The Informal sector and global economic crisis

Introduction

The informal sector is certain not immune to the ever changing global economic landscape especially as crisis affects the world. The biggest recent global crisis was the COVID pandemic which led to job losses and many other challenges. But beyond the COVID, the world continues to grapple with various crisis like natural disasters, geopolitical instability and things like that. How do these challenges affect the informal sector?

Its a struggle for workers in the informal sector to cope with economic crisis. In this discussion, we will first of all see the the size of challenges the informal sector faces both from the direct and indirect effects of economic instability. We will also review recommendations that have been made to assist the informal sector during times of crisis.

How Job cuts affect the informal sector

People loose their jobs on daily basis as a result of many challenges such as high cost of production. These job cuts affects all workers both in the formal and informal sectors. However, the informal sector bears the biggest brunt when someone is to be fired. This might not sound like popular opinion because there is a general misconception about job cuts and the informal sector.

Without backing them up with verifiable stats, a lot of people erroneously believe that the informal sector is least affected by job cuts. Others think that when people are laid off in formal employment, they usually find landing support in the informal sector. While that might be true party, it does not always tell the full story.

Basically, job cuts in the formal sector always begin in the informal sector. Organizations large and small always start downsizing from the workers that are considered least important. Often times, these workers are loosely contracted and do not belong to the formal sector. They neither enjoy the benefits of formal employment nor considered to be part of one.

So when a company wants to lay off workers, they start from those at the fringes such as the cleaners, drivers and other workers in that category. These workers often form the informal staff and that is where the layoffs start. In essence, the informal sector is where workers start loosing their jobs as a result of resizing in the formal sector. This idea is backed up with stats from Women in Informal Employment: Globalizing and Organizing (WIEGO).

Apart from the effects of job cuts in the formal sector, the informal sector also suffers in another way. When the job cuts finally affects the main workers in formal sector, they usually look to the informal sector for sustenance until the time they are able to secure new employment in the formal sector. Jobs are not easy to get by. People spend years looking for new jobs in the already saturated formal sector. So all too often, people fired from their formal jobs take up menial jobs only found in the informal sector. That is where another challenge comes for the informal sector.

As more new people flow in from the formal sector, the informal sector experiences tougher competition. For example, a worker from the formal sector might decide to use his car to do taxi service until he finds a new job. In essence, there is an extra taxi driver now competing for the same number of passengers in the route he operates. Existing taxi operators are now facing competition from this new entrant.

The more fired workers in the formal sector enter the informal sector, demand for the services of people already in the sector reduces because there is more that are offering the size service. This also indirectly affects pricing and income. For example, those already in the informal sector might be forced to offer their services at a lower price because competition is tougher and demand is lower. When this happens, it also affects the income of those in the informal sector, driving it to lower levels.

A recent study conducted by Women in Informal Employment: Globalizing and Organizing (WIEGO) confirms that with more job cuts in the formal sector, there is more competition for opportunities and less demand of services in the informal sector. Consider the following:

Street vendors experienced a significant drop in local consumer demand. They reported the greatest increase in competition, as greater numbers of people who lost their jobs or had to supplement incomes turned to vending as a possible source of income. source

Home-based workers who produced for global value chains experienced, for the most part, a sharp decline in their work orders. Home-based workers who worked on their own account for local markets reported increased competition and many had to reduce their prices to remain competitive. source

How to cope with the crisis

The informal sector is a very crucial part of global economy. They provide the resources and utility that keeps the world economy and formal sector going. As already indicate in my previous article on this subject, more people work in the informal sector than in formal sector. In fact, ILO statistics indicate that 2 billion workers are employed in the informal sector. That represents 61% of all workers.

So how could the large and every-growing sector be helped to survive global crisis? In many ways, but below are two suggestions:

• Emergency relief funding: From time to time, especially in periods immediately after a major crisis, government could provide some intervention in form of funding to help business in the informal sector remain in business. Crisis can affect their working capital and without intervention funding, a major crisis might knock many informal businesses out of existence.

• Formalization: Governments should provide appropriate frameworks to recognize informal sectors and create some sort of strategic organization. The framework would be aimed at providing the essentials needed to better the working environment in the informal sector. As regards formalization, here is what WIEGO as to say:

The goal of “formalization” should be to increase earnings and reduce risks of the working poor in the informal economy, not simply registration and taxation of informal enterprises. source

Conclusion

The informal sector is in crisis and needs all the help they can receive. Everyone should put hands together to see that this sector is not simply abandoned as it in fact is the situation at the moment.

References

• Links with Economic Crises
• Support to Informal Workers During & After Economic Crises

Note: Thumbnail is from Pixabay

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