Caroline Skinner Research Report No. 50 School of Development Studies (Incorporating csds) University of Natal, Durban June 2002

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Understanding Formal and Informal Economy Labour Market Dynamics: A Conceptual and Statistical Review with Reference to South Africa
Caroline Skinner
Research Report No. 50
School of Development Studies (Incorporating CSDS) University of Natal, Durban

June 2002


We would like to thank the International Development Research Centre Canada and the South African Netherlands Partnership for Alternatives in Development who have supported this project.

ISBN NO: 1-86840-492-7


2. Conceptual review 4

2.1 Informal Sector - Definitional Problems 4

2.2 iNFORMAL SECTOR to Informal Economy to informalisation 5



2.5 TOWARDS A SUB-SECTOR/commodity chain APPROACH 10

3. Context and Statistical review 15


3.2 South African Context 17

3.3 South African Labour Market trends 19

3.3.1 Employment in the formal economy 21

3.3.2. Employment in the Informal Economy 29

3.3.3 Unemployment AND hiv/aids 33

3.4 DATA problems and opportunities 35

4. Policy Responses and challenges 36

4.1 International Policy responses 36

4.2 National government Policy 38

4.3 regional and local government policy 40

4.4 Worker organisation responses 41


References 43

Appendix 1: Labour Statisticians Definition of the Informal Sector 50


Table 1: Size of the informal economy 15

Table 2: Trends in female wage employment by region 16

Table 3: Key labour market variables for South Africa, 1996-2000 20

Table 4: Sectoral analysis of job losses, 1990-2000 21

Table 5: Employment in Manufacturing by Sector, 1996 - 2000 22

Table 6: The formal sector as measured in STEE and LFS 2001 23

Table 7: Characteristics of work in the formal sector, 2000 24

Table 8: Changes in COSATU membership by sector, 2000 28

Table 9: Membership numbers – SACTWU, 1991-2000 29

Table 10: Employment in the informal economy in South Africa, 1996-2001 29

Table 11: Informal economy as a share of employment and GDP in South Africa and Sub-Saharan Africa, 1995 30

Table 12: Employment in the informal economy in South Africa by industry, 2000 31

Table 13: Informal employment as a portion of total employment, selected industries, 2000 31

Table 14: Employment by population group, sex and sector, 2000 33

Table 15: Unemployment in South Africa, 1996-2001 34

Table 16: Unemployment by race and gender,1999 34


Globalisation has been associated with a number of related labour market trends. Workers are increasingly in direct competition with their counterparts in other countries. This, combined with pressures to be ever more efficient, has resulted in the restructuring of firms’ activities, with significant job losses, an increase in informal activity and changes in the nature of work for those still in formal employment. Policy research however has tended to examine labour market dynamics in the formal economy separately from dynamics in the informal economy and vice-versa. Consequently there is little if any, knowledge of the factors that promote and/or impede the shifts from the informal economy to the formal labour market and vice-versa; little knowledge of the horizontal shifts and differentiation with the informal economy and within the secondary labour market of the formal economy or about the processes of progression or stagnation thereafter. This report is one of the first outputs of a three-year research initiative based at the University of Natal, Durban that aims to go some way to address these research gaps in a South African context. South Africa is a particularly interesting case as not only has liberal democracy been established, but since the mid 1990s the South African economy has been rapidly opened to the forces of globalisation through trade and financial liberalisation.

This report aims to synthesise relevant conceptual and statistical South African and international research. In so doing it provides a framework for the project informing how the project team will approach the research. It however also aims to act as a resource document for those interested in labour market issues generally and the informal economy particularly. Much attention had been paid to putting together a comprehensive bibliography. The report has three main sections – a conceptual review, a context and statistical analysis and an assessment of policy responses and challenges. In the conceptual review key definitional problems and debates around the notion of the informal sector/economy are considered. The theoretical positions on the informal economy are reviewed, concentrating on the strengths and weaknesses of each and how each deals with formal and informal economy dynamics. Recent literature on the changing nature of work and labour market flexibility is then reviewed. The section concludes by arguing that, given the heterogeneity of informal activities, a sectoral or commodity chain approach is well placed to explore specific formal - informal economy linkages. Suggestions are made with respect to adapting this approach to the analysis of the informal economy and particularly labour market dynamics. The context and statistical analysis starts by briefly reflecting on the international situation and then reflects on the South African historical and policy context. Statistics South Africa recent releases and other secondary sources are then synthesised to reflect on the changing nature of work in the formal economy, the nature of informal employment and unemployment. The section ends with a brief assessment of data challenges and opportunities. In the final section, the policy responses from, and challenges for, international institutions, national, regional and local governments and worker organisations are considered.

2. Conceptual review

2.1 Informal Sector - Definitional Problems

Despite Peattie’s (1987) critique of the term ‘informal sector’ as an ‘utterly fuzzy’ concept and her suggestion that those interested in policy and analysis of this phenomenon should start by abandoning the concept, the concept continues to be used. Since Keith Hart first coined the phrase ‘informal sector’ in the early 1970s to describe the range of subsistence activities of the urban poor in Ghana, there has been considerable debate about what exactly the term refers to. The most quoted definition is that contained in the International Labour Organisation’s Kenya Report (1972:6) in which informal activities are defined as ‘a way of doing things, characterised by:

  1. ease of entry

  2. reliance on indigenous resources

  3. family ownership of enterprises

  4. small scale of operation

  5. labour intensive and adapted technology

  6. skill acquired outside of the formal school system

  7. unregulated and competitive markets’.

Over the years the definition has evolved, as has the character of the phenomenon it aims to describe. Increasingly informal activities are the result of formal firms ‘informalising’. Further, there are supply relations from the formal to the informal. These trends deem some of the characteristics identified in the ILO definition nonsensical. Lund and Srinivas (2000:9) point out:

We do not think of formal sector procurers of fruit and vegetables from agribusiness who supply to informal traders as ‘trading in indigenous resources’.

A machinist doing piecework in the clothing industry is as likely to have acquired her skills in the formal education system as outside of it. More recent attempts to reflect these changes fall into the trap of only defining these activities negatively i.e. in terms of what they are not, as well as being vague. Swaminathan (1991:1, emphasis added) for example, argues:

What informal activities have in common is a mode of organisation different from the unit of production that is most familiar in economic theory, the firm or corporation. These activities are also likely to be unregulated by the state and excluded from standard economic accounts of national incomes.
Castells and Portes (1989:12) describe the informal economy as a ‘common sense’ notion that cannot be captured by a strict definition. Although the main writings on the definition of the informal sector differ markedly as to what criteria is used to define the ‘informal sector’ and as to the relative weighting of different criteria, a criteria common to all definitions is that these are economic activities which are small scale and elude certain government requirements or as Castells and Portes state, are ‘unregulated by the institutions of society, in a legal and social environment in which similar activities are regulated’. Examples of such requirements are registration, tax and social security obligations and health and safety rules. (See Appendix 1 for the international definition of the informal sector as adopted by the International Conference of Labour Statisticians in1993.)

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