The crisis has led to a dramatic increase in informal employment and sharp drops in wages among these people. The livelihoods of hundreds of millions of workers are under threat. In developing countries particularly, a jobs crisis can quickly turn into a poverty crisis. World leaders cannot afford to look the other way.
The level of informal employment is already at record levels worldwide: 1.8 billion people, or more than half of the global labour force, are working without a proper labour contract or social security cover, according to the OECD Development Centre. Millions of informal workers live permanently at the edge of poverty too. Clearly, informal workers are particularly vulnerable to the global economic crisis. When demand falls, they are the first to be laid off or see their usually very small businesses fold. The lower down the social pyramid, the worse matters get.
For example, the price that menial wastepickers in Ahmedabad, India got for used newspapers or recovered nuts and bolts halved between October 2008 and January 2009.
The share of informal workers worldwide is projected to grow in the years ahead. Before the crisis, projections estimated that as many as two thirds of the workforce would be in informal work by 2020. But with jobs being lost to the economic crisis and more migrants being forced into informal jobs, the picture could worsen. As with OECD countries, restoring growth in developing countries is a necessary but insufficient step to reverse this trend. Even during good times, with robust growth rates, informal employment increased in many developing countries. In India, though the economy grew by more than 5% per year throughout the last decade, approximately 370 million people-that's nine out of every ten employees-still do not have formal social security
What does this mean for policies? For the world's poor, working informally is often the only way to participate in the labour market. The challenge is to provide them with the necessary tools to move into better, more secure and more productive jobs. But the old approach of trying to coerce the informal economy into formalising won't work and should be given up. Rather, policies should aim to create more and better jobs throughout the formal and informal sectors together. This approach would improve the pathways from informal to formal jobs by harnessing the strengths and attributes of the informal sector, as well as tackling its weaknesses and vulnerabilities.
Consider training and skills. Though many so-called informal workers are classifi ed as unskilled, many have in fact acquired talents in their trades. Improving the quality and availability of training in such a way as to bring those talents to bear more effectively not only helps poorer income groups, but can inject the skills and competences that will eventually be needed to expand decent work in the formal economy too. This means placing more emphasis on increasing access to training for all and upgrading apprenticeships. Countries such as Benin, Ghana and Mali are modernising traditional apprenticeship schemes and issuing certificates attesting to the skills possessed by informal sector workers.
Schemes are also being developed to enhance the entrepreneurial gifts of and provide better support to small and microentrepreneurs, many of whom are informal. Microcredit, for instance, is being used to encourage informal-sector workers to develop their businesses and put them on a more secure footing. Micro-lenders have blossomed from Bangladesh through Bolivia to Uganda, showing that informal micro-entrepreneurs can generate enough value-added to repay and generate income.
Apart from providing training and credit, there are simple steps governments could take to stabilise informal workers and encourage more formalisation. They could follow Singapore's example for instance by providing street-food vendors with dedicated spaces, access to tap water, some waste collection and basic services such as simplified registration systems. Of course, for formalisation to make sense, policymakers must make it an attractive option, by providing better public services, strengthening the courts, easing access to credit and reducing the cost of tax compliance for example. In short, they must make sure workers feel they will gain from switching to the formal sector.
Even without formalising, there are actions governments can take to reduce the poverty and vulnerability that afflicts such workers and their communities. In many countries where payroll tax-funded social security systems only cover a small fraction of the population, universal entitlements to basic health or old age insurance are feasible and affordable. Thailand for instance has extended health insurance coverage to an additional 14 million people within the past decade or so. Such measures can reinforce other poverty-alleviation interventions, such as public-works programmes, employment guarantee schemes or conditional cash transfers.
A recovery will be essential to reversing the rising unemployment trend and will help keep the talents of tens of millions of workers firmly anchored in the labour market. The upturn will provide an opportunity to harness the talents of hundreds of millions of informal workers and to foster growth with more and better jobs. Policies to address informal sector challenges require a major effort on the part of governments in developing countries. Developed countries must support them in this challenge by honouring their commitments to increase aid and by boosting trade and investment. This won't be easy in a crisis, though the pay-off for rich and poor countries would be a more effective, more cohesive, and less impoverished global economy.
OECD (2009) Is Informal Normal? Towards More and Better Jobs in Developing Countries, OECD Development Centre Studies, ISBN 978-92-64- 05923-8, available at www.oecd.org/bookshop
©OECD Observer No 274, October 2009