Kenyan employees working in an informal "nyama choma" eatery
In emerging economies, the informal sector plays a crucial role in the operation of labour markets. While job creation is often seen as a measure of success, it is critical for any developing nation to create a robust job market more inclined to employ labourers in the formal, rather than informal, sector. In 2019, the East Africa Institute of the Aga Khan University released a report based on a study they conducted investigating job entry level skills for youth in the formal and informal sector. The Survey looked at 24 counties across the country and revealed some interesting insights into the impact that each sector has within context of its locality’s labour market.
The report defines the formal sector as part of the economy that encompasses all jobs with normal hours and regular wages, and are recognised as income sources on which income taxes must be paid. Contrastingly, the informal sector involves all remunerative work (i.e. both self-employment and wage employment) that is not registered, regulated or protected by existing legal or regulatory frameworks, as well as non-remunerative work undertaken in an income-producing enterprise. Informal workers do not have secure employment contracts, employee benefits, social protection or representation.
The Unofficial Economy and Economic Development, a working paper by Rafaela La Porta and Andrei Shleifer, highlights three broad views on the impact of informal work as it pertains to economic development. First, the “romantic view,” where the informal sector is considered a reservoir of the potentially productive formal firms that are kept out of formality by government regulations. Second, the “parasite view,” where informal firms are productive enough to survive in the formal sector but choose to remain informal in order to earn higher profits from the cost advantages of failing to comply with taxes and regulations. Lastly, the “survival view,” where the informal sector is a survival strategy for low skilled individuals who are deemed “too unproductive” to ever become formal.
Economic Survey Report of 2019 identifies informality as a prominent feature in the Kenyan economy. The high absorption of workforce in the informal firms and the potential to create employment opportunities could therefore be an indication of truth to the romantic view: that the informal sector could be a reservoir of potentially productive firms that play a very big role in economic development, especially through job creation, but are kept out of formality by government regulations.
Despite the prominence of informality in the labour market, the earnings differentials between the formal and informal sector are quite daunting, with
74 per cent of entry level staff in the formal sector earning between KES 10,001 – 50,000 (USD 100 – 500) per month, whereas 81 per cent in the informal sector earn a monthly income of between KES 5, 001 – 25,000 (USD 50 – 250).
The Regulation of Wages (General) (Amendment) order 2018 states that the basic minimum monthly wage (exclusive of housing) for employees in Kenya’s main cities (Nairobi, Mombasa and Kisumu) must be 13,572 KES/month and 7,240 KES/month in other [more rural] areas. Although the findings reveal that formal sector earnings are consistent with this guideline, the informal sector still seems to lag behind in complying with regulations. As a result, employees in the informal sector, compared to their counterparts in the formal sector, will not only be deprived of the right to earn a competitive wage, but are also subject to employment insecurity, work insecurity and social insecurity.
Time and time again, data shows that there is a high likelihood of informal firms following the parasitic view, where a firm could be productive enough to survive in the formal sector but chooses to remain informal to unfairly compete. While detrimental to the economic and social development of the country, the parasitic nature of this model does most damage to staff who are underpaid and often overworked with little recourse to redress as they are informally hired on a day-to-day or hour-to-hour basis.
On the other hand, while educational attainment had a higher premium in the formal sector, the Kenyan workforce reveals a homogenous sequence in the level of technical/post-secondary training across the formal and informal sectors. Among skilled employees,
51 per cent of formal and 40 per cent of informal employees have attained either a diploma or a certificate as the highest level of professional training. The fact that entry level staff in the informal sector possess high level skills contradicts the aforementioned survival view.
In conclusion, the data shows that
formal organisations enjoy 1.8 times more longevity and sustainability compared to businesses in the informal sector. Ultimately, there is a need for economic policies that bolster formalisation of potentially productive informal businesses, while at the same time ensuring adherence to labour laws to safeguard the welfare of skilled employees in the informal sector.
Mercy Karumba is an EAI research assistant conducting research on youth and employment in Kenya’s formal and informal sectors.