Informal Employment in Countries in Transition: A conceptual framework, by Sabine Bernabè

(CASEpaper 56, Centre for Analysis of Social Exclusion, London School of Economics, April 2002).

The term ‘informal sector’ has been used to describe an extremely wide spectrum of activities, making it less than useful as a guide to policy development. This paper provides a conceptual framework within which to analyse different types of ‘hidden’ activities in order to design appropriate social, labour market, fiscal, and other policies. The author distinguishes between ‘informal’ activities (undertaken to ‘meet basic needs’), ‘underground’ activities (deliberately concealed from the authorities), ‘illegal’ activities (generating goods and services forbidden by the law) and ‘household’ activities (producing goods and services for own-consumption).

A particularly important question raised by this categorisation of activity is whether it is possible to distinguish sufficiently between ‘informal’ and ‘underground’ activities. Many activities, deliberately concealed from the authorities, are undertaken to meet basic needs. Bernabè recognises the importance of the overlaps between the different categories (on pages 37 and 38), but this particular overlap sector should have had a section of its own because of its size and because it has important policy implications different from those related to the clearly informal sector and the clearly underground sector.

Referring to Eastern European countries in transition, the author concludes: “Having established a framework for analysis, further research is now needed to assess the welfare and income-generating potential of household, informal, underground and illegal activities. This will help to determine which of these ‘hidden’ activities should be ‘formalised’, eradicated, permitted, or even encouraged. The most ambiguous of these questions will be how to address informal activities. The answer will largely depend on the extent to which they are found to provide a social safety net and undermine government revenue. It will also depend on their potential for growth and on whether they contribute to a loss of human capital by deskilling what is a relatively skilled and educated labour force. Answering these questions will assist the formulation of policies that effectively stimulate growth, reduce poverty and strengthen public finance and the rule of law.”

The next task is comparative. Trapped in Poverty? Labour-market Decisions in Low-Income Households by Bill Jordan, Simon James, Helen Kay and Marcus Redley (Routledge, 1992) reports research into the informal/underground economy of an Exeter housing estate. The discussion of the research findings leads the authors to suggest that a Citizen’s Income would be a useful means of tackling “the particular combination of employment casualisation and benefit system failure” which they had found on the estate (Jordan et al, p.139). It would be interesting to see a similar piece of work on a community in a country in transition, and to see whether discussion of the findings might lead to a similar conclusion.