Date posted: July 27, 2008

The Informal Economy

The people in the top most photo are unemployed, yet they are obviously working. When you’re travelling through India you will notice a lot of people just hanging around. If a lorry stops and needs unloading they’ll lend a hand and earn a few rupees. If you’ve visited India you know that many people want to be your guide for the day. In Vietnam anyone with a motorbike doubles as a taxi driver.

It is estimated that only 40 percent of the working population in India has a formal job. It doesn’t really matter for the argument whether it is 30, 40 or 50 percent. The problem for the government is that only people with a formal job pay income tax. If the government wants to expand its investments in public services, it will have to increase tax revenue and that means increasing the number of people paying taxes in some form or another (income tax, value added tax, corporate tax, licences etc).

The people hanging around on the street, waiting for some small job to come by, are far from enviable and would rather have a regular job. Even many small entrepreneurs would rather have a secure factory job. Even though there may be enough regular work, businesses will not employ people to do the work, because they would then have to pay more because of the income tax involved not to mention the paper work.

In principle the workers could offer their services as self-employed entrepreneurs and afterwards write an invoice including VAT. Except that that’s intractable. The point is that, as it is, the system as a whole, by which I mean the economy and the social structure, works. As populations grow the system may begin to crack, for example because there are too many people hanging around and competing for the odd job, lending a hand where none is needed.

Jobs tend to emerge in new industries: the IT service industry, call centers, tourism, car manufacturing etc. As more people get a regular job the economy and the social structure change. Nobody will offer a hand if you’re unloading a truck in Central London, Paris, Amsterdam, Boston or Manhattan. Even though the road is blocked and everybody would be better off if the truck were to be unloaded quickly.

In service oriented economies such as the U.S. and Japan these kind of jobs have been incorporated within the formal economy. In many European countries these kind of jobs have simply vanished and the people who could do them are on unemployment or some other benefits.

In the U.S. when you arrive at a hotel someone will help you with your luggage. In Germany or the Netherlands don’t be surprised if the only receptionist just watches as you struggle to get through the door. In Japan someone will take your luggage from the airport shuttle and make a bow when it leaves. Yes, I’ve seen them do it. By that time another person will have hurried towards you to carry your luggage inside. As you’ll understand I stayed at good hotels.

In the U.S. bell-boys etc. rely mostly on tips for their income. In Japan the people who open the door for you when you enter a shop or restaurant are regularly employed and don’t expect a tip. In India the person who hands you a paper towel to dry your hands does expect a few rupees, but may not actually be employed by the restaurant. He may simply be allowed to hand out paper towels and thereby earn some money.

It could be argued that the countless parking space security officers not to mention the crossing guards in Japan and Hong Kong are a form of hidden unemployment. Their job prospects are slim and on the surface of it they don’t appear to add much economic value.

In countries such as Germany, Sweden or the Netherlands, taxes are high so as to pay for the social security system. In Japan costs are higher because companies employ people on a full-time basis to water the plants even though there’s only two that need watering every other week. For the economy as a whole it may not make much of a difference.

I find it hard to say which system is better. Each society functions in its own way. I tend to favour the Japanese and Hong Kong system, because the people in these jobs also fulfill a social function. Any verdict would have to take into account the social costs of vandalism, street violence etc. on the one hand and the benefits of the presence of attendants who may lend a hand, call an ambulance, guard your bag etc. on the other.

As always I’m taking a lot of shortcuts here since these are just some random ramblings.