More than 60 per cent of the world’s employed population – two billion women, men and young people – make a living in the informal economy.
Informal or gray economy refers to all economic activities carried out by workers that are not or insufficiently covered by formal arrangements, either legally or in practice. It is an unregulated part of the economy that is neither taxed nor monitored by the government. The informal employment sector includes daily wage workers, domestic workers, undeclared workers, and part-time or temporary workers.
The United Nations says a transition to a more formal economy is necessary to reduce poverty and inequality, promote fair working conditions, and increase the productivity and sustainability of businesses. According to the International Labor Organization’s guidance on the transition from the informal to the formal economy, understanding the individual drivers and challenges of the informal economy at the country level and a coherent integrated strategy to address the multiple drivers of the informal economy implementation is considered important for success. .
Some Sustainable Development Goals (SDGs) are aimed at reducing informal economic activity, such as no poverty (SDG 1), gender equality (SDG 5), reducing inequality (SDG 10), and peace, justice and strength. related to achieving social justice, including addressing issues related to. Institutions (SDG 16) and Partnerships for the Goals (SDG 17). This highlights the important and overlapping areas affected through the informal economy and the importance of progress in this area.
What is the reason for the informal economy?
The informal economy provides employment opportunities to people who do not have job security, labor security or social security, especially in developing countries. It is an easily accessible economy and provides an opportunity to acquire skills and knowledge to move into the formal economy. The main factors of informality are:
- Economic context and legal, regulatory, and policy frameworks: Informality can manifest itself differently depending on a country’s economic context. The informal economy includes a wide variety of occupations, from minibus drivers in developing countries to construction workers in developed countries.
- Sector and economic factors: Informal workers tend to be paid less than their formal sector colleagues due to a lack of social protection and access to credit.
- Lack of education: Informal enterprises tend to remain small, have low productivity and limited access to finance.
- Discrimination: Globally, 58% of employed women work in the informal sector, and are most likely to be in the most precarious, low-paying informal jobs.
- Climate change: Informal settlements built out of “formal” institutions increase risk from most climate change impacts, such as rising temperatures and sea levels. A high proportion of the population living in informal settlements works within the informal economy, as these workers are often excluded from services such as obtaining legal residence.
What are the social consequences of informality?
- Self-employed work can lead to long hours with no benefits, hazardous working conditions and irregular income.
- Lack of training and technology can reduce skill levels, reduce access to information and reduce productivity.
- Without a formal employment contract, workers are not protected under labor law and have no social protection.
- Many countries and regions with high levels of informal labor also have high levels of poverty.
- Lack of access to worker representation and trade unions based on the fundamental principle of ETI Fundamental Regulation 2: Freedom of Association
Social justice issues in the informal economy
- due diligence: Companies conduct risk assessments that measure a company’s social and environmental performance. However, due to unaccountable workers in the gray economy, visibility is minimal and cannot penetrate further down the supply chain, including outsourced and subcontracted work.
- Supply chain visibility: In some cases, home-based workers at the bottom of the supply chain are the most vulnerable workers and may be invisible at the top due to subcontracting and lack of written contracts.
- Purchasing practices: Poor purchasing practices, such as last-minute changes, can lead to shorter lead times for suppliers. This pressure on suppliers has led to a lack of visibility in the informal sector and an intensification of work leading to unauthorized subcontracting. This could result in mandatory unpaid overtime.
- climate change: Migration in response to climate impacts can lead to increased displacement and forced migration in the face of life-threatening risks. This can occur within or across national borders. In the absence of a clear strategy to support these people, they often rely on informal work as a means of earning income.
- COVID-19 (new coronavirus infection) As the recent ILO COVID-19 and Informal Economic Assessment revealed, the pandemic has worsened the situation of some workforces in global supply chains. Many roles within the informal sector have been severely affected by COVID-19, and the lack of formal protection has left people without income. Women, children, and migrant workers are particularly affected as they struggle to access their rights, including access to vaccines.
How can businesses improve standards in the informal economy?
- public promise: Make a public commitment to improve working conditions and include this in your statement on modern slavery and human trafficking.
- governance:Corporate governance and specific policies need to clarify what is actually happening in complex supply chains, especially at the bottom, where visibility is low and workers are most vulnerable, and actions and programs to address them. need to be designed.
- transparency: Map your supply chain, understand the tiers and the human impact of working at each tier, and understand characteristics such as gender, employment status, and fair employment law provisions.
- law: Understand how the laws of different countries affect formal employment. For example, in the UK, a temporary employee becomes a permanent employee after she has worked for 12 weeks and is entitled to the same rights as a directly employed person. This includes receiving the same salary as your permanent colleagues in the same job, automatic pension enrollment and annual leave.
- Supply chain risk assessment: Conduct risk assessments through human rights due diligence to understand how the informal sector impacts business and supply chains, including waste and recycling.
- responsible sourcingnt: Integrating human rights into procurement and production practices, including gender equality, freedom of association, and collective bargaining indicators for supplier selection.
- Adapting to a climate-resilient labor market: Governments and businesses must adapt to climate-resilient labor markets, including by providing adequate health care, education, and public services. Businesses invest in human capital that can increase the ability of communities, including indigenous peoples, to cope with the impacts of climate change, especially by empowering women and youth who are often the first to face high unemployment rates. is needed.
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