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Given that estimates for the size of the informal sector can reach up to
90% of the rural labour force and 69% of the urban labour force in
and the role of this substantial sector in developing countries. This essay
will first consider varying definitions of the informal sector, finding that
the both its origin and role differs markedly depending on which definition
given to both the positive and negative impact that the informal sector
on the linkages between sectors and the recent rural conflict as a result of
subscribes to the notion that the informal sector is simply a ‘reserve pool’
secure formal employment. Capp et al. (2005) subscribe to this view, and
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considers the informal sector as wholly separate from the formal sector,
(1983), however, rallies against such a dualistic notion, arguing that the
are strong bilateral links between the two sectors, examined later, that
the literature falls by identifying two schools of thought, each with two
definitions. The first is the dualistic notion under which there is a pure
legislation; workers are pushed into a sector with low productivity and
poor remuneration.
Flórez (2002) lists here are the ‘Structural Articulation Approach’ and the
(and restricts the possible size of an informal sector firm). The structural
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entrepreneurial sector, raising the possibility that each sub-sector may
activity as the illicit production of licit goods, excluding the drug trade. In
Colombia, this drastically alters the effect of the sector, as discussed later.
Figure 1: Size of the Informal Sector in Ten main Colombian cities. Source:
Flórez (2002)
Figure 1 shows not only that the size of the informal sector can vary
PREALC are dualist estimates), but also that the size of the informal
falling during the early 90s boom and rising during the late 90s recession.
This supports the dualistic notion that the informal sector is a survival
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also finds that, under the structural articulation approach, the direct
and 2000).
Goldberg and Pavcnik (2003) find that almost all of the informal-formal
formal sector. Perry et al. (2007) conclude that one factor may be
Colombia’s high minimum wage; they find that, over the 11 years
preceding their study, the minimum wage had risen by 30% in real terms
to become the second highest in Latin America, which has implications for
the absorptive capacity of the formal sector. Indeed, Maloney et al. (2006)
driving structural wage differences between the two sectors leads to a rise
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Figure 2: Formal Sector Earnings and Formal Sector Employment. Source:
Maloney et al. (2006)
neoliberal labour market reforms of the mid 1990s, which Flórez (2002)
notes raised the cost of a new employee from 12.5% of their wage to
required licenses for operating, and that the police operate protection
rackets which entrench the informal sector activities and reduce the
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1996/7 data to show that Colombia not only has a relatively high tax
burden on formal sector firms and a high level of corruption, but that both
figures 3 and 4 show (Colombia has been highlighted with a red dot).
Figure 3: Tax Burden and the Informal Sector. Source: Johnson et al. (1998)
Figure 4: Corruption and the Informal Sector. Source: Johnson et al. (1998)
While the above provides compelling evidence for the informal sector
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bureaucracy, there is also evidence that a significant portion of the
sector migration. The model postulates that migrants with little skill enter
capital and experience and then graduate to the formal sector. After
Flórez (2002) finds that workers without previous experience are over-
figure 5 shows.
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Further support is given by Peattie (1981), with anecdotal evidence of
firms is that employees they have exerted effort and money on training
leave to start their own firms. Bernal (2009) uses a 2006 household
survey to discover that when formal sector employees were asked why
they hadn’t started their own business and the most popular choice
(35.1% of respondents) was that they lacked the resources to do so; when
the question was asked to informal sector employees, the most popular
choice (45.3%) was that it was the only job they could secure. Such
different roles. First, Bromley (1978) finds that street vending is such a
profitable enterprise during peak periods that formal sector workers (such
8
Figure 6: Number of Street Traders in City Central Zone in Cali. Source:
Bromley (1978)
One of the most significant ways in which the informal sector has a
positive impact upon the economy is through its linkages with the formal
sector; Portes (1983) notes that the informal sector provides access to
cheap consumption, which reduces living costs and acts against the
also impacts in a more direct fashion upon formal sector costs by boasting
them attractive temporary workers for large formal sector firms – this is
approach.
larger orchards loans the cart and apples (upon payment of a deposit)
which are returned at the end of the day, with a share of the profits.
That the informal sector can act as a complement to the formal sector is
also shown by Flórez (2002), who finds that, while the aggregate motion
Table 1: Correlation Coefficient between Lagged GDP Growth Rate and Sub-
Sector Relative Size. Source: Flórez (2002)
A negative coefficient signifies a rise in the growth rate leads to fall of that
sector due to their close integration with it; the entrepreneurial sub-sector
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subcontracted labour is also susceptible as it is derived from the demand
Bromley (1978) notes that only 5% of Cali street vendors had post-
primary education and Flórez (2003) notes that rural-urban migrants have
migrants must first gain human capital before entering the formal sector.
Further, Gërxhani (2004) notes that while the size of the sector falls with
GNP, in the OECD was 12% compared with 39% in Latin America and 44%
goods production leads to one of the greatest threats the informal sector
poses for a developing economy. The Colombian drugs trade has been
human capital). Using the homicide rate as a proxy for perverse social
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capital, it can be seen that there is a relationship between such capital
and TFP growth, as shown in figure 7, where the homicide rate rose with
Figure 7: Homicide Rate (Pink Line) and TFP (Blue Line). Source: Cardenas
(2001)
The drugs trade has also distorted rural-urban migration; Flórez (2003)
and that, while the percentage of recent migrants of rural origin had fallen
Given that Flórez (2003) also finds that even the informal sector has a
limited ability to absorb recent migrants, such forced migration has lead
in figure 8.
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Figure 8: Unemployment, Underemployment and Informal Employment in
Seven Colombian Cities. Source: Flórez (2003)
sector can act as a drag on growth. Capp et al. (2005) stresses the unfair
whilst Loayza (1996) notes the informal sector reduces the corporation tax
study on Belgium, Adam and Ginsburg (1985) find that the existence of an
informal sectors. Finally, the informal sector has low productivity due to
informal shoe producers average 2.4 pairs a day compared to the 3.5 of
larger firms, with scarce capital and inputs a commonly cited problem.
the tax base of the Government. However, it can also play a similar role to
the formal sector and reinforce the formal sector through acting as a
BIBLIOGRAPHY:
Capp, J., Elstrodt, H-P., and Jones Jr, W. B. (2005) ‘Reining in Brazil’s
Informal Economy’, The McKinsey Quarterly 1.
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Flórez, C. E. (2002) The Function of the Urban Informal Sector in
Employment – Evidence from Colombia 1984-2000, CEDE Document No.
2002-04. Bogotá: Universidad Los Andes.
Perry, G. E., Maloney, W. F., Arias, O., Fajnzylber, P., Mason, A., and
Saavedre-Chanduvi, J. (2007) Informality: Exit and Exclusion in Latin
America. Washington, DC: World Bank.
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