Nature of informality

Informality in Africa

3.1 Nature of informality

Despite its importance, there is little agreement on how to define informality. Each country has its own definition, and the multiplicity of definitions, sources and typologies of informal employment make it difficult to draw a unique picture or undertake consistent cross-country analyses.

ILO has set international standards to disentangle the over-lapping concepts of “informal economy”, “informal sector”

and “informal employment”. The term “informality” is used to refer broadly to one or more of the three categories.

According to the definition provided by the ILO Inter-national Conference of Labour Statisticians, the informal economy includes both the informal sector and informal employment. The concept of the informal sector uses an enterprise-based definition and looks at production units (i.e., enterprises and firms) that are not covered or insuffi-ciently covered by formal arrangements as the unit of ob-servation. On the other hand, the concept of informal

em-ployment uses jobs as the unit of observation and includes all jobs in the informal economy or all persons who, during a given reference period, were employed by at least one in-formal sector enterprise, irrespective of their status in em-ployment and of whether it was their primary or secondary job. The informal employment concept also includes jobs done by persons who are engaged in the formal sector but in a capacity and with entitlements similar to those existing in the informal sector.

The various categories of employment, including formal, informal, inside and outside the informal sector, are depict-ed in table 6 below.

• Informal employment: cells 1 to 6 and 8 to 10.

• Employment in the informal sector: cells 3 to 8.

• Informal employment outside the informal sector:

cells 1, 2, 9 and 10.

Table 6: Classification of informal employment

Production units, by type

Jobs by employment status Own-account workers Employers Contributing

family workers Employees Members of producer cooperatives Informal Formal Informal Formal Informal Informal Formal Informal Formal

Formal sector enterprises 1 2

Informal sector enterprises 3 4 5 6 7 8

Households 9 10

Source: Hussmanns (2004), ILO (2013b).

Note: Cells shaded in dark grey represent jobs, that, by definition, do not exist in the type of production unit in question. Cells shad-ed in light grey represent formal jobs. Non-shadshad-ed cells represent the various types of informal jobs.

3. Informality in Africa

As shown in table 6, self-employed (own-account) workers (cells 3 and 9) are engaged in solo activities or work with family members or non-family workers (for example, street hawkers of perishable and non-perishable goods, small garage operators, tailors and shoeshine boys). Wage-em-ployed workers (cells 2, 6 and 10) work with no contracts, no defined tenure or work standards, and with no reference to a minimum wage. They are typically in construction, auxiliary activities like canteens, transport and cleaning, or activities that do not form the core of the business of their employers. Unpaid family workers (cells 1 and 5) work with no contracts, no defined tenure or work standards, and with no reference to remuneration. Employers (cell 4) choose to work informally, running enterprises that are not registered and that may hire workers informally. Very few informal enterprises may be hiring employees on formal contracts (cell 7). However, given the heterogeneity in sta-tus and in employment activities, jobs sometimes straddle the boundary between employment categories.

The informal employment categories depicted in table 6 essentially reflect attempts to avoid or mitigate the impact

of labour market constraints arising from one or more of the following:

• Unemployment

• Legislation, regulations or other structural forms of discrimination

• Taxes

• Scale diseconomies

These can be grouped under four broad categories, depend-ing on which constraint people aim to overcome by op-erating in the informal sector as an employer, employee, own-account worker or contributing family worker (see table 7). This taxonomy provides a useful framework for organizing and structuring discussions about informality and inequality and for drawing out relevant policy impli-cations.

It is important to distinguish between the types of infor-mality in different countries to establish the direction of the impact of informality on inequality and to make policy recommendations related to the functioning of formal and Table 7: Types of informality

Types of informality* Constraint addressed by

informality Features Job category [cell number]**

Subsistence Low skills;

Unemployment

Workers without requisite skills to work in the formal labour market;

low wages; low productivity

Own-account workers [9]

Contributing family workers [1], [5]

Employees [2], [6]

Induced Legislation/regula-tions; gender-based and other forms of discrimination; low demand for jobs in the formal sector

Workers or employers with produc-tivity levels comparable to formal sector workers who are forced into informality by explicit or implicit barriers

Workers with productivity levels comparable to formal workers and no barriers to formality, who choose to work informally for higher (un-taxed) earnings or to evade market regulation

Employers [4]

Scale diseconomies Members of producer

coopera-tives [8]

* This classification is as hypothesized by Fernandez and others (2016).

** “Cell number” refers to the notation in table 6.

*** Rarely do employees in informal enterprises have formal contracts or social protection coverage.

African Social Development Report

Informality and Inequality in Africa: Exploring the Linkages

informal labour markets. The subsistence or involuntary informality of a street vendor with few skills and limited opportunities arising from structural constraints is very different from the voluntary informality of a qualified en-trepreneur who wishes to avoid paying taxes or for whom informality offers greater benefits than formality and/or because the benefits of operating formally do not outweigh its costs. Although both groups are engaged in the informal sector, their motivations are very different.

Informality becomes a forced choice when vulnerable groups that need to work are excluded from the formal sec-tor owing to a lack of opportunities, lack of resources and/

or discrimination (Subrahmanyam, 2015). Formal sector opportunities may be scarce because of rapid labour market growth, slow job creation and/or formal sector redundan-cies during periods of economic downturn, crisis, reform or transition (Bosch and Maloney, 2008; Klasen and Pieters, 2012). In some cases, individuals lack the resources needed to obtain formal sector positions, be it the skills required by employers or the capital needed to run their own business-es, which is especially problematic where barriers to entry into the formal economy are high (DeSoto, 1989; Gerx-hani and Van de Werfhorst, 2013). In some cases, discrim-ination prevents groups from gaining access to the formal economy. For some vulnerable groups, self-employment in the informal sector may be the only option for earning an income in order to survive (ILO, 1972; Hart, 1973).

The informal labour market, with low barriers to entry, is able to absorb many of those who are keen to avoid un-employment. If those individuals were not working infor-mally, they would most likely be unemployed. In this way, subsistence or induced informality is a default alternative to unemployment. For the poor in low-income countries, unemployment is not an option. Individuals have to choose between self-employment, working in subsistence agricul-ture or working in the urban informal sector in order to survive. It is for this reason that labour statistics reveal low unemployment rates in much of Africa, while rates of in-formal employment are high.

15 The propensity of individuals to engage in informal (including illegal) activities increases when rule of law is weak, trust in government is low, and/or regulations are weakly monitored and enforced, or are tightly enforced by corrupt officials who demand payment for getting things done through formal channels (Torgler and Schneider, 2007).

However, being informally employed does not automat-ically mean being poor, having low productivity or be-ing excluded from social services and social security. In many parts of the world, the informal economy also in-cludes small-scale entrepreneurs who are not poor, have a large capacity for innovation and have sizeable growth potential. They may be in the informal economy volun-tarily if it offers them greater benefits with fewer restric-tions (Maloney, 2004; Oviedo and others, 2009; Chen, 2012) or if doing so allows them to avoid paying taxes and complying with regulations (Maloney, 2004; Perry and others, 2007). Workers may prefer being informally employed if they perceive the costs of social protection to outweigh the expected future benefits or if they prefer a higher take-home wage in lieu of employer social security contributions (Chen, 2012). For some workers, the infor-mal sector may offer better wages and perquisites than the formal sector, especially for those engaged in illicit activi-ties.¹⁵ The present report limits its analysis to involuntary informality.

There is a high degree of heterogeneity across countries with respect to the nature of informality. Own-account workers comprised over half the total of those employed in Burundi, Uganda, the United Republic of Tanzania and Zambia in 2012. In the Congo and the United Re-public of Tanzania, household survey data indicate that the primary reason for entering the informal sector was that individuals were unable to find wage employment.

High levels of subsistence and induced informality in these countries suggest the need to eliminate structural causes by enhancing access to high-quality education.

Middle-income countries like South Africa, tend to have more sophisticated social protection systems, which act as a security net for the unemployed. Employment in the informal sector is very low in South Africa, even though the unemployment rate is high.

Each type of informality requires different policy respons-es and it is important to take into account the distribution of informality in the labour market when formulating pol-icies. For example, if subsistence or induced informality

3. Informality in Africa

is most prevalent and workers would be better off in that type of employment than if they were unemployed, then the informal labour market is positively affecting the lives of these informal workers.