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Tuesday, November 27, 2012

The precarious new world of 'informal' jobs


27 November 2012
Klaus Zimmermann

A new spectre is haunting the world economy - the spectre of informality.

The term describes people who are either working in informal arrangements with their employers or who are irregularly self-employed. In either case, these workers lack job security.

Until a few years ago, informal employment generally referred to the economies of the developing world. This is no longer the case.

In light of the staggering increase in youth unemployment in the "rich" West, informality has gone global. It is the inevitable result of businesses seeking more flexibility in the face of structural change and economic decline. With fewer job prospects in general, informality is affecting people in the middle and late stages of their working lives.

Both developed and developing countries have long aimed to provide more inclusive economic growth. What is different now is that it is the developing countries that are having an easier time realising this elusive goal. More and more of their citizens are reaching the middle class.

In the developed nations, by contrast, there is a growing sense of exclusion and frustration - from the "indignados" of Spain and the Occupy Wall Street movement in the United States, to the short-term contract holders in otherwise economically successful countries like Germany.

There is also a rising concern about whether the limits of growth have been reached in this part of the world.

Even in the ever-optimistic US, young Americans are moving back home in increasing numbers because they cannot find jobs after graduating from college. Reports in US newspapers about such ''boomerang'' kids are nothing new - but they used to refer solely to those in more dysfunctional economies like Italy's.

It is true that, purely in terms of jobs, Western countries may get some relief as a result of their declining birth numbers. As baby boomers retire in ever larger numbers, the odds are that young people will eventually find jobs.

But this hope may prove to be an illusion: There is not a lot of evidence to support the notion that jobs can be easily transferred from the old to the young.

HIGH TOLL ON THE YOUNG

Informality takes a high toll on young workers. Young people who begin their working lives with temporary or short-term employment start out with lower wages, and this lowers their lifetime earning potential.

While workers in their 20s do not tend to think about retirement, it is an undeniable fact that their retirement prospects are being short-changed by informality. These workers are also less likely to receive the schooling and training opportunities that formal-sector employers often provide.

The increasing level of informality in the West is driven, at least in part, by employers seeking to lower their costs by resorting to alternative but legal arrangements with employees. Not surprisingly, companies are doing what is best for them, not their workers.

This is another manifestation of the short-term thinking afflicting Western, particularly American, companies these days.

In order to reduce the cost of benefits, training and wages, many companies are inclined to overlook the long-term value of investing in their employees' skills and loyalty.

Obviously, the prolonged recession has hastened companies down this path. The question is: Will informality become too deeply ingrained in the system for it to change when better economic times return?

As dismal as the picture currently looks in the West, it is still a far cry away from the situation in many parts of the developing world. For example, only around 6 per cent of India's workforce is part of the country's formal economy.

Still, the important difference is in the direction of economic aspirations.
For over two centuries, they worked almost exclusively in the West's favour. But now, we find that the sense of optimism and economic security that long characterised the West is shifting to the rest of the world.

The developing world is becoming as economically dynamic as today's industrialised nations have been over the past century and a half. This rebalancing of global labour markets is only fair and long overdue.

While such rebalancing ought to make developing economies less informal and precarious, there are some clear risks. The dramatic increase in the size of the young population, especially in India and Africa, means that the potential benefits of this profound change can easily be dampened, if not lost.

The situation in China, however, is quite different. The country's working-age population has just passed its peak, and poverty among the elderly is fast emerging as a major problem. The latter happens to also be a topic discussed intensely in ''rich'' countries like Germany and Japan.

All of which goes to show that informal employment and economic precariousness, rather than being a distinguishing characteristic of life in the developing world, is fast becoming the common condition of humanity. It is a potent symbol of global economic integration - and our shared need to find new solutions and a more flexible, adaptable society. Harvard Business School Publishing Corp

Klaus Zimmermann is director of the Institute for the Study of Labor in Bonn, Germany, and a professor of economics at the University of Bonn.

Klaus Zimmermann

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