Seven Transformations for More Equitable and Sustainable Cities

Image: WRI Ross Center for Sustainable Cities

Image: WRI Ross Center for Sustainable Cities

World Resources Report

Chapter 9

Informal Urban Employment – Recognizing and Supporting Informal Workers

Informal economic activities must be supported because they not only provide livelihoods for the working poor but also supply goods and services that keep the city’s formal economy running. Transforming urban employment policies to recognize the hidden value of informal employment and support informal workers can increase their well-being and boost the economic resilience of cities.

 

9.1 What Must Change and Why

Informal work is the cornerstone of the global South’s economies

Worldwide, 2 billion workers operate in the informal sector, representing more than half the urban workforce in the global South. Informal workers supply many of the goods and services that keep cities running, “holding up the world” like the mythical giant Atlas, yet they are largely invisible to city administrations, and their working conditions remain unsafe and insecure.311

The informal sector refers to the production and employment that takes place in unincorporated or unregistered small enterprises.312 Informal employment is employment without legal and social protection, both inside and outside the informal sector.313 The informal economy encompasses all units, activities, and workers defined as such and the output from them.314 These terms are often used interchangeably and imprecisely, yet it is clear that together, informal workers and enterprises form the broad base of the global workforce and economy.

Voices: Martha Chen on the critical role of informal workers


Although most economic theorists predicted that the informal economy would decline as countries developed and urbanized, this has not happened. On the contrary, the informal economy has persisted and is growing and generally thrives in cities alongside robust formal sectors. The poor and women make up a disproportionate share of the informal workforce and may need to take these jobs because they have lower levels of education.315 Many informal jobs trap workers in poverty and provide little protection or security.316 But although the informal economy is often associated with poverty, it is important to acknowledge its diversity and the fact that some workers choose informal work over other types of formal low-skilled jobs.317 For now and the foreseeable future, the informal economy will remain a key factor in the well-being of the urban economy as a whole.318

Informal workers generate income, consume goods and services, and create jobs for others. Although the informal economy does not typically generate tax revenues for the city, many governments charge informal vendors for day licenses, permits, and operating fees and levy other kinds of taxes and penalties. Contrary to common perception, informal and formal enterprises seldom operate in isolation and are actually often mutually dependent.319

Whether they sew garments, drive minibuses, cook and sell food, pick waste, construct buildings, or run small manufacturing businesses from home (see Figure 29), informal urban workers play an essential role in the economies of the global South.

Figure 29 | Informal workers in India play a significant role in key sectors of the urban economy

Source: Chen and Beard (2018), using data from Chen and Raveendran (2014).

Though it is vast and vital to both the urban poor and the cities where they live, the informal sector has received relatively little attention. Much past research has focused on strategies for boosting formal sector productivity in cities as a pathway out of poverty.320 The World Bank identifies institutions and regulations, infrastructure and land (which includes urban services), skills and innovation, and enterprise support and finance as the four categories of interventions needed for “competitive cities,” but their study does not explore the role of the informal economy.321 Cities with large informal sectors have also tended to ignore them, push them out of sight, treat them as a liabilities, or get rid of them. Many have barely any data on informal employment, and the interlinkages with and contribution to the formal economy are not widely recognized.322

Our research aims to help fill this void. It underscores what a growing number of economists have come to believe: the informal sector is not just a problem to be solved by “formalization” but an opportunity to improve livelihoods and prosperity for all. With the right kinds of support, it can raise productivity and incomes for the poorest workers and generate additional benefits citywide.323 Affordable and reliable services are a key component of that support. Currently, informal workers suffer disproportionately324 from poor access to infrastructure and services,325 making it more difficult for them to connect to inputs and customers, avoid interruptions, and eke out a livelihood. Being under-serviced multiplies the costs of getting and treating water, managing waste, and generating or buying power. It can hit small, cash-poor operations the hardest. In some African cities, for example, households and small businesses lack access to electricity and water not because the service does not exist but rather because the connections are too costly.326

9.2 Priority Actions

A. Quantify the contributions and challenges of informal workers

Local officials must collect, analyze, and incorporate into official planning better data on the true extent of informal work and its importance to the city as a whole. Data from Mukuru, one of Nairobi’s largest informal settlements, indicates it has a robust informal economy comprising over 20,000 independent and undocumented small-scale service providers who generate almost $64 million (approximately 7 billion Kenyan shillings) annually. It supports both local livelihoods and the economy of the entire metropolitan region, representing a fifth of the total revenue of the Nairobi City Council for the 2015/16 fiscal year and about 4 percent of the Kenyan government’s annual national budget.327

Dharavi in Mumbai—often considered Asia’s largest slum—has an active informal economy with about 20,000 small-scale manufacturing units and household enterprises producing leather, textile, and pottery products exported around the globe with an annual turnover of over $1 billion.328 These enterprises provide livelihoods to slum residents. Reports show that 60 percent of Mumbai’s segregated waste is processed in Dharavi, which is home to almost 30,000 waste pickers, and indicates the vital role this informal settlement, which houses almost a million people, plays in managing solid waste in a megacity.329

A study on the contribution of urban informal settlement dwellers to India’s urban economy, which was based on surveys conducted in 50 Indian cities and comprising over 5,000 households, found their total contribution to be 7.5 percent of national GDP.330 The survey looked at a broad set of social, economic, and demographic issues in Indian informal settlements, considering incomes, expenditures, education, and living conditions, including their levels of access to services such as electricity, tap water, and sanitation. Across the 50 cities, one-third to half of all residents lacked one or more of these services, but in some of the lower-income Indian states, 80 percent of slum residents lacked these facilities.

Studies like this clarify two issues. First, not all workers living in informal settlements are “informal.” Some are indeed self-employed or own account workers, but others may be employed in formal or legal businesses but their productivity and quality of life are affected by the absence of basic services in informal settlements. Second, those who are informal workers produce the goods and services that benefit the formal local economy, and as such, their lack of access to services and poor living and working conditions have high shadow costs for the economy, with negative impacts on well-being and economic resilience. Detailed surveys, such as the studies mentioned here, can help assess the value generated by otherwise invisible and uncounted informal workers and enterprises located in informal settlements and then bring it to the attention of decision-makers.

B. Stop the exclusion of informal workers from city life

Cities can begin by acknowledging the legitimate value of informal and home-based workers—not harassing or penalizing them—and by ensuring they are granted the same rights as other workers. These rights include legal recognition, economic and social rights, access to core infrastructure and services, social protection, and better representation in city decision-making (see Figure 30). Legitimacy brings the invisible giant—the large number of informal workers—into plain sight.

Urban governance attitudes have too often been shaped by traditional measurements of labor productivity and economic development, which do not recognize or capture the value of the informal economy in the global South. They obscure its importance to the livelihoods and well-being of all city dwellers. A different formula, one that factors in the value of shared opportunities and resilient livelihoods for all citizens, would change these calculations. Recognizing the informal sector’s importance and better meeting its needs can help achieve its potential.

Figure 30 | Cities can support informal workers in various ways for a more inclusive economy (illustrated by three categories of informal workers)

Source: Chen and Beard, 2018.

In Indian cities such as Surat and Ahmedabad, the Mahila Housing Trust has tried this approach by negotiating with city agencies and leveraging city funds on behalf of informal workers. These funds have been used to upgrade housing conditions and access solar energy technologies to run refrigerators, soldering irons, and sewing machines for home-based businesses. These changes have raised incomes, saved money, and lowered energy consumption.331 In Bangkok, an organization of home-based and other informal workers called HomeNet negotiated with the Bangkok Mass Transport Authority to extend service to the outskirts of the city where most informal workers reside, giving them access to inputs for their products and markets to sell them.332

Transformation 2 provides more examples of how cities across Argentina, Brazil, Colombia, and India have altered their employment practices to contract previously informal waste pickers and their cooperatives for door-to-door waste collection as part of municipal solid waste management systems.333

C. Expand access to public spaces, services, customers, and social safety nets

Legal recognition and full acknowledgment of the rights of informal workers implies a full and fair expansion of the benefits of urban living to include all city residents. Government should:

  • Provide core public services such as electricity, water, and sanitation to informal workers to make their home-based and other workplaces more productive
  • Grant regulated access to public spaces for informal workers to pursue their livelihoods (while balancing the interests of other users of these spaces, such as pedestrians who need to use sidewalks)
  • Allow informal worker organizations to compete for public procurement to increase demand for their goods and services
  • Extend social safety nets to informal workers
  • Promote access to credit for informal workers and their organizations

Examples from cities across the global South illustrate how these steps can improve informal workers’ earnings, well-being, access to opportunities, and economic contributions.334 For example, a number of cities have opened more space for street vendors. Informal worker groups and NGOs engaged with India’s Ministry of Urban Development, which led to the adoption of a national law to recognize and protect street vendors and identify designated zones for them to operate.335 The cities of Bhubaneshwar, India, and Durban have worked with local NGOs and informal worker groups to create designated zones in public areas and improved markets for street vendors, acknowledging their important role in each city’s economy.336

City governments have also offered procurement opportunities. In India they have begun working with the Self-Employed Women’s Association, a trade union with 1.5 million members, to give self-employed women jobs that provide core public infrastructure services. The partnership is organizing workers and linking them to specific city government departments responsible for sanitation, water, electricity, and housing. Since these cities lack the budgets and investment capital to meet the demand for services, employing these informal workers fills unmet needs, creates employment, fosters more inclusive cities, and saves money that would otherwise have to be spent on hiring city staff to manage service delivery.337

As COVID-19 has made all too clear, informal workers need social safety nets, just as other workers do.

In response to the pandemic, the World Bank has allocated $1 billion to improve social safety net programs for the urban poor in India, and the Indian government is creating the National Database of Migrant Workers to better target assistance to the numerous migrant and informal workers affected by the pandemic.338 In 2020, Nigeria committed almost $200 million as part of a survival fund to compensate informal workers, including transit operators idled by the COVID-19 pandemic.

In Lesotho and Vietnam, unemployment benefits have been expanded to workers in the informal sector.339 Many countries have expanded their cash transfer programs, with most Latin American countries, including Bolivia and Colombia, explicitly including informal sector workers.340 In one case in Brazil, the city of Maricá has gone even further, providing additional payments to those with lower incomes.341 Programs like these, which are typically more prevalent in rural areas, also need to cover urban informal workers to protect their lives and livelihoods and, in doing so, protect the economic resilience of cities.

We argue that informality is not an anomaly or a transient phenomenon but rather is the very essence of contemporary urbanization in the global South; therefore, urban policies need to be developed from this perspective.342 Trying to formalize the entire informal sector quickly is not feasible, realistic, or necessarily desirable. National governments should make it easier for informal enterprises and workers to join the formal economy if they want to. National governments can provide legal standing to informal enterprises and self-employed informal workers. Legal standing might require them to pay taxes; yet in return, they would no longer need to pay daily bribes or other fees and penalties to be able to operate. They would gain security and more reliable income. Simplifying complex business registration regulations could at least give informal business operators choices.343 Studies show that reforming employment practices to make it easier to register a business can boost employment because larger informal business owners will formalize their businesses and smaller business owners and daily wage earners are likely to shift to formal jobs.344

More inclusive cities recognize the legitimacy of informal workers and grant them the rights to which other urban workers are entitled. Acknowledging the current and potential contributions of the informal workforce is necessary for achieving greater prosperity citywide. Table 5 lists the actions and roles required of different actors to move Transformation 4 forward.

Table 5 | Roles of specific actors in advancing Transformation 4: Informal Urban Employment

Informal Urban Employment—Recognizing and Supporting Informal Workers

City Government and Urban Sector Specialists

  • Recognize the challenges of different types of informal workers and the value they generate in the urban economy across sectors
  • Increase the access of informal workers to public spaces, services, procurement opportunities, and social safety net programs
  • Grant informal workforce the same rights as other urban workers: legal identity and standing, economic and social rights, organization and representation, social protection, and access to core infrastructure services.

National Government

  • Reform laws and regulations to support informal workers with easy business registration procedures and social safety net programs, and penalize their harassment
  • Gather data on informal and migrant urban workers, by sector, including their working conditions, wages, and contributions to output in different economic sectors
  • Ensure taxation programs are progressive and transparent and account for the informal taxes and operating fees informal workers already pay
  • Create incentives for cities to offer public procurement contracts for services such as waste management to informal worker organizations with a path to formalization and benefits
  • Engage informal worker organizations when setting policies in sectors in which they are employed, and support them in negotiations with local governments

Civil Society, including Nongovernmental Organizations, Experts, and Researchers

  • Work with city government to increase the access of informal workers to public spaces, public services, and public procurement opportunities
  • Advocate for a more inclusive vision of economic prosperity, so that it is shared across all who contribute to the workforce
  • Ensure equal employment rights and security for informal workers, including social and fiscal safety nets in times of crisis and disasters
  • Support and facilitate participation of informal workers groups in urban decision-making that affects their lives and livelihoods

Private Sector

  • Recognize the contributions of informal workers to the overall economy, including formal business and output, and penalize their exploitation
  • Partner with informal small entrepreneurs to invest in and scale local innovations
  • Comply with wage laws and offer paths to formal employment and reliable livelihoods with benefits and insurance schemes
  • Include informal workers in supply chains for goods and services and provide reliable business to support their livelihoods
  • Create and operationalize innovative credit instruments in the banking sector for informal workers and businesses investing in informal settlements, thus fostering financial inclusion

International Community, including Development Finance Institutions

  • Develop financing programs that help cities integrate informal workers into formal employment and service delivery systems, with social and fiscal safety nets, health benefits, and secure livelihoods
  • Incentivize a change in mindset to acknowledge the implications and contributions of the informal economy
  • Design programs that ensure economic gains are distributed for shared prosperity, ensuring access for all citizens to the full range of opportunities the city offers

Source: Authors.