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4.3 Informal labour markets: Working Out of Poverty

Written by: International Labour Organization

Article Overview: A strategy for improving governance

4.3 Informal labour markets: Working Out of Poverty

Most workers and many small enterprises struggle to escape the uncertainties
of life and work in the informal economy to try to earn a decent living.
Although it would be wrong to say that informal economies are
unregulated, the norms used by informal economic units are mainly set and
applied by informal means. In some cases these norms are benign and incorporate
widely accepted community values concerning fairness. However,
some of the rules are determined by locally powerful individuals or groups
to serve their own interests. Furthermore, although not all formal laws and
regulations are ignored in the informal economy, their application is often
arbitrary and uneven.

Informality is principally a governance issue. The absence of an appropriate
framework for the governance of markets in general, and labour markets
in particular, creates an environment of insecurity which prevents the
accumulation of physical, financial, human and social capital. Without a
strategy for the gradual extension of formal regulations to meet the needs of
informal workers and enterprises in the developing world, the productive
potential of the world’s working poor will remain untapped, acting as a brake
on growth and a source of increasing social tension.

A new approach must be based on the reality that most people live and
work in the informal economy not by choice but out of a need to survive.
Wage workers, own-account workers and small businesses in the informal
economy face similar problems of insecurity and vulnerability. Unable to
find other jobs or start businesses in the formal economy, they lack protection,
rights and representation, and often remain trapped in poverty. Especially
in circumstances of high unemployment, underemployment and
poverty, where opportunities in the formal economy are scarce, the informal
economy is the only source of income-generating work. Although many
businesses operating in the informal economy display extraordinary creativity,
dynamism and innovation and are producing to meet the needs of poor
consumers for accessible and low-priced goods and services, they rarely have
the means to cross the threshold into formal recognition and obtain the security
it can provide for further investment and the creation of more and better
jobs.

Crime and corruption are major problems facing workers and enterprises
in the informal economy. The absence of effective mechanisms for the
enforcement of basic laws to protect individuals from theft and violence is a
barrier to the growth of productive employment. The fact that although most informal workers and businesses produce legal goods and services, they are
unable to comply with procedural legal requirements (for example regarding
registration of enterprises) compounds the problem of extending the rule of
law to people who are most in need of its protection.

Reducing poverty through decent work requires the elimination of the
negative aspects of informality, while at the same time ensuring that promoting
the incorporation of workers and economic units into the mainstream
economy does not destroy opportunities for livelihood and entrepreneurship.
Continued progress towards recognized and protected decent work will
only be possible by identifying and addressing the underlying causes of informality.
At the core, a main barrier to entry into the economic and social
mainstream is the inability of either informal workers or employers to assert
the basic rights essential to the efficient and equitable functioning of labour
markets.

Effective policies to deal with the problems of informality require the
participation of organizations able to represent the concerns and ambitions
of informal workers and businesses in national policy-making. Workers and
employers in informal activities may wish to join existing trade unions and
employers’ organizations, or they may want to form their own. Employers’
and workers’ organizations play a critical role in either strategy: extending
membership and services to employers and workers in the informal economy,
and encouraging and supporting the creation and development of new
member-based, accessible, transparent, accountable and democratically
managed representative organizations. In many countries, it is essential to
reform legal and administrative frameworks that do not guarantee and protect
freedom of association and make it difficult for workers and employers
in the informal economy to organize.

The growth of the informal economy can often be traced to inappropriate,
ineffective, misguided or badly implemented legal and institutional
frameworks and the lack of proper and effective implementation of policies
and laws. Breaking out of the trap of informality and poverty requires a policy
environment that promotes a culture of responsible entrepreneurship
and encourages micro, small and medium-sized enterprises, in particular, to
start up and grow within a supportive legal system. Commercial policies that
stimulate self-employment and small business expansion, an efficient, accountable
public administration free from corruption and a strong educational
system are of central importance to private sector investment, whether
domestic or foreign. At the same time, labour market regulations need to
balance the needs of small enterprises for flexibility and efficiency with
workers’ needs for security and fair treatment.

There are no easy solutions to the international and national governance
failures that have given rise to the massive growth of informal economies
in the developing world. Governments therefore need to formulate
and implement a comprehensive approach aimed at helping informal businesses
and workers overcome the obstacles to benefiting from the security
that legal recognition of their activities provides to enterprise development
and the creation of decent work opportunities.

This will entail the identification of legal and administrative requirements
that unnecessarily raise the threshold of entry to formality beyond the reach of many informal economic units. It will also need a major investment
in training and education and other policies to overcome exclusion from productive
and remunerative employment. Local authorities often have a key
role to play in encouraging community mobilization around local development
plans. In addition, for national action to integrate the informal economy
to succeed, reforms in the governance systems for the global economy
are also necessary, as described in Chapter 5.

The 2002 session of the International Labour Conference committed
the ILO to developing a programme of work and technical assistance, drawing
on the expertise of its tripartite constituency, to support member States’
efforts to use the range of tools available within the decent work approach
to poverty reduction and development.

A major challenge is to achieve a balance between, on the one hand, the
need to ensure that a strategy for improving governance of informal labour
markets does not make the already difficult life of people in the informal
economy harder and, on the other, the reform and progressive extension of
regulatory frameworks that are used in the formal economy. To be effective,
new governance systems must make sense to those for whom they are intended,
otherwise they will not be used or may inadvertently raise new obstacles
to the creation of more and better jobs.

Dialogue with representative organizations of various types is essential.
However, workers and small businesses in the informal economy face enormous
difficulties in exercising the right to freedom of association, not least
those caused by the constantly shifting nature of employment relationships
and the short lifespan of many micro businesses. Governments, local authorities
and established trade unions and employers’ organizations have a major
role to play in promoting the development of representative organizations
and involving them in mechanisms of social dialogue over the policies
needed to bring work in the informal economy within the ambit of economywide
regulatory frameworks to promote decent work. Supporting this effort
is a major priority for the ILO in its discussions with constituents on decent
work strategies for poverty reduction.

Related Articles
  4.0 Sustainable pro-poor growth and the governance of the labour market: Working Out of Poverty
  1.11 Working to end child labour: Working Out of Poverty
  Preface: Working Out of Poverty
  4.6 Conclusions: Working Out of Poverty
  4.1 Institutions, markets and development: Working Out of Poverty

Article Tags: accumulation, community values, creativity, developing world, dynamism, economic units, fairness, formal economy, informal economy, insecurity, labour markets, laws and regulations, new approach, norms, poverty, small businesses, social tension, uncertainties, underemployment, vulnerability



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