Formal-Informal Economy Linkages

by ALTMAN, M., 2008
Research Report, Employment Growth & Development Initiative, Human Sciences Research Council

The term informal sector, informal economy, ‘second economy’ and informality is often used interchangeably. Altman defines ‘informality’ to entail precariousness, in that the activity operates beyond bureaucratic rules or regulations. This is an important concept for poor working people. Focusing policy on structural solutions to reduce precariousness in household livelihoods is particularly important in a developing country context. This paper outlines conceptual issues associated with emerging definitions of informality. It reviews thinking about the factors that contribute to informal self-employment in any economy, and the related policy implications. It then considers factors that contribute to precarious employment in formal firms. The second half of the paper focuses on the experience of South Africa, where most ‘informality’ is found in formal companies rather than informal firms. The policy environment contributing to this outcome is outlined. The paper concludes by identifying policies that might reduce precariousness.