Informal sector a jobs lifeline?

Statistics South Africa released its Quarterly Labour Force Survey for the three months ending in June earlier this month – and the results are decidedly bleak. While employment figures managed a modest bump of 66 000 to 25-million, the number of jobless South Africans nudged up by 158 000 to a record-breaking 8.4-million. This staggering total, the highest since 2008, means that a whopping 33.5% of the economically active population is out of work.

The disheartening numbers don’t stop there. When applying the expanded definition of ‘unemployment’, which includes those discouraged from seeking work, the joblessness rate leaps to 42.6%. The youth are the hardest hit, with 60.8% of South Africans aged 15 to 24 finding themselves idle at home.

This high number of zero earners is a significant contributor to the country’s extreme inequality, which stands as the highest globally, according to the Gini coefficient.

But why does Brazil, whose economy faces the same challenges as South Africa’s – low investment levels, high energy costs, a skills scarcity and a rather volatile exchange rate – manage its unemployment rate at a comparatively trim 14%?

A working paper from the Center for International Development at Harvard University sheds light on one contributing factor: South Africa’s informal sector is less robust compared with other middle-income countries. In peer countries, 45% of economically active individuals are engaged in wage employment and another 45% in informal work, while 10% are unemployed. South Africa’s ratios, however, reveal a different story: 50% are in wage employment, only 16% are in informal employment and 34% are without jobs.

These statistics suggest that South Africa, compared with the mean middle-income country, is an above-average generator of wage employment. However, where South Africa falls short is in its ability to absorb labour through informal-sector jobs, which other countries leverage to a greater extent.

The report’s authors urge the South African government to expand the informal sector, noting: “The informal sector has the potential to provide a point of first entry into the labour market for many unemployed South Africans and provide employment opportunities in the context of a formal economy that is not large enough and not growing fast enough to absorb the many South Africans in need of employment.”

Some of the constraints on the growth of South Africa’s informal sector are the unintended consequences of excessive regulation, with the report highlighting that the hierarchical structure of the legislation governing the sector leads to significant red tape. This bureaucratic burden increases compliance costs for small businesses, which in turn slows the rate of new business establishment.

The Business Amendment Act, in particular, has “regulated away” the freedoms previously enjoyed by informal traders by allowing municipalities to take a punitive approach to street-trader management.

Other stifling pieces of legislation identified in the paper are those related to safety and health, which impose requirements that may be out of the reach of small businesses, such as building structures conforming with specific standards. Additionally, the National Road Traffic Act prohibits trading along public roads outside urban areas.

The authors also take issue with zoning regulations, suggesting that standard land-use zoning is a poor fit for informal contexts. They highlight the irony: despite Cape Town designating 5 500 trading bays around the city at locations informed by trading plans, most informal trade actually spills over into residential areas, with many thousands of traders involved.

The restrictive zoning – in Cape Town and elsewhere – has the effect of displacing trading to outlying township communities where the market is smaller and less affluent.

Then there is the spatial legacy of apartheid. As the economically marginalised mostly live on the outskirts of cities, they struggle to engage in the informal economy, being far away from economic nodes, as transport is either inefficient or costly for daily commutes to these nodes, leaving them with a potential market of only local residents, who often have limited purchasing power.

While no one would argue that chaos in the informal sector is the answer, surely there is room for legislative finesse. With a dash of legislative ingenuity, South Africa could reshape laws and regulations to support small businesses while still protecting consumers. Such reforms could address not only unemployment but also the two other major ills afflicting the country: poverty and inequality.