The Scale of Informal Labor and Its Impact on the Economy | KCET
The Scale of Informal Labor and Its Impact on the Economy
Measuring the nature and impact of the informal economy is difficult due to the lack of a common understanding of its meaning. Some think of the new "gig" economy as informal because of the nature of independent contracting and lack of wage work. Others use more formal definitions, such as unincorporated, unregistered market enterprises (ILO, 2015). The size of informal employment is consequential; over 60% of workers in the world earn the majority of their income in the informal economy, reaching a high of 85.8% in the region of Africa (ILO, 2018).
Participation in the informal economy may be voluntary or involuntary. Some might choose to participate in the informal economy due to flexibility of work. As noted above, work in the "gig" economy – or crowdwork – could be considered part of the informal economy. Crowdwork allows workers to function "informally," as workers find jobs one at a time through a digital platform offering a large pool of workers (Berg et al., 2018). Platforms like Uber, in which the company obtains a percent of profit from drivers, match people with profit generating tasks based on their location. Meagher (2017) notes that the line between the formal and informal economy continues to blur, supporting the term "frugal innovation," which is defined as a collaboration between formal and informal participants that lead to low cost, high-quality goods and services.
The choice to pursue an unregistered business in the informal economy is frequent in developing countries. This informal entrepreneurship is rampant in places such as East Africa because of the lack of infrastructure or investment (Williams et al., 2017), which subsequently produces a resilient informal sector (Ikoja-Odongo, 2004). These informal businesses are supported through technological advancements such as mobile money, which are used as frequently as banks in developing countries like Uganda for moving cash in transactions (Larsson and Svensson, 2018). This research paper concluded it is often assumed that immigrants do not choose the informal economy, as numerous barriers exclude them from formal employment.
Similarly, in the United States, participation in the informal economy is often involuntary. In particular, immigrants in the United States face a number of unfavorable policies that make work in the informal economy the only employment opportunity (Visser, 2016). Unfavorable policies include language access laws requiring workers to speak English for employment, or state and local employment verification, which requires a driver's license. Not surprisingly, 75% of day laborers are undocumented immigrants (Valenzuela et al. 2006) without such verification mechanisms, suffusing the informal economy and precipitating anti-immigrant rhetoric toward day laborers (Crotty, 2017).
Cutting immigrants off from the formal economy has important consequences for economic growth. In a study by the Center for American Entrepreneurship, first generation immigrants were cited as responsible for founding 18.4% of Fortune 500 companies and second generation immigrants responsible for 24.8%, totaling 43.2% of Fortune 500 companies in 2017 ("Immigrant Founders," 2017). On a more micro scale, 18% of small business owners in the U.S. are immigrants, generating a total of $776 billion in 2007 (Liu et al., 2014). To the extent that a significant amount of micro-entrepreneurial activity is driven to the informal economy, economic activity and tax collection is suppressed.
Two areas where policy could move informal activity to the formal sector for immigrants is in the market of day laborers and street vending as relates to economic mobility. Both of these areas could consider adjustments to further remove barriers to formal economic participation.
More Stories on the Informal Economy
For example, day laborer centers protect day laborers so they can continue to participate in economic activity (Visser, 2016), providing basic social services and language classes, legal support, and even protection against abuse (Crotty, 2017). Organizations such as the National Day Laborers Organizing Network (NDLON), born from a Pasadena day laborer center, recognize safety for undocumented day laborers is necessary to encourage formal economic participation (Nicholls, 2016). If undocumented immigrants are to formally participate in the economy, policies must account for the safety of this subpopulation.
Further, new policies to legalize street vending provides expanded opportunities to increase economic mobility for immigrants. In 2014, the L.A. Bureau of Street Services estimated 50,000 street vendors to be in LA, producing an estimated $504 million industry through local buying and selling of goods. However, due to the informal nature of street vending, an estimated $83 million was lost in tax revenue (Yen et al., 2015).
Los Angeles recentlylegalized sidewalk vending, just months after California legislation was passed requiring local regulation of street vending practices. As street vending becomes legal in more cities across California, cities must avoid imposing unnecessary barriers to participation, such as expensive regulations (Kregor, 2017) and identify opportunities to expand access to capital for low-income entrepreneurs. For example, the Minneapolis-based Mercado Central operates as a business incubator, pairing technical assistance with community development (Carr and Servon, 2008). Entrepreneurship classes in Spanish and culturally relevant financing mechanisms were provided, specifically empowering low-income immigrants to start businesses (Carr and Servon, 2008). Building on local assets of immigrant populations, Mercado Central removed barriers for immigrant entrepreneurs to participate in formal businesses.While formalized day laborer centers and legalized street vending provide opportunities for immigrant entrepreneurs to more fully participate in the economy, full access to economic inclusion is limited by stalled immigration policy reforms. Expanded naturalization pathways for immigrations would remove barriers to obtaining legal status, which would allow more individuals to work in the formal economy, (Trevizo, 2018) and by extension, increase opportunity for economic mobility. This benefits not only the individual workers and their families, but has significant impacts on future economic growth.
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Bromley, Ray and Tamar Diana Wilson. (2018). Introduction, The Urban Informal Economy Revisited. LATIN AMERICAN PERSPECTIVES, Issue 218, Vol. 45 No. 1, 4–23.
Carr, J. and Servon, L. (2008). Vernacular culture and urban economic development: thinking outside the (big) box. Journal of the American Planning Association, 75:1, 28-40.
Crotty, S. (2017). Can the Informal Economy Be "Managed"?: Comparing Approaches and Effectiveness of Day‐Labor Management Policies in the San Diego Metropolitan Area. Growth and Change, 48(4), 909–941.
Ikoja-Odongo, R. and Ocholla, D. (2004). Information-Seeking Behavior of the Informal Sector Entrepreneurs: The Uganda Experience. Libri 54, No.1: 54–66.
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Kregor, E. (2017). How Do You Formalize a Tamale: How to Ease Street Vendors' Transition out of the Shadow Economy. UC Irvine L. Rev., 7, 453.
Larsson, C., & Svensson, J. (2018). Mobile phones in the transformation of the informal economy: stories from market women in Kampala, Uganda. Journal of Eastern African Studies, 12(3), 533–551.
Liu, C., Painter, G., & Wang, Q. (2014). Lessons for U.S. Metro Areas: Characteristics and Clustering of High-Tech Immigrant Entrepreneurs. Ewing Marion Kauffman Foundation.
Meagher, K. (2017). Cannibalizing the Informal Economy: Frugal Innovation and Economic Inclusion in Africa. Eur J Dev Res, 30(1), 17–33.
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