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Unlock This CourseInformal employment is a massive part of the global economy, especially in developing countries. It includes all the jobs that aren't officially registered with the government - from street vendors selling food to people working in small workshops without contracts. Understanding why informal employment exists helps us see how economies really work in many parts of the world.
Key Definitions:
Informal jobs are usually small-scale, use simple technology and require little capital to start. Workers often have no job security, work long hours for low pay and have no access to benefits like healthcare or pensions. These jobs are common in agriculture, street trading, domestic work and small manufacturing.
The main economic reasons why informal employment grows are linked to how developing economies struggle to create enough formal jobs for everyone who needs work.
Many developing countries can't create formal jobs fast enough to keep up with population growth. When the formal economy is weak or growing slowly, people have no choice but to create their own work in the informal sector. This is especially true in countries where agriculture is declining but manufacturing hasn't grown enough to absorb all the workers.
As farming becomes more mechanised, fewer workers are needed. These displaced agricultural workers often move to cities seeking work but find limited formal opportunities.
Many developing countries struggle to build strong manufacturing sectors that can employ large numbers of people in formal jobs with good conditions.
The formal service sector often requires higher education levels, leaving many people without the skills needed for available formal jobs.
In India, about 90% of workers are in informal employment. The country's rapid population growth has outpaced formal job creation. Many people work as street vendors, rickshaw drivers, or in small workshops. Despite economic growth, the formal sector hasn't expanded enough to absorb the millions entering the workforce each year.
Population changes and social factors play a huge role in driving people towards informal employment. Understanding these helps explain why some regions have much higher rates of informal work than others.
When people move from rural areas to cities faster than urban economies can create formal jobs, informal employment becomes the only option. Cities in developing countries often can't provide enough infrastructure, services, or formal employment opportunities for all the new arrivals.
People leave rural areas due to poverty, lack of opportunities, or environmental problems. They arrive in cities with few skills suited to urban formal employment, so they create their own informal jobs like street trading or casual labour.
Many people in developing countries lack the education and skills needed for formal employment. Without proper qualifications, they can't access formal jobs and must rely on informal work that doesn't require certificates or training.
People who can't read or write are excluded from most formal jobs, pushing them into informal work like manual labour or street vending.
Education systems often don't teach skills that match what formal employers need, leaving graduates to create their own informal businesses.
Many families can't afford to send children to school, so they enter the workforce early in informal jobs rather than gaining qualifications for formal employment.
Lagos has grown from 1.4 million people in 1970 to over 15 million today. This rapid growth has overwhelmed the city's ability to provide formal jobs. About 60% of Lagos residents work in the informal sector, including street trading, motorcycle taxis (okadas) and small-scale manufacturing. The city's infrastructure can't keep up with population growth, forcing people to create their own economic opportunities.
Government policies and institutional weaknesses often encourage informal employment, sometimes unintentionally. Understanding these political factors helps explain why some countries have much larger informal sectors than others.
When governments can't effectively regulate the economy or provide basic services, informal employment flourishes. Weak institutions make it difficult to enforce labour laws, collect taxes, or support formal business development.
Complex bureaucracy and corruption make it expensive and difficult to start formal businesses. Many entrepreneurs choose to operate informally rather than deal with lengthy registration processes, multiple permits and potential bribery demands.
Countries with weak social safety nets force people to find any work available, even if it's informal. Without unemployment benefits, healthcare, or pensions, people can't afford to wait for formal employment opportunities.
Without unemployment benefits, people must work immediately in whatever jobs they can find, often in the informal sector.
Lack of public healthcare forces people to earn money quickly through informal work to pay for medical expenses.
Without retirement security, people work in any available job, including informal employment, to survive in old age.
Economist Hernando de Soto studied Peru and found that it took 289 days and cost 32 times the minimum wage to legally register a business. This bureaucratic burden pushed many entrepreneurs into the informal sector. Street vendors, small manufacturers and service providers operated without legal recognition because the formal system was too expensive and complicated to navigate.
International economic conditions and globalisation patterns also influence informal employment levels. These external factors can either increase or decrease the pressure towards informal work.
Globalisation has mixed effects on informal employment. While it can create new formal jobs through foreign investment, it can also destroy traditional industries and force workers into informal activities. Competition from cheap imports might close local factories, pushing workers into informal services.
When countries open their markets to international trade, some local industries can't compete with cheaper imports. Workers from these industries often end up in informal employment, such as street trading or small-scale services, because formal alternatives aren't available.
Informal employment results from a complex mix of economic, social and political factors. The main causes include insufficient formal job creation, rapid urbanisation, educational barriers, weak governance and global economic pressures. Understanding these causes is crucial for developing policies that can help transition workers from informal to formal employment while recognising that informal work often provides essential income for millions of people worldwide.
The challenge for policymakers is to address the root causes of informal employment while supporting the people who depend on it for survival. This requires improving education, strengthening institutions, creating better business environments and ensuring that economic growth benefits everyone, not just those in formal employment.