4, May, 2017
BRIEF

Rethinking the Effect of Informality On Inclusive Growth: Lessons from Colombia and South Africa

This policy brief uses the case studies of South Africa and Colombia to argue that the relationship between informality and inclusive growth depends on the type of informality in question.

This policy brief uses the case studies of South Africa and Colombia to argue that the relationship between informality and inclusive growth depends on the type of informality in question.

To this end, we suggest a typology of informality which takes into account the informal worker’s preferences for informality and level of productivity as well as possible barriers to formality. We call the three types of informal workers identified “voluntary”, “induced”, and “subsistence” informality, and suggest policy recommendations aimed at increasing inclusivity of growth for each of these groups of informal workers.

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Key Lessons:

  • One of the most effective policies to combat voluntary informality is labour law monitoring and control. However, this policy should not be implemented indiscriminately, since it can have negative implications for inclusive growth if applied to subsistence informal workers.
  • Enforcing formality on workers who engage in subsistence informality is not only likely to fail, but may imply an enormous cost in terms of inclusive growth. In the long term, the only way to reduce this type of informality is to either increase education and skills or to improve productivity, particularly in rural areas where subsistence informality is more common.
  • While workers should have some kind of protection to improve working conditions, ‘too much’ protection can make formal hiring ’too’ expensive, thereby increasing unemployment and informality.
  • Policies focused on labour market discrimination are relevant for workers who show low preferences for informality and have similar education and experience as other formal workers, but are segregated from the formal labour market by race, gender or other explicit or implicit discriminatory rules of society.

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