Trade and Employment From Myths to Facts - International Labour ...

Chapter 4: Trade and the informal economy
pany. However, the contemporary era has seen an unprecedented increase in casual
labour employed in a range of rights-less contracts and appalling working conditions.
This chapter presents studies that attempt to conceptualize and formalize how
trade and trade liberalization influences the informal economy, and how the informal
economy impacts on the potential of a country to benefit from international trade.
In this chapter, the term informal economy refers to “all economic activities by
workers and economic units that are – in law or in practice – not covered or insufficiently
covered by formal arrangements” and thus it includes self-employment in
the informal economy and paid employment in informal occupations. Casualized
and precarious work within the formal economy is therefore also included.
The informal economy has been addressed in this chapter in terms of three approaches,
namely dualistic, legalistic and structuralist. Theoretical studies on the impact
on the informal economy have emerged with varied conclusions depending on the
assumptions they have used. Many studies find, however, that trade liberalization
leads to an increase in the size of the informal economy. The impact on wages in
the informal economy is less clear and depends on the specific assumptions in the
model. One critical element is the mobility of capital. If capital can flow between
the formal and the informal sectors, trade liberalization is likely to lead to higher
wages in the informal sector. On the other hand, wages come under pressure if capital
is not mobile.
Several econometric studies, mainly from Latin America, confirm a statistically
significant link between trade and informality. Although the causality is not unambiguous,
liberalization policies may have created incentives to cut costs by registered
firms and to outsource into the informal economy. The identified impact of trade
on informality is, however, small in most studies. For Brazil, studies failed to find a
significant impact. In Colombia, trade increased employment in the informal sector,
and in Mexico studies show that trade liberalization has led to formalization. Hence,
one could conclude that the trade composition, supply capacity, details of the trade
liberalization scenario and other specific circumstances, such as labour market conditions,
determine the direction of the impact of trade on employment. Labour
markets that facilitate adjustment processes, low administrative barriers, capital mobility
and certain forms of regional trade integration are among those circumstances
that may support formalization of the informal economy.
Empirical ex post studies have also reviewed standard trade theories and indicate
that, contrary to traditional theses, trade liberalization does not necessarily lead to
rising welfare of unskilled labour. In general, it has been shown that the impact of
trade on the informal economy cannot be separated from the impact on employment
as a whole. Development in the informal sector is linked to the overall impact that
trade has on employment.
This chapter also presents ex ante approaches to observe the impact of trade on
the informal economy. Ex ante studies have tried to anticipate the likely impact of
trade on informal production, employment and wages. An advantage of these CGE
models is that they cover the whole economy and are thus useful instruments if
effects from trade policy changes spread into all sectors and if second-round effects
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