The challenge of informal work

Earlier this month, the World Bank Group (WBG) and the International Monetary Fund (IMF) hosted our biennial meeting with the International Trades Union Confederation (ITUC). I, together with relevant senior World Bank colleagues, met with 97 representatives of 71 trades unions from countries all around the world.
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The ITUC and other labor organizations are key partners in the World Bank Group’s mission to end extreme poverty and build shared prosperity. ITUC representatives are important advocates in the ILO’s Social Protection Floor initiative. They are also valuable consultants for our efforts to implement the 2013 WDR’s recommendations on employment protection legislation. Moreover, the work they do at the national level ensures they are closely connected to local workers’ experiences and needs.

We share the same goal of wanting to create the right conditions so that everyone – no matter their circumstances – has the opportunity to secure a good job and build a better life. Unions play an essential role in ensuring that workers have access to adequate working conditions and are protected against various risks, from unemployment and illness to disability and longevity.

One of the key areas of discussion we had was over the issue of informality. The reality is that most of the bottom 40% in many countries finds work in the informal sector: as unpaid workers in household enterprises; as own account workers; as workers in subsistence farming; as self-employed; or working in informal enterprises. This means that trying to improve their prospects is at the heart of the WBG’s twin goals.

It is important to note that the WBG has neither a passive approach, nor a resigned acceptance, to informality.  Quite the opposite actually. And moreover, this is an area in which we and the unions have a common goal of achieving better jobs with living wages for all. Put simply: we all agree that formal is better.

Our view is that we need to be working with firms that are in the informal sector, as we move them towards formality. This is not inconsistent with the goal of formalization, and at the same time, it doesn’t condemn those workers to extremely difficult circumstances because we want them to formalize. We are building on lessons learned to develop a strategy to encourage.

Some economies, such as in West Africa, are characterized by dynamic informal sectors and stagnant formal economies where formal employment in the private sector is scarce.  At the ITUC meeting, Mody Guiro from the CNTS union in Senegal spoke about how in his country, 80% of all jobs are informal, 90% of all new jobs are informal and 92% of all women’s jobs are informal. As he said, the informality of jobs is increasing.

Formalization inherently means greater access to public services, better markets, often higher quality employees.  At the same time, formalization also requires compliance with regulations and payment of taxes. This can increase costs for businesses. What we must do is get the incentives right without completely destabilizing business.

We also know that the current definition of informality lumps together a range of businesses, of different sizes and shapes, some of which are far along the spectrum of informality and very close to what we think of as formal. Different firms, in different regions, in different stages of informality, need different solutions. Therefore our interventions are focused on providing what is right for each situation.

For subsistence entrepreneurs, the WBG is focused on improving productivity and livelihoods. Small informal firms and subsistence entrepreneurs sell low-quality products to other microenterprises and low-income households. They operate in unregulated and competitive labor markets, and usually employers and employees have no social security protection.  Often they are in business not by choice but out of necessity and hardly make enough to survive.

Large informal firms are different and require a different set of interventions. They are comparable in size to those in the formal sector, but conduct business in many the same ways informal firms do.  Informal employment can be caused by large formal firms underreporting sales or employees.  In other cases, large firms are themselves not formally registered. It can be difficult and costly to register, and increases their vulnerability to bribery and corruption.

There are two real life examples of how we are helping firms along the path to formalization. The Bank’s Women’s Entrepreneurship Program in Ethiopia is working through one stop shops that mainstream registration processes while simultaneously providing access to training, financing without collateral, mentors and additional business support.  The program is piloting innovative psychometric credit worthiness assessments to increase access to finance and it is slanting incentives for the target beneficiaries clearly towards the side of formalization. The Togo Private Sector Development Support Project is currently conducting an impact evaluation on the training of 1000 micro and small scale informal entrepreneurs. Programs like these are teaching business sense, and nudging entrepreneurs towards formality through small steps, in addition to expanding the knowledge base.

In more general terms, our programmes support the road to formality in four ways. We help governments provide universal access to social protection systems. We provide access to finance for informal firms. We provide vocational training for informal firms and we promote safe work places for informal firms. We then try to advise governments to move away from the notion that all informal firms are inherently bad. Fundamentally, the WBG and the global union movement share many of the same goals and many of the same convictions. We especially all agree that formal is better than informal. We are learning from what has been working, sharing experience and producing a more coherent strategy for WBG operational engagement in this space.

This article was first published by the World Bank’s Jobs and Development Blog. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Nigel Twose is the Senior Director responsible for the World Bank Group’s work, together with its development partners, to tackle the global jobs challenge. 

Image: Motorized mannequins hold signs that read “Hire Me” in Toronto May 23, 2014. REUTERS/Mark Blinch.