16, September, 2016

Informality and Inclusive Growth: What South Africa can tell us about the benefits and costs of informal employment

This brief explores the relationship between informal employment and inclusive growth in sub-Saharan Africa, focused on the case of South Africa, with recommendations on how to address different types of informality.

Informality in the labour market is often seen as both a hindrance and a help to inclusive growth. On the one hand, low pay and less benefits – which characterise informal markets – may exacerbate poverty and inequality concerns. On the other hand, it is far better than the alternative: unemployment.

This brief explores the relationship between informal employment and inclusive growth in sub-Saharan Africa, with a specific focus on South Africa. We find clear benefits of informality for inclusive growth, including absorption of vulnerable groups into employment and the flexibility of the informal sector during and after economic downturns. Informal employment is not a magic bullet though; with issues such as lower pay, less benefits and job insecurity among the most problematic.

We find policy measures aimed at reducing informality work best when they relax the external and internal constraints facing informal firms. Policy measures that aim to reduce informality by making it costly to be informal can unintentionally increase unemployment by pushing firms out of the market, which constrains inclusive growth. For this reason it is recommended that policy makers aim to support rather than to penalise informal enterprises.
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Key Lessons:

  • Make formality more attractive than informality: (a) Increase the benefits of formality by providing incentives to firms who formalise. (b) Decrease the costs of formality by making legal requirements a simple, cost-effective, and efficient process.
  • Don’t penalise informal firms, support them by eliminating constraints: (a) Eliminate external constraints: provide a space to work in, electricity and other necessary services, and the required infrastructure. (b) Eliminate internal constraints: provide educational and upskilling programmes.
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