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INFORMAL ECONOMY

Recent studies estimate approximately 60% of the world’s population earns their wages in the informal economy. Focusing on the prevalence of informal work across Africa, Latin America, and South Asia, analysts frequently advocate for a transition to the formal economy in these regions as part and parcel of development goals. But increased attention on informal work in the US and Europe has complicated how the informal economy is defined across both high-income and low-income nations.

In the introduction to his co-edited 2000 book, sociologist FARUK TABAK considers informalization through a long term, world-systems view.

From the text:

“From the late 1960s to the 1980s, the interest in and literature on the informal economy grew almost exponentially—as did the informal economy itself. The term informal economy originally referred to that great mass and realm of economic activities and transactions lying outside official accounting, more by default than design (at least initially). And during the opening decades of the post-1945 period, its overwhelming presence in what was then referred to as the developing world was no surprise. Indeed, the informal economy was considered one of the developing world’s defining characteristics; the failure of these transactions to show up in official statistics was attributed mainly to the inability of state apparatuses to compel compliance and thereby reinforce relations of rule. In fact, in modernization theory, administering and overseeing the eradication of the informal realm was a political priority for buttressing relations of governance. It was a forgone conclusion that once these relations were solidly (re)established, the informal realm would steadily yet inexorably be brought under strict statal regulation.

This paradigm reigned as long as informalization remained an attribute of the periphery, but was eventually undermined by the equally relentless pace of informalization in the core zones after the 1970s. As the research suggests, the inability of state apparatuses to effectively administer and regulate a wide and growing range of productive activities conducted within their jurisdictions contributed to the spread of the informal economy. At other times, a state’s unwillingness—not necessarily its inability—to police these activities and transactions was the most salient determinant. In certain locales, corporate restructuring swelled the ranks of of the informal sector by farming out the production of goods and services formerly produced in-house. In other locales, massive rural-to-urban migration and the resulting urban demographic explosion precipitated and sustained the process of informalization. Moreover, state bureaucracies in the periphery—the very agencies expected to preside over the demise of the informal sector—resorted to hiring and farming-out to firms and enterprises in the informal sector as they administered “public” enterprises. Yet the multiplicity of processes underlying informalization and the inability to identify a single cause does not mean the concept or the term itself should be dispensed with in toto. A narrow focus on the variety of the processes underlying the informal economy overlooks the sheer magnitude and cumulative significance of these activities in the functioning of the capitalist world-economy.”

• A previous JFI Sources examines the International Labor Organization’s attempts to quantify the informal economy in the “developing world.” Link. And Saskia Sassen’s 1997 article looks to the US to understand informalization, asking “whether these systemic conditions in advanced market economies in the post-fordist era are also engendering a new dynamic of informalization in the Third World along with older dynamics.” Link.
• Zoran Slavnic rejects the notion of separate informal and formal economies. Instead, “All economic actors are increasingly ready to adopt informal economic strategies.” Link. Martha Alter Chen comes to a similar conclusion, finding “most informal enterprises and workers are intrinsically linked to formal firms.” Link.
• “The common impression that the devaluing of labor is a function of globalization and competition from lower-cost producers in the global south does not appear to be the case.” James DeFilippis, Nina Martin, Annette Bernhardt, and Siobhán McGrath examine informal work in Chicago and New York, finding that the bulk of labor violations occur in industries that serve local consumption. Link.

NEW RESEARCHERS

Economic Geography in the Spanish Empire

PhD Candidate in Economics at Universitat Pompeu Fabra and the Barcelona GSE SEBASTIAN ELLINGSEN studies economic geography and trade using spatial data. In a 2020 paper, Ellingson examines market access and economic activity in the Spanish Empire following reforms that opened up direct trade to Europe.

From the paper:

“The spatial distribution of economic activity depends largely on market access and history, but countries differ greatly in the extent to which their geographies reflect these two determinants. What explains these differences? To study these questions, I exploit a large-scale historical experiment: the expansion of direct trade with Europe in the Spanish Empire. To promote a comparative advantage in the extraction of bullion, early Spanish commercial policy severely restricted the direct trade of goods with Europe. However, driven by political developments in Europe, these restrictions were gradually lifted in the second half of the 18th century. While only four ports were permitted to trade goods directly with Europe in 1765, this number had increased to 50 by 1800. I find that the reform had large and heterogeneous effects on trade costs between Europe and the Americas. These changes in trade costs affected population growth and the incorporation of towns into the empire. These effects were substantially larger in localities with lower population density. Second, these effects were larger in the peripheral regions of the Spanish Empire, showing that the economic geography was much more sensitive to changing fundamentals in areas that were less densely populated. Finally, these effects were effect were larger in coastal areas. Consistent with these patterns, I show that the correlation between pre-colonial density and population density in the year 2000 is substantially smaller in areas more intensively treated by the reform.”

Each week we highlight great work from a graduate student, postdoc, or early-career professor. Have you read any excellent research recently that you’d like to see shared here? Send it our way: editorial@jainfamilyinstitute.org.

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• A new JFI report by Marshall Steinbaum examines the crisis of un-repayable student debt: “Student debt cancellation is inevitable, in part because it’s already happening: a larger and larger fraction of the loans originated in any given year are not going to be repaid at all, and many more will never be fully repaid.” Link. The report is the fourth in JFI’s series on millennial student debt.
• Join us on Tuesday, November 24 at 6 pm ET for the next meeting of the Social Wealth Seminar, featuring Phillip Rocco on Covid-19 and the crisis of American Federalism. RSVP to sws-reservations@jainfamilyinstitute.org.
• “We find that the significant drop in tax progressivity starting in the late 1970s is the most important driver of the increase in wealth inequality since then.” By Joachim Hubmer, Per Krusell and Anthony A. Smith Jr. Link. And a new Peterson Institute report compares inequality across high-income nations. Link.
• Till von Wachter examines the persistent effects of entrance to the labor market during an economic downturn. Link.
• “Elites can use the threat of desegregation to unite both wealthy and poor members of high-status groups against taxes, and weaken the bureaucratic capacity essential for tax collection.” Pavithra Suryanarayan and Steven White on taxation and bureaucratic capacity in American South during Reconstruction. Link.
• Mengzhu Zhang and Shenjing He on informal property rights and extralegal property systems in China. Link.
• A recent Census Bureau report using 2017 data finds that homeowners are nearly 89 times wealthier than renters, with median wealth at $269,100 for homeowners and$3,036 for renters. Link.
• Adam Storer, Daniel Schneider, and Kristen Harknett examine racial and ethnic inequality in service sector job quality, looking at precarious scheduling, firm segregation, and racial differences between managers and workers. Link.
• “Book production is one of the few more or less reliable guides to the long-term development of the European economy in this period, since it matches not only periods of growth and decline, but also regional patterns of economic performance. Whereas during the sixth and seventh centuries on average only about 120 books were produced annually in Western Europe, in the peak year of 1790 total production was more than 20 million books. Sociocultural factors—the spread of Christianity and the growth of the monastic movement—have had a major impact on growth during the first half of the Middle Ages; these processes lead to a cultural homogenization of Western Europe, with relatively low regional differences in per capita consumption and production. From the eleventh to twelfth centuries on, however, the market took over the role of the monasteries. Demand from cities and universities drove the continuous growth of the book industry in the late medieval and early modern periods. The long-term increase in book consumption also reflected the significant decline in book prices, particularly after 1454.” By Eltjo Buringh and Jan Luiten Van Zanden. Link.

Each week we highlight research from a graduate student, postdoc, or early-career professor. Send us recommendations: editorial@jainfamilyinstitute.org.