2: Informal economy Flashcards
What is the informal economy?
All economic activities by workers and economic units that are not covered by formal activities by formal arrangements or are not sufficiently covered by formal arrangements.
What are the alternative definitions of the informal economy by Smith (1994)?
Market-based, legal production of goods and services not captured by official GDP statistics
Markets-based, legal and illegal production of goods and services not captured by official GDP statistics
Market- based, legal production of goods and services that escapes tax authorities
Market and non-market-based, legal and illegal production of goods and services not captured by official GDP statistics.
What do the definitions of the informal economy depend on?
-Purpose/ study of the research
-Method of measurement
-Availability of data
What % of Europeans work are part of the informal economy?
5-7%
What % of Africans work in the informal economy?
70%
What are some characteristics of the informal economy?
-Vulnerability
-Its a global phenomenon
- Dynamic, persistent, pervasive
Characteristics of people in the informal economy
- Have no legal protection
-Face greater risk working and living (including financial and health) - Do not enjoy the same rights as formal workers
- Face lower wages than formal workers
What are some legal examples of the informal economy?
- Unreported income from self-employment
- Unregistered workers
- Home-based production
- Neighbouring help
- Unpaid family working
What are some illegal examples of the informal economy?
- Trade with stolen goods
- Drug production and dealing
- Prostitution
- Gambling
- Trafficking and human slavery
What are the direct methods of measuring the informal economy?
-Relying on micro-data
-Labour market focused
-Labour force survey
-Household survey
-Firm-based survey
What are the indirect methods of measuring the informal economy?
Rely on macro-data
Broad focused
Currency demand approaches
The multiple indicators multiple causes (MIMIC)
Electricity consumption
Advantages/ disadvantages of using indirect methods
Broad measures/ well suited for times series analysis
Cover long years
Suffer from strong assumptions and model specifications
Advantages/ disadvantages of using direct methods
Do not suffer from strong assumptions and model specifications.
Capture only a proportion of informal economic activities
Less-suited for time series analysis
What are the 4 approaches to the informal economy?
Dualist
Structuralist
Legalist
Voluntarist
What are some characteristics of the dualist approach to the informal economy?
Dualists see informal and formal economies as separate.
According to the dualist school, the informal economy is tempoary
The informal economy is a marginal economy that differs from modern activities
The informal economy is mainly labour focused
The engagement of informal economic activities is survival.
Why is the informal economy seen as seperate in the dualist approach?
Individuals in the informal economy are seen as less educated and skilled.
Lack modern technology
Find it challenging to have a role in the modern economy.
What drives informality?
Poverty- limited livelihood opportunities, recognition of skills and jobs for the working poor
Flexibility
Changing production structures- The easing of trade and financial barriers, coupled with the fall in communication and transport costs, has made it easier for businesses to break up production and sub-contract them in countries where labour is cheaper.
Economic restructuring- Privatisation of state enterprises and public services
Economic crisis- large decline in growth and employment
Jobless growth
The informal economy is heterogeneous
Inequalities between and within countries
what are some characteristics of the structuralist approach to the informal economy?
- Informality is increased due to capitalism
-The informal economy is unable to create sufficient jobs
- The formal economy and the formal are intrinsically linked
- Deregulation and liberalisation trigger informal economic activities
- The informal economy is the nature of the growth of capitalism
Characteristics of the legalist approach to the Informal economy
- The informal economy is a response to a hostile legal system and the burdensome regulations of governments
-Its a rational economic decision of people to avoid heavy regulations in the formal sector
- Bureaucratic procedures must be simplified to encourage informal enterprises to register formally.
Characteristics of the voluntarist approach
- States that the informal economy is no a marginal/ disadvantages economy
- The informal economy is a voluntary choice made by individuals after weighting the cost benefits of participating in the formal economy.
- Argues that the informal economy is the deliberate choice of individuals.
How is the informal economy heterogeneous?
Causes and determinants will change across countries, cities and even within cities
This depends on the country’s economic, political, social and cultural background and the city or areas in which it is located
Definition of heterogeneous in economics
Differences in capital assets, livelihoods, income and other economic endowments.
These differences can make it more or less difficult for people to communicate, trust and co-operate with each-other.
What should be done about the informal economy?
-Governments should acknowledge that the informal economy is present worldwide and should not discriminate between developed and developing economies.
- Governments should understand the nature of the informal economy and should not ignore its illicit side
-They need to formulate and evaluate effective policies
- Need to understand why people are engaging in informal economic activities
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