Shifting the Lens to the Informal Economy
Too few South Africans are employed. This was one of the findings of the National Planning Committee’s (NPC) diagnostic report[1] released in 2011, which aimed to identify the main challenges confronting the country and to examine the underlying causes. Over a decade later nothing has changed. In fact, the labour market has deteriorated further.
One of the key objectives set out in the National Development Plan (NDP) was to increase employment from 13 million people in 2010 to 24 million by 2030. Between 2010 and 2019 (before the Covid pandemic), employment numbers grew by a modest 2.5 million to 16.4 million employed people, at an average increase of 280,000 jobs per annum. Since the pandemic, the trend has turned downwards. According to the latest dataset from the Quarterly Labour Force Survey (QLFS), only 14.5 million people were employed by the end of the fourth quarter in 2021. This means that employment levels have increased by a shocking 646,000 (4.6%) in eleven years between the fourth quarter of 2010 and the fourth quarter of 2021. Meanwhile, the size of the working-age population has increased by 6.7 million (20.2%) over the same period.
Unemployment is most prevalent among young people, people with low academic attainment, women, and black South Africans. Figure 1 below provides a picture of how these groups have higher unemployment rates than the national average over time. Youth unemployment is particularly alarming; effectively, one out of every two young people in the country is unemployed.
Figure 1: Unemployment Rate by various groups (%)
Source: Stats SA
The South African Informal Economy
The South African formal and informal economies are interlinked with notable dependencies. Informal retailers are often the last point of sale for products, waste pickers are a critical source of supply for large recycling companies, minibus taxis commute a significant portion of formal sector workers on a daily basis, while domestic workers provide essential housework and childcare for workers in the formal economy.
Using internationally aligned statistical definitions, WIEGO[2] provides three key terms that are useful for analysis in this article:
- The Informal Sector refers to all employment and production that takes place in unincorporated, small or unregistered enterprises;
- Informal Employment can be defined as any employment relationship without social and/or legal protection; and
- The Informal Economy relates to an overarching term that refers to all units, activities, outputs and workers as defined above.
Stats SA in its surveys identifies informally employed people as those who are in precarious employment situations, irrespective of whether they are employed in the formal or informal sectors. This definition encompasses employees “who are not entitled to or receive basic benefits such as pension or medical aid contributions from their employer, and who do not have a written contract of employment”[3].
From a global perspective (Figure 2), informal employment represented 61.2% of the world’s two billion employed persons by 2016. In Africa, informal employment represented nearly 86% of all employment opportunities, which is far more than any other region in the world.
Figure 2: Informal employment as a share of total employment in 2016 by region (%)
Source: International Labour Organisation
However, in South Africa the percentage share of informal employment ranks amongst the lowest of similar developing countries, with about one in every three employees in informal employment. South Africa has similar features to more developed European countries, such as Greece and Turkey. In our sample of countries (Figure 3), Nigeria and India have the highest proportion of people informally employed, at 93% and 88% respectively.
Figure 3: Informal employment as a share of total employment (2016, %)
Source: International Labour Organisation
Taking a deeper dive into the local dynamics, the sector distribution of informal employment proves to be quite insightful. Figure 4 below reveals that private households (33%) and trade (28%) represent nearly two-thirds of all informal employment. The wide range of sectors in the informal economy reaffirms the notion that policies targeted at the informal sector must consider sector-specific needs.
Figure 4: Sector Distribution of Informal Employment (4Q21)
Source: Stats SA
Impact of COVID-19 Pandemic on Employment
Nowhere is the devastation of the COVID-19 pandemic more glaring than in the South African labour market. Lockdown measures that were enforced to manage the pandemic induced significant disruption to economic activity across all sectors of the economy. The 6.4% contraction in the economy in 2020 resulted in significant job losses that have still not been recovered, despite the partial economic recovery in 2021.
By the end of the fourth quarter of 2019, there were approximately 16.4 million people employed. During the height of the lockdown in the second quarter of 2020, overall employment figures dropped by 2.3 million to 14.1 million (Figure 5), where 14% of jobs were lost. The most recent employment figures (for 4Q21) show that only 14.5 million people are now employed – a reduction of 1.9 million jobs (11%) since 4Q19.
Figure 5: South African employment levels (millions)
Source: Stats SA
Disaggregating the employment data reveals a divergence in the performance between the formal and informal employment figures since the beginning of the pandemic. By the second quarter of 2020, during the most stringent lockdowns, 22% of informal employment was lost compared to only 11% in the formal sector (Figure 6). Given the significant prohibition on the mobility of both people and goods, which was limited to only essential items and employees, it would have been reasonable to expect that over this period most of the job losses would have been in the informal economy.
As the trajectory of the pandemic continued to evolve and the country navigated its way through this, there has been a marked recovery in economic activity. By the latest data, informal employment levels improved to a net 7% jobs lost versus pre-Covid levels. In contrast, formal employment continued to shed jobs, with net losses rising from 11% in 2Q20 to 14% in 4Q21.
Figure 6: Employment losses during the pandemic versus 4Q19 as baseline
Source: Stats SA, Matrix Fund Managers
The pandemic has resulted in marked job losses across the various sectors in informal employment (Figure 7). By 2Q20, most job losses were in private households (-281,000), community and social services (-191,000), and trade (-178,000). Looking at the latest employment figures, it is quite evident that all these sectors have seen a significant recovery.
The mining sector, in particular, has seen the sharpest recovery in informal employment, being the only sector that has seen growth in employment since the start of the pandemic. The latest QLFS data reveals that people employed in the informal mining sector have increased to 22,600 jobs from only 5,500 jobs by 4Q2019.
Figure 7: Loss of Informal Employment by Sector versus 4Q19
Source: Stats SA
Implications for Household Behaviour and Consumer Spending
The inability of the South African labour market to absorb the majority of jobseekers over the last decade, as well as the COVID-19 pandemic shock, has had a material impact on household consumption behaviour and the real economy. This is evident in the credit extension to households and the FNB/BER Consumer Confidence Index data (Figure 8). Both sets of data show a general downward trend since the highs in the mid-2000s. A declining level of confidence is an indication that consumers are concerned about their future. This affects their propensity to incur debt and spending on durable and discretionary goods. The pedestrian credit growth to households during the last decade also supports the inference of consumers being significantly strained.
Figure 8: South African Consumer Indicators
Source: SARB, IRESS
In more recent times, consumers are also having to contend with rising inflation and tightening monetary conditions. February 2022 data reveal that headline CPI came in at 5.7% y/y, driven largely by transport (14.3%), administered prices (13.1%), and food and non-alcoholic beverage (6.4%). The South African Reserve Bank believes that the risks to the inflation outlook continue to be assessed to the upside and it is against this backdrop that the Bank has begun the process of unwinding monetary accommodation by increasing the repurchase rate by 25 basis points in their previous three successive meetings. Further increases are expected over the medium term. Higher inflation and rising interest rates will put further strain on consumers and will likely erode their disposable income. The impact of inflation will disproportionately affect the lower income households who experience high and sticky borrowing rates and have limited financial buffers to support them in the face of rising basic goods prices.
Lending Support to the Informal Economy
The analysis presented above reveals that the informal economy can play a pivotal role in expanding employment opportunities in the country. The informal economy may be better placed to absorb young people with low skills, which represent the majority of job seekers in the country. Increasing the share of informal employment to total employment to be comparable to other developing countries in the African continent and globally, should be a key policy imperative. Part of achieving this requires the government to provide a nurturing environment for SMMEs to become sustainable, to grow and to increase their employment capacity.
During President Cyril Ramaphosa’s State of the Nation Address in 2022, he recognised the important role of small, micro and informal enterprises in providing job opportunities for poor people. He emphasised that government would introduce far-reaching measures to support small, micro and informal businesses, including a loan guarantee scheme to assist small businesses recover from the pandemic and the civil unrest. The redesigned loan scheme will incorporate lessons from the previous iteration and it “will involve development finance institutions and non-bank SME providers in offering finance, expand the types of financing available and adjust eligibility criteria to encourage greater uptake”[4]. Additionally, to relieve the regulatory burden on informal businesses, the President committed to a review of legislations that affect SMMEs, with some regulations found to be costly, complicated, and difficult to comply with. To give effect to this, Minister of Finance, Enoch Godongwana, in his maiden Budget Speech, announced that the total support package of the bounce-back scheme will amount to R20 billion.
In seeking to expand job opportunities within the informal economy, the Institute of Economic Justice (IEJ) cautions that informal work should not be romanticised, given that incomes in the sector are typically low, the working conditions remain poor with little job security or social protection. The IEJ in their informal economy policy brief[5], proposed a policy approach aimed at improving the protection and enhancement of incomes of informal workers and entrepreneurs, working in different locations and segments of the economy. Some of these policy proposals include:
- Legal Reforms: Amendments to the Labour Relations Act and the Basic Conditions of Income Act to extend rights, protections and benefits to own account workers;
- Investing in Infrastructure: The provision of basic infrastructure – shelter, water and toilet facilities – for workers in public spaces. This helps in building resilience and productivity; and
- Training and access to financial services: Access to financial services such as a bank accounts and payment facilities can help enterprises manage shocks and access other market opportunities.
It comes as no surprise that attention is
shifting to the informal economy as a means of creating jobs, in part because
of the lower barriers to entry. President Ramaphosa has outlined that there
will be a special focus on small, medium and micro businesses, on cooperatives
and the informal sector in a bid to support the employment of more people. To
achieve this objective, the government must swiftly put in place the necessary
policy measures that are conducive for the creation of job opportunities in the
informal sector,
while contending with the trade-offs of protecting and advancing workers’
rights.
[1] NPC (2011). Diagnostic Overview.
[2] Women in Informal Employment: Globalizing and Organizing
[3] Stats SA (2022). Quarterly Labour Force Survey. Q42021
[4] Ramaphosa (2022). State of the Nation Address
[5] IEJ (2018). Informal Economy/Sector Policy Brief. Jobs Summit Policy Brief Series
