Since its ‘discovery’ in the early 1970s by Keith Hart (1973), the informal sector has often been viewed as a sphere of the economy that is distinct from the formal sector.
There have, of course, been a number of insightful contributions (e.g. Tokman 1978) highlighting the linkages between the formal and informal spheres of the economy. In the policy arena, however, it is often the case that these are seen as two distinct, and unrelated aspects of the economy. In this article, based on evidence from South Africa, it is suggested that a deeper and more systematic analysis of the nature of economic linkages between the formal and informal economies is critical for appropriate policy responses to the changes occurring in labour markets, particularly the growth in informal employment.
There are two strands of the literature on the informal sector that do consider the issue of relationship between the formal and informal. First, that concerned with defining the informal sector, which often defines the informal sector in relation to formal sector enterprises. The informal sector is easier to enter, has smaller enterprises using different and more indigenous technologies and is less skilled and regulated than the formal sector. Second, and related, the literature has been concerned with the structural relationship of the informal sector in relation to the rest of the economy. In the 1970s, Marxists were concerned with whether the informal economy constituted a reserve army, or was ‘petty commodity production’. More recently, with the growing interest in microentrepreneurship especially among neoliberal economists, the emphasis has been on issues of regulations in the formal sector and the growth of budding entrepreneurs in the informal economy, supposedly free of the regulatory burden that exists in the formal sector.
The emphasis in this article is not on these longterm structural relationships. Rather, using South African data, it explores short-term economic interactions, movements and linkages between the formal and informal sectors. The ILO (2002) estimates that informal employment typically comprises somewhere between 50 and 75 per cent of non-agricultural employment in developing countries. It is suggested here that the interactions and linkages between formal and informal work need to be more central to the social protection policy agenda in developing countries.
This article comes from the IDS Bulletin 39.2 (2008) Informal Employment, Labour Markets and Social Protection: Some Considerations Based on South African Estimates