countries has lagged behind the growth of the labour force, and these trends are likely to continue in a near future. 2. The level of informal employment into the formal sector is also increasing in many countries 3. High exposure to risk combined with low social protection coverage place most informal economy workers in a very vulnerable situation.  Supporting the transition to formalization appears to be one of the main policy challenges to fight decent work deficits

Multiple factors of informalization At the root of the problem of informal employment is: •

The inability of many countries to create sufficient numbers of formal jobs for a growing labour force, especially in rural areas

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Global economy trends related to the reorganization of the production at global level and the development of new formal/informal economy linkages => Emerging forms of informal employment can be complementary with economic growth and globalization

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The lack of an appropriate environment for sustainable formal MSEs

Informal employment and decent work deficits? Typically, though not in all cases, informal workers: 1. Are exposed to inadequate and unsafe working conditions, and have high illiteracy levels, low skill levels and inadequate training opportunities. 2. Have more uncertain, less regular and lower incomes than those in the formal economy, suffer longer working hours and an absence of collective bargaining and representation rights. 3. Their physical and financial vulnerability is increased by the very fact of working in the informal economy, which is either excluded from or effectively beyond the reach of social security schemes or safety and health, maternity and other labour protection legislation.

Informal Economy: The ILO definition • The conclusions of the general discussion on informal economy that took place during the international labour conference in 2002 indicate that the “term “informal economy” refers to: “ All economic activities by workers and economic units that are – in law or in practice – not covered or insufficiently covered by formal arrangements. Their activities are: - Not included in the law, which means that they are operating outside the formal reach of the law; - Or they are not covered in practice, which means that – although they are operating within the formal reach of the law, the law is not applied or not enforced; or the law discourages compliance because it is inappropriate, burdensome, or imposes excessive costs” (paragraph 3)

Informal economy: A complex reality • Informal employment comprises: 1. Own-account workers and employers employed in their own informal sector enterprises, 2. Contributing family workers, irrespective of whether they work in formal or informal sector enterprises 3. Employees holding informal jobs, whether employed by formal sector enterprises, informal sector enterprises, or as paid domestic workers by households

it encompasses very heterogeneous realities and calls for differentiated and context specific policies

Informality, Poverty and Gender

Considering the heterogeneity of the Informal economy • Labour market segmentation with five employment states: 1. Employment in the formal sector, 2. Employment in the upper-tier informal sector, 3. Employment in the easy-entry sector, 4. Employment in rural agriculture, 5. Unemployment.

Tackling the great diversity of vulnerabilties in the informal economy • The first step toward designing effective interventions to improve conditions in informal forms of employment is to recognize the heterogeneity of informal activities. • For example, consider the case in which informal workers are able to capture the majority of the value-added they produce. Under such conditions, interventions that increase labor productivity will raise living standards, since workers will be able to capture the gains of the productivity improvements. • However, for wage workers in the informal economy a focus on productivity improvements as a strategy to raise living standards could be far less successful than extending social protection, skill development or enforcing core labour rights or minimum wages

Towards a pragmatic approach to facilitate transition to formality 1. • • •

Promoting formal employment: Proemployment macroeconomic policies Proemployment sectoral policies Supporting formal sustainable MSMEs development

2. • • •

Reducing informal employment: Reducing the cost of the transition to formality Increasing the benefits of being formal Increasing the cost of being informal

3. Promoting decent work in the informal economy: • Increasing productivity • Increasing the capacities of workers to organize themselves • Providing a minimum social protection floor, etc

Facilitating transition to formality • Prevailing policies to this effect generally favour a multidimensional approach which focuses on: 1. Providing support to foster the productive development of MSMEs by facilitating their access to the market and productive resources: credit programs, as well as training and promotional programs to up-grade informal economy units and facilitate their access to more dynamic markets. 2. Improving the social protection and working conditions of informal workers. At this level, policy options tend to get mixed with poverty-alleviation and social protection policies. 3. Reforming the regulatory framework.

The enterprise-upgrading policies for the informal economy • It should include: 1. Promoting a greater awareness of the benefits and protection that come with formalization, 2. Creating an enabling policy and regulatory environment that reduces, both at the national and local levels, the barriers to formalization while protecting workers’ rights, 3. A particular focus on women entrepreneurs, 4. Fostering linkages between enterprises of different sizes in value chains and clusters to improve market access, 5. Access to finance and business development services, and 6. Encouraging informal enterprises to join together in production conglomerates or cooperatives.

Do not forget that Informality is costly too The opportunity costs of operating in the informal economy are as follows: • Limited access to public services and high transaction costs related to vulnerability to corruption, absence of rules of law and high opportunism from business partners; • Avoid profitable expansion. The majority of informal enterprises do not expand or invest in modern equipment for they wish to minimize their visibility and avoid attention from government institutions. • Limited access to financial and BDS. Besides this, financial institutions view MSEs as costly and risky. • Limited possibilities to cooperate with formal enterprises. The participation of informal firms in bilateral vertical linkages with formal ones depends on their degree of formality

Accelerating the Formalization of Informal Enterprises: A pragmatic approach • Measures for encouraging the formalization of informal enterprises need to address: - The factors hindering their growth (productivity, skills, access to resources and markets) - The costs of formalization which discourage their participation in formal societal institutions. • Regarding labour regulations, the formalization of informal firms may require review of labour regulations (i.e. specific regulations for specific informal sub-categories) so as to enable those who can meet part of the social contributions to do so instead of not complying at all or closing up their businesses and in that way increasing unemployment and poverty.

Innovative strategies for the enforcement of labour law • States should search for innovative forms of regulation based more on “carrot and stick” approaches than “command and control” to avoid unnecessary rigidity. • Some of the more effective innovative regulatory approaches have succeeded precisely because they have been inclusive and participatory in their design and implementation. • Three different regulatory techniques may prove particularly fruitful:

1. Education, information and social dialogue. 2. Provision of financial subsidies and other incentives. 3. Innovative procedural regulation

There is not a stand-alone solution • The State should use a wide range of regulatory and enforcement techniques to achieve its policy goals. • Techniques to design regulatory systems can, and should: - Include hybrid strategies, using both governmental and nongovernmental actors; - Be multi-faceted, using a number of different strategies simultaneously; and may be indirect.

=> Core labour rights and standards as non-negotiable minima, with non-compliance being subject to non-discretionary punishment… But assumption that regulations are more likely to be effective when there are different options available to enforce laws.

Improving labour administration and labour inspection • In most situations, laws exist but the lack or limited compliance and enforcement of laws and the regulatory framework in the informal economy is the challenge.  The strategy based on reducing the cost of the transition to formality and increasing the benefits of being formal should go hand in hand with increasing the cost of being informal  the cost of informality should be increased in case of non compliance with fundamental principles and rights at work • These requires both: 1. Innovations in workplace inspection and advice, dispute settlement and promotion of collective organization and action. 2. Training programs that target Informal enterprises which need to be sensitized to the need of improving employment and working conditions.

The need for an integrated policy framework to facilitate transition to formality Adapted to local conditions, integrated policies that address:

Growth strategies and quality employment generation

Regulatory environment, including ILS and core rights

Organization, representation and social dialogue

Gender equality and the informal economy

Entrepreneurship, skills, finance, management, access to markets

Extending social protection, including social security

Local (rural and urban) development strategies

Thank you