Labor Informality in Economic Thought

Shirley Benavides Vindas

The study of labor informality in the development of economic thought has been present directly and indirectly, discussed from the main approaches: the Marxist critique, critical or heterodox economics, institutionalism, and the political or ideological, among others; this demonstrates the need to evolve in the construction of this concept, as it is a topic generated by multidimensional aspects, some more complex than others, but which enable understanding its main determinants and consequences.

It is considered necessary to discuss the evolution of this term from a multidimensional level in the current context, transitioning from the conception of "outside the formal system" to a more integral vision that includes the absence of a series of fundamental rights and freedoms to avoid social and economic exclusion, which leads to a situation of precariousness.

Origins and Historical Evolution

We have moved from a Marxist vision, to a dualist approach of informal or traditional versus formal or modern, to others much broader and more integrative for its analysis, such as structuralists, legalists, voluntarists, institutionalists, survival theories, which mark paths that facilitate knowing the determinants and barriers that prevent the incorporation of the economically active population (EAP) into formalization with the advantages it presents.

Understanding its evolution also enables comprehending the changes in the labor context that have occurred over time, such as the technological revolution with its virtuality, which has generated various services like digital platforms that enable global freelancers without contracts or protection; aspects that lead to the discussion on the need to generate inclusive and quality jobs, as proposed by the ILO.

Therefore, explaining the evolution of the various approaches allows for a better understanding of informal work, the analysis of the effectiveness of public policies that seek to close inequality gaps, adapting the analysis to current environments, and why not, contributing to the existing theoretical discussion.

The development of some theoretical approaches, as chronologically as possible, will allow knowing their evolution over time, with their respective contributions to the evolution of the concept.

Modern Multidimensional Approaches

Although labor informality has generally been interpreted as an anomaly of economic development or a sign of institutional weakness, from a Marxist perspective, this situation does not constitute a system error, but an inherent expression of the capitalist mode of production, which allows precariousness; the exclusion and lack of labor rights that characterize informal work respond to structural logics that favor capital accumulation.

Marx presents a definition related to work that is worth highlighting: "By labor power or capacity for work, we understand the aggregate of physical and mental faculties existing in the living personality of a human being, which he sets in motion whenever he produces a use value of any kind." (p. 203); he refers to the "industrial reserve army," which allows capitalists to control labor conflicts and flexibilize the active labor market, reducing wages and working conditions—a situation that not only enables informality but also precarious employment, which is a functional form of appropriation of surplus value.

For his part, Keynes pointed out that the theory of effective demand explains involuntary unemployment in terms of insufficiencies in this demand, without explicitly mentioning informal employment as such; it explains that the level of employment is determined by effective demand, defined as the intersection of the aggregate demand function and the aggregate supply function. Therefore, insufficient effective demand creates unemployment problems, even though employment depends on the aggregate supply of employment.

Keynesian economists like Joan Robinson referred to the existence of "disguised unemployment," defined as "the set of inferior occupations performed by dismissed workers, where the term 'inferior' is associated with the low productivity level it presents; the principle of effective demand can generate unemployment, which constitutes the normal state of things, since the full employment assumption is not met. A reduction in effective demand causes a decrease in the employment level in industries, increasing disguised unemployment due to the absence of unemployment subsidies.

Institutions, Ideology, and Gender

Neokeynesian theory has made efforts to present, from the supply side, approaches that explain labor informality, such as the escape and exclusion theories, alluding to labor market imperfections as an effect of rational decisions by economic agents, leading them to enter informality, or due to the surplus labor released from one economic sector—basically the primary one—and the other two sectors lacking the capacity to absorb them, particularly due to low economic growth.

It should be noted that marginal productivity—the wage—is higher in the modern or formal sector than in the informal one, that the expansion of the modern sector, through the capital accumulation process, absorbs labor from the subsistence sector, increasing its surplus value and capital formation, which is interrupted when the labor surplus is exhausted, leading the excluded to informal labor in search of income generation options.

For their part, the dual labor market theory presented by Americans Doeringer and Piore (1971) provides a relevant theoretical framework to understand the structural foundations of employment segmentation and its relationship with phenomena like labor informality, indicating that labor is divided into two segments: a primary one with high wages, promotion opportunities, good working conditions, stability, versus jobs in the secondary market where it is the opposite of what was stated; the latter is the result of the exclusion of people from formal employment due to structural and economic barriers, enabling discrimination and poverty in that stratum of societies through informality.

From this perspective, labor informality can be interpreted as a concrete manifestation of the secondary market, through structural segmentation of the labor market, where large sectors of the population such as youth, women, and workers with low education levels or in migrant conditions are located. From this perspective, informality will not disappear merely through the imposition of norms or incentives for formalization, but requires deeper transformations: industrial policies that increase productivity, labor inclusion strategies, and improvements in education and training.

The International Labor Organization (ILO) in its International Conference of Labor Statisticians (ICLS) (2003) presents a classification of the informal sector and employment, defining the informal sector in terms of production units as units of observation, while the concept of informal employment refers to jobs as units of observation.

For the ILO, labor informality is analyzed as a multidimensional phenomenon, including both unregistered employment and poor working conditions affecting informal workers; therefore, it not only refers to unregistered employment but also to decent work, which it has characterized as fulfilling people's aspirations during their working lives through productive employment that generates a fair income, workplace safety and social protection for all, better prospects for personal development and social integration, freedom for individuals to express their opinions, organize, and participate in decisions affecting their lives, and equal opportunities and treatment for women and men.

Another approach is the imperfect transaction model, through which labor informality is understood from Williamson's (1975) transaction cost theory, linked to the new institutional school approach, which states, within the framework of the imperfect transaction model, that labor informality is the result of information asymmetry and transaction costs, as well as lack of trust between employers and workers, as this situation can lead to limiting formalities and boosting the informal sector of the economy. This model allows analyzing labor informality beyond economic marginalization; it also takes into account institutions, in their efficiency and transaction costs, enabling a vision beyond economic growth.

The 1998 Nobel Prize in Economics winner for Development and Freedom, Amartya Sen (1999), defines development beyond economic growth, but as the expansion of capabilities and freedoms that provide people with real opportunities. The reduction of workers' real choice freedoms about how and where they want to be employed excludes them from the possibility of formalizing; an economy with high informality can have growth, but if it does not expand freedoms and capabilities, it is not true development, according to this approach.

For his part, North (1990), another Nobel Prize in Economics winner, demonstrated the importance of institutions as generators of the rules of the game in an economy for its development. Therefore, institutional quality in a given territory enables or not labor informality, by not adequately regulating or protecting workers' rights. In neo-institutionalism, labor informality is part of the result of deficient or non-existent labor-related institutions that fail to protect workers or ensure compliance with labor rules of the game; institutions define resource distribution, how inclusive or exclusive it is, directly impacting social development and equity.

To the above are added researchers Acemoglu and Robinson, also 2024 Nobel Prize in Economics winners, who provide a clear path to demonstrate that labor informality is stimulated not only by individual or business factors but also by structural barriers of institutions that generate asymmetries in the labor market; its reduction requires deep transformations in political and economic institutions, guaranteeing opportunities for economic growth and development for the entire society.

For its part, from labor economics, which predominates some foundations of the classical and neoclassical school, informality is understood as employment not subject to the same compensation, stability, or security norms as formal employment. Informal workers are forced to operate in this sector due to labor market distortions, so informality is the result of a worker adaptation process in the face of restrictions imposed by regulations that generate market failures. It is a structuralist approach that differentiates labor sectors within the labor market; the informal becomes the outlet for income for workers excluded from formality, which according to the author leads to the dualist vision and the integrative of it; generated because the formal labor market lacks the capacity to absorb all available labor force due to lack of better economic growth. This suggests that informality is a consequence of insufficient economic growth and structural restrictions.

Toward Inclusive Policies

For the survival model and the submerged economy, it conceptualizes informality as a survival strategy for those who cannot access formal jobs due to lack of alternatives in the formal labor market; for Schneider and Enste (2000), informality is a form of adaptation to economic exclusion and lack of opportunities in the formal sector, being the option for generating their income, with some effects on the formal economy, such as:

The Global Commodity Chains (GCC) theory developed in the 1990s by American sociologist and economist Gary Gereffi provides an analytical framework that can be applied to understand how labor informality can arise or persist in economies inserted in productive globalization processes, a situation that can lead to hiring informal providers or small production units that do not comply with labor regulations, stimulating labor informality as part of a competitiveness strategy in global chains, facilitating precarious conditions for workers, such as the absence of formal contracts that exclude basic labor rights.

From the [Escape and Exclusion Theory] of the World Bank, Maloney and colleagues (2007) indicate that informality is a multidimensional phenomenon, as agents interact with the State along several dimensions, creating a large gray area between the extremes of full compliance and non-compliance with laws, and it is examined through two perspectives: the "exclusion" and the "voluntary" views. In the exclusion view, workers would prefer the benefits of formal jobs but are excluded from them due to labor market segmentation and institutional rigidities, but—again—it can arise from economic dualism, labor mobility barriers (geographic or informational), efficiency wages, or coordinated evasion of sales and payroll taxes. In contrast, the voluntary view suggests that informal jobs essentially reflect workers' implicit decisions, given their preferences, skills, costs and benefits of formality, and availability of other social protection means.

It is relevant to note that labor market rigidities are not generated exclusively by the government; the business park can contribute to them through hiring restrictions, for example, age, gender, skills, place of residence, among others. Those excluded by such entry barriers to the formal labor market will try to generate income, and the informal market will be their option.

For its part, the relationship between gender and labor informality is worth highlighting, which reveals a critical dimension of the structural inequalities that persist in contemporary labor markets; but the determinants and characteristics are different according to sex; for women, they tend to be part of informal employability due to aspects such as culture, their family care role, among others, which lead them to perform low-productivity income-generating tasks; a situation that induces them toward precariousness and absence of social protection.

Another interesting approach to mention refers to the view held by Pope Francis, who convened the Encounters of Popular Movements, where he highlighted the 3 T's: Land, Roof, and Work; in this framework, he stated that the economy should not be one of exclusion and inequity where money reigns instead of serving. That economy kills. That economy excludes; it should not be a mechanism of accumulation but the proper administration of the common home; he stated that true inclusion is that which provides dignified, free, creative, participatory, and supportive work.

As exposed in the tour of the various theoretical approaches, the determinants of informality can be multidimensional, and of course, they are permeated by ideological traits at various levels of their idea proposals about what the economy and society as a whole should be; from this, there is a direct convergence on how labor markets are conceived and their role in productive activities and the market in general; ideology is relevant.

From critical Marxism, informality as a form of capitalist exploitation through the industrial reserve army, linked to a capital strategy to appropriate surplus value, providing "flexibility" or "autonomy" to workers. In Post-Marxism, P. Bourdieu's position, for example, reaffirms ideological hegemony, and the informal worker internalizes that symbolic domination, with which the system justifies precariousness, for example, with the discourse of "autonomy" to hide exploitation relations. Ideologies influence how subjects interpret their own labor situation; the idea of "self-employment" in informality is often part of an ideological construction that justifies the lack of rights as freedom and holds the individual responsible for their situation.

On the other hand, for utilitarianism in maximizing economic efficiency, social insecurity, inequality, and suffering can be generated; as Amartya has exposed with his capabilities approach, linking it to the lack of real freedom to choose ways of life in all planes, including the labor one. Informality implies a way of making the worker invisible and devaluing them, denying them social recognition as a subject of rights and contributor to the common good, pushing them into precarious conditions.

For its part, neoliberalism, as an economic and political ideology, informality is often seen as a form of "individual entrepreneurship" that provides an option in the face of unemployment, enabling labor flexibilization but outside regulation; the same Harvey, D. (2007) argues that neoliberalism restructures work, dismantling labor protections and promoting precariousness. Classical liberalism of Locke and Smith, and utilitarianism, consider informality as a solution to excess regulation: the informal worker is free, autonomous, and entrepreneurial.

Therefore, this labor condition present in many economies, especially in developing countries, should not only be analyzed from economic logic, since the orientation of institutions—public policy in its design, execution, and control—are conditioned by ideological frameworks that guide them, but from a more integral approach that includes the ideology dominating the studied society. Another group of ideas is found in what neo-institutionalism proposes, related to the effectiveness of institutions, which play a key role in shaping the labor environment; if they are inefficient or corrupt, or extractive, in the words of Robinson and Acemoglu, they limit the State's capacity in its execution and oversight to provide labor rights, which can foster informality.

Of course, the execution of institutions is not neutral; it is permeated by the dominant economic ideology of the type of government in which it is immersed; in liberal ideologies, informality is interpreted as a result of excessive regulations with high costs for labor formalization, accompanied by institutional rigidities; therefore, the role of the State, according to liberals, should focus on reducing and flexibilizing barriers to labor market formalization.

At the other ideological extreme, where the State is conceived as interventionist, informality is the result of systemic exclusion, because informal workers do not choose to be outside the system but have been marginalized by an economic model that fails to generate sufficient quality jobs, as exposed in the previous section; from this ideological angle, the State is responsible for guaranteeing labor rights and generating active inclusion and quality employment policies; for this, its regulatory institutions will be strengthened and will tend to provide social benefits access to the informal sector.

Therefore, it could be pointed out that there is a link between institutions and the dominant ideological framework, which governs both the interpretation of informality and the proposed solutions to this situation, which can become precarious for a part of society in that employability condition; hence the importance of taking it into account in a deep analysis of informal employability in the labor market.

The ideology of a country or territory serves as a fundamental platform to generate the institutional conditions that enable or limit labor informality, in any of its forms, and if stimulated, it can lead to the precariousness of a part of its society.