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Globalization and informal jobs in developing countries

A Joint Study of the International Labour Office and the Secretariat of the World Trade Organization

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This study focuses on the relationship between trade and the growth of the informal economy in developing countries. Based on existing academic literature, complemented with new empirical research by the ILO and the WTO, the study discusses how trade reform affects different aspects of the informal economy. It also examines how high rates of informal employment diminish the scope for developing countries to translate trade openness into sustainable long-term growth.

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Openness to trade and informality

Globalization and the opening of markets in developing economies to trade is believed to have affected informal employment in these countries. This chapter summarizes the theoretical arguments for such a link and presents the relevant empirical evidence. In particular, it asks the questions: What roles do trade reforms and trade expansion play in explaining changes in the share of informal employment? How does trade opening affect the relative wage of informal, compared to formal, workers? While the long-term allocative effects of trade opening have been extensively studied by trade economists since at least the eighteenth century, the short- and medium-term impact of trade reforms on the composition of employment, the wage structure and unemployment only started to attract the attention of researchers in the early 1990s (Agénor, 1995). This chapter contains two parts. First, a summary of theoretical approaches concerning the impact of trade on informality is provided. Second, empirical studies aimed at validating different theoretical hypotheses are discussed.

English

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