Policy Frameworks

 Gloria Solórzano Espinosa is a food vendor in the local municipality of Los Olivos in Lima, PeruPhoto by Juan Arredondo/Getty Images Reportage

Informal employment is a widespread feature of today’s global economy. On average, informal workers have lower earnings and face higher risks than formal workers. Policies should seek to increase the earnings and reduce the risks of the working poor in the informal economy. In its 2002 report Decent Work and the Informal Economy, the International Labour Organization (ILO) said the goal is to reduce the “decent work deficits” of informal workers, who tend to experience greater deficits than formal workers in four dimensions: opportunities, rights, protection, and social dialogue.

The following is a brief summary of the policy discussion in The Informal Economy: Definitions, Theories and Policies by Martha Alter Chen (WIEGO Working Paper No. 1, 2012). For more detail, please download the paper. 

The Formal Regulatory Environment

Over-regulation creates barriers and costs to those operating informally, just as it does to those operating formally. Deregulation, whether in financial, product or labour markets, can lead to increased informalization.

WIEGO’s research indicates that many wage workers are caught between contradictory trends: rapid flexibilization of the employment relationship (making it easy for employers to expand or contract workforces as needed) and slow liberalization of labour mobility (making it difficult for workers to move easily across borders).

The lack of a regulatory environment, common in the informal economy, can also be costly. For example, few cities have adopted a coherent policy towards street trade, choosing either to ignore it or to try to eliminate it. Both stances have a punitive effect: eviction, harassment, and the demand for bribes by police, municipal officials and other vested interests.

It is essential that policymakers determine what commercial and labour regulations are appropriate to informal self-employment and informal wage employment, respectively.

A Comprehensive Policy Framework

Both economic and social policies have a direct impact on the informal economy. While no single prescription can address the concerns of all categories of informal enterprises, activities, or workers, there is a growing consensus that a comprehensive policy framework should entail four broad goals:

#1: Create more jobs, preferably formal jobs, through labour-intensive growth – Some argue this can be done through employment policies alone; others believe that employment goals must be integrated into development strategies. Some also contend that the overall structure of employment opportunities must be transformed to allow the working poor to take advantage of available opportunities.

#2: Register informal enterprises & regulate informal jobs – Registering and taxing informal enterprises should be done by simplifying bureaucratic procedures and offering benefits and incentives in return for paying taxes. Concurrently, appropriate regulations should discourage employers from hiring workers informally—or informalizing existing jobs. Employers should be encouraged to contribute to health coverage and pensions for their workers, and extend other benefits.

#3: Extend state social protection and legal protection to the informal workforce – There is a growing consensus that universal health care and pensions coverage are needed, though little agreement on the appropriate role for of government regulation and public expenditure, and the mix of public versus private provision.

There is also a need to extend legal protection to informal workers. The United Nations Commission on Legal Empowerment for the Poor has prioritized three areas: property rights, labour rights, and business rights. In most countries, this will require reforming existing legal regimes as informal workers are not covered under existing labour regulations or commercial/business laws. But many informal activities are governed by industry-specific regulations (e.g. those governing trade in fresh food) and undermined by local regulations that discourage or ban informal activities.

For more details on social and legal protection for informal workers, see Social and Legal Protection for the Informal Workforce.

#4: Increase productivity of informal enterprises & incomes for informal workers – There are two ways to achieve this. The first is to increase the positives: through supportive measures to improve assets and market access, to provide legal identity and rights, to raise productivity, and to improve terms of trade or employment The second is to reduce the negatives: through measures that reduce risks and address market power imbalances, and that reduce policy or institutional biases which work against informal enterprises. This requires recognizing how market power imbalances and policy biases favour large formal enterprises over smaller informal enterprises, formal workers over informal workers, and men over women within these categories.

The challenge is to monitor the impacts of different policies on different categories of the informal workforce and to address negative impacts.

Informality into the Future

Informal employment is the main source of employment and income for the majority of the workforce in the developing world. Both informal enterprises and the informal workforce need to be valued for their contributions and integrated into economic planning and legal frameworks. To ensure policy responses are appropriate to the constraints and risks faced by informal workers, they must gain greater visibility in official labour force statistics and greater representative voice in rule-setting and policymaking processes. Efforts to strengthen organizations of informal workers must be increased and sustained.

What is needed, most fundamentally, is a new economic paradigm: a hybrid economic model that embraces the traditional and the modern, allowing the smallest units and least powerful workers to operate alongside the largest units and most powerful economic players.

Related Reading

Inclusive Cities blog post by Martha Chen (July 2014): “Self-Employed Women in the Urban Informal Economy: Reducing Their Risks and Constraints

A budget analysis tool developed and tested by WIEGO: Informal Economy Budget Analysis.

See WIEGO’s Core Programmes or WIEGO’s approach to promoting fair and ethical trade, inclusive urban policies, and social protection for informal workers.

The ILO’s Social Protection web portal offers data, tools, publications and news on Social Protection from around the globe.