27, May, 2015

Informality and Inclusive Growth

This design and methods paper sets out how the authors will explore the transitions between unemployment, informality and formal employment and how they might affect or promote inclusive growth at both individual and macroeconomic level.

This paper is a working document, and the first stage in the conduct of a joint research in the topic of informality and inclusive growth. The research will study the cases of Colombia and South Africa and analyse to what extent these lessons can be applied to other countries in Africa and Latin America.

In the last decade a number of emerging markets have recorded relatively high growth rates, yet we see a limited impact on poverty and inequality suggesting that economic growth is not inclusive. In part, this is related to the fact that a large number of individuals are not participating in the formal economy and are informally employed or unemployed. Besides having lower household income, this group may also not achieve any of the non-income welfare benefits of a formalised welfare system yielding poor developmental outcomes. However, it is also true that for a large proportion of the population informal employment is a default option to unemployment, which has a positive impact on inclusive growth.

The purpose of this research is to explore this apparent contradiction, and understand the impact of informality on inclusive growth in different country environments. The analysis of labour markets in South Africa (relatively high levels of unemployment and low levels of informal employment) and Colombia (lower rate of unemployment, but with a persistent level of informality) provides an opportunity to create a framework broad enough to understand the complex paradox of informality.

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