Informal Employment and the Global Financial Crisis in a Middle-Income Country

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by Mike Rogan

What happens to informal employment during an economic crisis? The conventional wisdom is that the informal sector—which consists of small, unincorporated enterprises—acts as a safety net for vulnerable workers during periods of crisis. The assumption is often that job losses in formal sector industries lead to an increase in the number of workers who create their own work through informal self-employment. Internationally, there is evidence to both support and refute this claim; this contradictory evidence suggests that crisis events have different impacts on informal employment, both within and across countries.

The conventional wisdom is that the informal sector...acts as a safety net for vulnerable workers during periods of crisis.

Many studies that link crises and informal employment look primarily at the impact of crises on workers pushed out of the formal sector. Far fewer examine the impact of crises on workers who were already in informal employment. In one recent contribution to the topic, WIEGO research undertaken in 2009 and 2010 showed that the global economic crisis impacted informal workers in much the same way as their formal sector counterparts in a number of developing or low-income countries: namely, through price fluctuations, reduced demand for goods and services, and the related increase in competition for this shrinking level of aggregate demand.

Yet these findings also raise an additional question: are there differential effects of crises on informal employment in middle-income countries (MICs)? MICs, as a broad group, have included some of the fastest-growing economies over the past several decades and constitute a growing share of the global population. MICs, therefore, form an important part of the international development agenda. Moreover, many of these countries have been integrating into the global economy at a particularly fast rate.

Typically, middle-income countries display the characteristics of both low-income and high-income countries. MICs, on average, tend to have lower levels of informal employment than low-income countries but higher levels than OECD countries. This means that the dynamics between the formal and informal economy (and particularly the informal sector) are likely to be somewhat unique in many middle-income countries, relative to both high- and low-income countries.

The question that arises, therefore, is whether the impacts of economic crises on informal employment in MICs are different from the impacts in low- and high-income countries. In other words, are job losses in the formal sector associated with an increase in, for example, self-employment in the informal sector?

...the South African policy framework sees the informal sector as an employment safety net and does not distinguish between survivalist or vulnerable types of work on the one hand or successful informal enterprises on the other.

One way to explore this question is to examine changes in the relative size of the informal sector before, during, and after the recent (2008) global financial crisis. This article does so for South Africa, an upper-middle-income country which is unique in a number of ways. While the country has the largest economy on the African continent and a particularly large private/formal sector, it is also one of the most unequal countries in the world. One of the well-documented puzzles associated with the country’s labour market is the high rate of unemployment (roughly 25 per cent using a strict definition) which accompanies a relatively small informal sector. It therefore might be reasonable to expect that during crisis times, some of those who have lost their jobs would move into informal sector self-employment.

Indeed, the country’s official long-term development strategy, the National Development Plan, subscribes to the conventional understanding of informal employment and notes that the informal sector has “fared relatively well during crises and provides a cushion for those who lose formal sector jobs” (Page 374). The same strategy document goes on to project that between 1-2 million new informal sector jobs will be needed by 2030 if the country is to meet its employment targets. In short, the South African policy framework sees the informal sector as an employment safety net and does not distinguish between survivalist or vulnerable types of work on the one hand or successful informal enterprises on the other.

Yet there is also evidence that contradicts this notion by identifying a hierarchy of risk among the informally employed. In this model, home-based workers, casual wage workers, the informally self-employed, and, in particular, women are more vulnerable and face a higher risk of poverty.

So which version is correct? Is the informal sector a large, homogenous sector which shields workers from unemployment during difficult times or are some types of informal employment also vulnerable to economic shocks? If the conventional understanding is correct, we would expect the data to show us that the informal sector in South Africa fared better than the formal sector, in relative terms, during the recent global financial crisis and possibly even increased in size.

However, if this is not the case, then it is important to find out what actually happens during a crisis both in terms of the informal sector as a whole and in terms of which workers are affected the most. We already know that crises rarely impact all workers in the same way, but unless we are able to say more, we risk not understanding some of the fundamental ways in which the formal and informal sectors respond to labour markets in crisis.

The informal sector during the financial crisis in South Africa

...the size of the informal sector, relative to total employment, did not change significantly and, if anything, decreased during the period in which the crisis was linked with job losses.

Between the onset of the global crisis (i.e. the fourth quarter of 2008) and the third quarter of 2010, the South African economy shed roughly one-million jobs in total. However, there is very little evidence to suggest, over this particular crisis period, that the informal sector was absorbing these “lost” jobs. In fact, the non-agricultural informal sector actually contracted by about 4 per cent during the crisis period and only fared marginally better than the formal sector (which decreased by 7 per cent).

As the figure below suggests, if we “zoom” into the immediate crisis period (i.e. 2009), the share of informal sector jobs to total employment actually decreased at the same time that the workforce contracted. While the longer term trend suggests that the percentage of the workforce in the informal sector is relatively stable (albeit with some relatively minor fluctuations), the key finding is that the size of the informal sector, relative to total employment, did not change significantly and, if anything, decreased during the period in which the crisis was linked with job losses. At the very height of the crisis (i.e. the third quarter of 2009), the share of total non-agricultural employment in the informal sector actually decreased to 16 per cent.

Non-agriculture workforce graph

Notes: Own calculations from the Quarterly Labour Force Surveys. The data are weighted. Sample not restricted to the working age population.

The shrinking of the share of the workforce in the informal sector over the crisis period in South Africa is not the end of the story. Women in the informal sector experienced the effects of the crisis differently than men. On the eve of the crisis, a considerably larger share of the female workforce was in informal self-employment (14.5 per cent of employed women compared with 9.5 per cent of employed men). After the crisis, however, the share of the female workforce in informal self-employment decreased dramatically (with only minor changes for men). While this may be part of a longer-term trend that requires more research, the large drop in informal self-employment for women in the immediate aftermath of the global financial crisis indicates that the crisis period was experienced differently by women and men.

Moreover, the decrease in informal sector employment (15 per cent) for women over this period was far greater than the decrease in formal sector employment (4 per cent). Combined with the large increase in the number of women in unemployment (19 per cent) at the same time, this means that these trends are not likely to be pointing towards a shift from the informal sector to the formal sector for women during the crisis. In fact, a closer look at the data shows that most of the decrease in female informal self-employment in South Africa occurred in the wholesale/retail sectors and particularly in urban informal and deep rural areas. These are parts of the country where there has traditionally been a larger share of the workforce in the informal sector.

Informal self-employment graph

Notes: Own calculations from the Quarterly Labour Force Surveys. The data are weighted. Sample not restricted to the working age population. Estimates exclude work in private households.

Lessons from the South African experience?

In South Africa, the evidence does not support the conclusion that the informal sector is a residual category which absorbs workers during a crisis. While the possible reasons for this finding require further investigation, it seems safe to conclude that the informal sector in South Africa felt the shocks of the global economic crisis to the same extent as, or even more, than the formal sector. This was particularly true of women in informal self-employment. 

Therefore, not only was the crisis felt in both the formal and informal sectors, but the greatest impact appears to have been among the most vulnerable workers in the informal sector. This finding suggests a number of important things about the role of the informal sector in employment.

Perhaps first and foremost, it would seem that the informal sector is not a “free-entry” option which cushions formal sector workers from economic shocks. The fact that the number of workers in the most vulnerable segment of the informal sector (rural women in informal self-employment) decreased the most during the financial crisis suggests that turning to survivalist forms of self-employment in the informal sector is not an automatic option for displaced workers.

In South Africa, the evidence does not support the conclusion that the informal sector is a residual category which absorbs workers during a crisis.

Second, the finding that women’s informal trading activities (i.e. in the wholesale and retail sectors) declined to such an extent should alert us to the ways in which informal trading is not shielded from broader macro-economic shocks which are traditionally associated with the formal sector. One possible explanation is that informal retailers are linked with some of the same supply or value chains as formal traders but are less able to take advantage of economies of scale, supplier networks and extended lines of credit. 

None of these findings, of course, say anything about the actual working conditions (e.g. loss of earnings) experienced during the crisis. In other words, even for those workers in informal employment who managed to keep their work going, the crisis was likely to affect earnings, working hours, and many other aspects of the work itself. Therefore, future research should explore the different ways in which crisis events impact the most vulnerable segments of the workforce.

Finally, to the extent that the South African experience of the 2008 crisis was similar to other MICs, these findings have important implications for the populations of these countries. Nearly one-third of people living below the $2/day poverty line now live in MICs, and, for many of the working poor in these countries, their livelihoods continue to depend on earnings from informal sector employment. The fact that a number of these countries are rapidly integrating with the global economy, combined with the fact that the informal sectors in these countries are not likely to be shielded from the effects of global crises, implies that governments should look for ways to extend protections to workers in the informal sector, particularly for its most vulnerable segments.

 

Mike Rogan, of Rhodes University, South Africa, has provided research support for many of WIEGO's projects, including the Informal Economy Monitoring Study, and has co-authored Health Risks and Informal Employment in South Africa: Does Formality Protect Health?.

 

Top photo: Asiye eTafuleni

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