Deconstructing Poverty Labor Market Informalization, Income Volatility and Economic Insecurity In Bolivia and Ecuador1



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Deconstructing Poverty

Labor Market Informalization, Income Volatility and Economic Insecurity

In Bolivia and Ecuador1


Lourdes Beneria and Maria S. Floro2

I. Introduction3
This paper examines the nature of current labor market informalization and its links with poverty and household survival. It explores conceptually the dynamics of informality and demonstrates the interconnectedness of job precariousness, vulnerability and gender relations. The paper also examines empirically, using Bolivia and Ecuador households and individual workers sample data collected in 2002, the critical role of women informal workers in household maintenance and social reproduction.
The persistence of poverty in the developing world and the increase in the importance of the informal economy has typified socio-economic trends during the past three decades. Hence, the need to re-conceptualize the informal economy and its significance for sustainable growth and human welfare. Likewise, we need a better understanding of the different forms that economic insecurity takes in order to rethink issues of distribution and social policy related to different vulnerable groups. In this sense, gender divisions represent an important dimension in the distribution of the burden of poverty and economic insecurity. Socially ascribed positions of workers affect their vulnerability; thus this paper investigates the degrees of informality and the extent of income volatility among home-based workers in Bolivia and Ecuador.
The empirical section is based on the 2002 sample survey data of poor urban households engaged in home-based work collected in Bolivia and Ecuador as part of a four-country research project that attempts to understand the roles of financial and labor resources in the coping strategies of urban poor households as their countries undergo rapid global market integration, financial crises and economic restructuring4.The survey instrument is comprehensive and involves questions on household and community characteristics as well as informal employment, savings, assets, credit, and participation in household decision making. It also attempts to take into account the distinct needs of women and men in poor households, their multiple roles and specific concerns by collecting separate head and spouse data on employment, savings, credit and household decision making.

II. Dynamism of the Informal Economy:
During the 1970s and early 1980s, studies on the informal sector often assumed that, with economic growth, it would tend to be absorbed by the modern economy. The tremendous growth of informality since then has reversed these expectations, pointing to the strong tendencies in the global economy to generate precarious jobs below subsistence wages. According to ILO estimates, informal employment represents one half to three-quarters of non-agricultural employment in developing countries (ILO, 2002). Regional and country differences are significant but the growing importance of informality has been registered in high income countries as well; self-employment, part-time work, and temporary work represent 30 per cent of overall employment in 15 European countries and 25 per cent in the United States.
It is well known that the increase in women’s economic participation in paid work in the global economy has been paralleled by processes of deregulation in the conditions of work. For a variety of reasons, women are disproportionately represented in informal employment, which, according to ILO estimates, accounts for 60 per cent or more of female employment in developing countries. Likewise, in 1998 women represented 60 per cent or more of the part-time workers in all the OECD countries that reported data. In some labor categories such as home-based work, their participation ranges between 30 and 80 per cent of all workers, while 80 percent of industrial homework is carried out by female labor (ILO, 2000).
Since its inception, the notion of “informal sector” has been subject to debates and criticisms, particularly in terms of the heterogeneity and artificiality of the formal/informal division. The implication of the initial 1970s formulations by Keith Hart --published in 1973 but based on a 1971 study of urban Ghana-- and the ILO mission to Kenya in 1972 implied that modernization and economic growth would facilitate the absorption of the “informal sector” by the modern sector. By contrast, during the 1980s the literature emphasized the links rather than the divisions between the two sectors, pointing to the dependency of the modern on the informal sector as a way of lowering costs, thus implying that there was no incentive for the former to absorb informal activities (Benería and Roldán, 1987; Portes and Castells, 1989). The 1990s saw a deepening of these processes and an expansion of informality, thus increasing the need to further understand the factors that have reversed the prediction of the initial formulation. Hence the continuing debates on the topic and their increasing relevance to understand the persistence of poverty and the increasing economic/social vulnerability in the midst of an expanding global economy (Rakowski, ed. 1994; De Soto, 2000; ILO, 2002).
This raises questions regarding the differences between earlier and current stages of informalization. Have conditions changed and, if so in what way? Several observations can be made in this respect.5 First, since the 1980s, the macroeconomic context has changed significantly due to the implementation of neoliberal policies in many countries, including the Philippines, Ecuador and Bolivia. Privatization, market de-regulation and economic restructuring have contributed to set up the conditions for an expansion of informal activities and precarious working conditions. We provide specific examples related to Bolivia and Ecuador in subsequent sections.
Second, the expansion and deepening of markets has extended the links, direct or indirect, between formal and informal activities while the distinction between the two has become increasingly blurred. Large firms have developed, directly or indirectly, increasing links with informalized production through outsourcing and subcontracting. This trend has been examined by several studies in the case of Thailand and the Philippines as well as from Latin America (Boonmathya et al, 1999, Balakrishnan and Huang 2001; Pérez-Sainz, 1994 and 2000; Buechler 2002). Nevertheless, as argued below, many other forms of informal work remain disconnected from the more formal productive activities, particularly those related to survival activities.
Third, informal activities are no longer viewed as the anomaly that eventually will disappear. On the contrary, the trend has been the opposite; the decline in formal employment, particularly in the public sector, and the dynamism of the informal economy in many cases has enhanced the relative attractiveness and the predominance of the latter. Likewise, social exclusion has become more prevalent among unskilled labor and rural-to-urban migrants.
Fourth, although the traditional association of informal work with low skills and low productivity still holds, the last two decades have introduced many changes in this respect. With the increase in outsourcing and subcontracting under globalization, several segments of informal activities have their center of gravity in the core firms that generate them. This implies that their levels of productivity can be high and competitive, particularly because technology transfers and skills can take place through these linkages.
Fifth, increased informality and the deterioration of working conditions in developing countries during the past two decades have taken place in a climate that has emphasized citizenship, political rights, individual agency, and democracy. Hence the contradictions and social tensions between these discourses emphasizing empowerment and equality on the one hand, and the realities of precariousness, poverty, and powerlessness associated with informality on the other. Globalization has intensified these tensions by enlarging their scope and sphere of reference, and by contributing to the factors that generate informality.
As a result, nonstandard forms of employment have multiplied, thereby introducing a greater diversity in working life patterns for both men and women. There is wide variation in the range of activities, skill and capital requirement and the working conditions under which these workers operate.
These changes have raised new questions about how to best re-conceptualize the informal economy in order to understand its nature and consequences. In this paper we want to further this discussion by focusing on the different degrees of informality and vulnerability. There have been recent efforts to expand the concept of informality and to rethink its nature and functions from a socio-economic perspective. The ILO analysis, for example, emphasizes an “expanded concept” of the informal sector by introducing the notion of “informal economy” in order to “incorporate in this concept the whole of informality –including both enterprise and employment relations—as manifested in industrialized, transition, and developing economies.” (ILO, 2002: 11). The objective is “to incorporate the real world dynamics in labor markets today –particularly the employment arrangements of low-income workers.” The ILO analysis proceeds with a detailed list of what is or is not part of the informal economy by focusing on specific activities and on the characteristics and measurement of informal employment. However, it does not deal with the distributional dimensions that we want to emphasize in this paper.
Low earnings and precarious working conditions associated with informal labor can be attributed to economic, institutional, and socio/political factors. For orthodox economic analysis, low earnings are explained by the dynamics of labor supply and demand –more specifically, on an abundant labor supply relative to existing demand. In addition, low earnings are explained through the prevalence of low labor skills and low productivity. Insufficient labor demand can result from scarcity of local capital a la De Soto (2000) reinforced by the inability of many developing countries to attract foreign investment.
Thus, within an orthodox neoclassical model, the low earnings and precarious working conditions associated with informality represent a labor market “equilibrium” that can only change to the extent that these explanatory factors can. But what if this “market equilibrium” generates below subsistence incomes and working conditions that undermine human capabilities? Further, what if it does not provide for a life that is worthy of the dignity of every human being, as the human development approach would have it? This is in fact the grim situation for a large proportion of the population in Ecuador as the empirical section of this paper will illustrate. It is in this context that we provide an analytical framework that highlights the distributional dimensions as well as links between the formal, informal and reproductive (primarily the household) sectors of the economy.

III. Towards a Conceptual Framework of Distribution and Informalization of Work
The growing labor market informalization can be viewed as part of the overall regressive process of redistribution associated with neoliberal policies and globalization. It functions as one of the channels through which capital has been able to lower labor costs, and it has contributed to the growth of precarious jobs and increasing labor market insecurity. The result has been, as many authors have already pointed out, the erosion of the bargaining power of labor relative to capital. There are five related aspects to this process namely: 1) increasing labor market flexibilization; 2) the weakening (even absence) of the labor contract; 3) rising income inequality and worker differentiation; 4) institutional questions related to ownership and appropriation of production; and 5) gender-related socially ascribed positions in society and within the household.
1) Much has been written during the past quarter century about labor market deregulation and flexibilization. These processes have been closely linked with neoliberal policies and market liberalization requiring a flexible labor force that can be redeployed, and contracted quickly during periods of expansion, and can be maintained at arms length at little or no cost during periods of slump. In this sense, the informal economy facilitates and reinforces labor market flexibilization, taking on different forms and operating through different channels.
In the case of Bolivia and Ecuador, the informal economy has evolved in such a way that it has not resulted in an increasing number of global firms and domestic enterprises being involved directly with workers outside the “traditional workplace” through the process of outsourcing and subcontracting. Indirectly, the informal economy, as with the household, performs a vital function in social reproduction of labor including those employed in the formal, market economy. For their part, informal shopkeepers, traders, artisans, manual workers and vendors provide goods and services at very low prices by charging very low mark-ups in their product and/or low wages for their labor. This helps reduce the cost of living for lower-income workers thus lowering the cost of social reproduction and. at the same time, distribution costs of goods produced at the formal economy –a typical situation in times of economic crisis. Thus, in both countries, the informal economy has played a “survivalist role” which, in the case of Bolivia, was symbolized by the new entrants into the sector when the mines closed down.
In many developing countries, domestic and multinational firms have been able to tap into the seemingly abundant supply of labor, including a large proportion of women workers, by creating new forms of outsourcing and subcontracting whereby workers produce goods or perform tasks in their homes (Benería and Roldán 1987; Portes and Castells 1989; Hsiunh 1996; Prugl 1999; Carr, Chen and Tate 2000; Freeman 2000). This has led to the evolution of adaptive mechanisms such as the vertical and horizontal chains of production networks, such as in garments, footwear, toys, consumer goods and handicraft industries. Production is carried out by multi-layered networks of parent firms, subsidiaries, contractors, subcontractors and homebased-workers that make finished goods for buyers across the world (Gereffi 1998; Chen et al, 2000).
It is through these inter-linkages between the formal, informal and care (household) economies and the resulting diverse production arrangements that allow owners and managers of capital/firms to maintain a fluid and adaptable labor force that they can tap during periods of expansion and lay off during periods of slump. It also enables them to maintain a high degree of “veiled” competition among workers that regulates wages and disciplines the workers in the formal market economy. The fluidity of movement by labor between the formal economy, the informal economy and the household (care) economy is part of our analytical model which shows how individual workers (and their households) are fully responsible for their own survival and reproduction when demand conditions change.
Fig. 1a and 1b depict this fluidity and overlap; Fig. 1b shows how, during economic crises, the informal and care economy expand to pick up the slack of the formal economy. Firms can continue to hire and lay off workers in order to adjust labor input with less resistance from labor, thus providing maximum flexibility for capital. At the same time, many governments, including Bolivia and Ecuador, have adopted labor laws that tolerate and even promote labor flexibility without much concern about safety nets and unemployment compensation schemes during periods of high unemployment and underemployment. Global competition has generated the typical race to the bottom or the weakening of labor protections even in countries with strong welfare states. It is therefore not surprising to find a wide range of informal sector activities. As argued below, a basic distinction is between subsistence or survival work --as with most street vending-- and that linked to a process of accumulation --such as organized garbage picking, subcontracted garment homeworking, and packaging. Many of these activities remain “excluded” or “marginalized,” operating in the market fringes to meet the evolving demand among the growing impoverished middle and low-income classes for cheaper, more affordable food, basic commodities and services ranging from haircuts to food vending.
[Figures 1a and 1b about here.]
2) The weakening and individualization of the labor contract is a consequence of this flexibilization, resulting from market forces and reinforced by labor market deregulation and the diminishing bargaining power of labor, either individually or collectively through, for example, the absence or decreasing power of unions. In many ways, informalization highlights the unequal nature of the labor/capital exchange under capitaslism. The owner of labor is free in the sense that he/she can accept or reject work, move from one firm to another, and even from one sector to another, but ultimately, without access and control over productive resources, he/she takes responsibility for her or his own survival and reproduction (Foley and Michl 1999). As authors writing within the Marxian tradition have often pointed out, this generates an asymmetric dependency of labor on the employment-creating capacity of capital, thereby creating unequal exchange between sellers and buyers of labor.
In addition, the individualization of contracts undermines the existence/possibility of programs built on solidarity in the form of cross-subsidies between different categories of labor –whereby the lower wage worker makes lower contributions than higher income workers despite getting similar benefits.
In the case of informal but self-employed labor in which there is no labor contract per se, as in the case of self-employed work in micro-enterprises, labor weakness results from the insecurity and precariousness in which these firms operate in the market. As the subsequent empirical analysis will illustrate, these firms and their workers operate within the context of market flexibilization; they are forced to quickly adapt to often rapidly shifting market conditions, for example through the use of family labor that can be brought in and out of production at much ease and/or though absorbing costs of production (such as in the case of electricity costs generated through home-based production).
Neoclassical theory tells us that the market forces of demand and supply determine the wage level and labor earnings. However, it does not emphasize the importance of the relative degree of competition among the suppliers of labor affecting the workers’ relative bargaining power; the weakening and individualization of contracts that accompanies informalization shifts labor to labor market spaces in such a way that it diminishes the bargaining power of both formal and informal labor. Similarly, the weakening or even disappearance of labor contracts contributes to disciplining labor, particularly since the process is also accompanied by the use of informal, contingent labor force unprotected by labor laws and social protection schemes.
Thus, while the so-called new “employment contract” and “boundary-less workplace” have tended to diminish the power of labor overall (Stone 2001; Levine et al 2002; Benería 2003), these tendencies are intensified under the conditions prevalent in the informalized workplace. In this sense, informalization tends to reinforce the relative advantage of capital over labor; it also sets the parameters under which self-employed labor operates. Similarly, and to the extent that women’s participation in these processes is higher than men’s, these processes have gender dimensions that need to be taken into account to evaluate both gender equality and gender-aware policy.
3). One consequence of the different processes associated with informalization has been the tendency to rising income inequality and worker differentiation. Although firm hierarchies have been flattened in many cases, the economic distance between the top and bottom workers has tended to increase. The new employment contract has been found to increase earnings of skilled labor (Levine et al 2002) while the growing informalization of jobs alongside stagnant growth or decline of regular, core, protected jobs has often meant that employment adjustments under economic restructuring concentrate the burden of shift on those workers who either become unemployed or become part of the “periphery.” This includes contingent work such as with casual, part-time or subcontracted labor. These changes also shift some costs of adjustments associated with market volatility and fluctuation onto the unpaid workers engaged in household maintenance and reproduction of both the “reserved” unemployed and “periphery” workers, hence generating gender impacts that need to be taken into consideration in terms of worker differentiation.
These processes undermine the bargaining power of workers and make the maintenance and enforcement of workers’ rights and labor standards more difficult. At the same time, they enable owners and managers of capital to reap higher returns and/or to absorb lesser risk. For many workers, this has generated increasing risk and economic and social vulnerability. It is therefore not surprising that we have observed growing inequalities between owners of capital and owners of labor input and also among workers themselves. At the same time, this has implications for the relative vulnerability of the different groups of workers in terms of job loss and joblessness.
Increased wage dispersion has been registered with respect to skills, age, ethnicity, and specific sectors (Wood 1991; Freeman and Katz 1993; Fontana and Wood 2000; Standing 2000). For instance, those with high skills, high-end jobs and/or employed in expanding sectors are likely to earn higher, if not rising, wages while those with less skills, work in low-end jobs and/or employed in displaced sectors are likely to face low, if not declining real wages. Workers who are hired on a casual, subcontracted or part-time basis and who have little or no labor protection are likely to earn less and have less benefits than those with regular, full-time jobs. Workers with means of expressing their voice in collective bargaining are likely to earn more than those without. This reinforces the growing division within labor and increased differentiation in economic well-being among the working population.
Gender becomes a major axis of differentiation around labor market adjustments. Women workers tend to earn lower wages than their male counterparts as a result of discrimination and gender norms that permeate economic and social institutions. These norms and gender constructions vary across countries and cultures, thus influencing the ways in which discrimination operates (Kabeer 2003; Benería 2003). At the same time, and although women can be found at the bottom of labor hierarchies, we have also observed increasing income differentiation among women (McCrate 1995; Lavinas 1996).
The result of these tendencies has contributed to the wide growing disparity of income distribution and social inequalities observed across countries –and to the persistence of poverty amid plenty. Informal labor prevails among the world’s 6 billion people who live on less than $1 a day, and poverty has been increasing in many areas (World Bank, 2000/01). Hence, the importance of focusing on informal labor to deal not only with poverty but also with inequality and distribution. As argued in the World Bank report, the distribution of income is an important factor in dealing with poverty: “Other things being the same, growth leads to less poverty reduction in unequal societies than in egalitarian ones” (p. 55). Further, the report dismisses the often mentioned assumption that inequality stimulates individual initiative and fosters competitive and entrepreneurial spirit. In fact, based on a sample of 65 developing countries, the report argues that: a) high inequality reduces the possible impact of a given rate of economic growth, and b) lower inequality can increase efficiency and economic growth. It is our contention that, given the increasing importance of the informal economy, it is key in dealing with these issues.

4) Institutional factors including those affecting the functioning of the market play an important role in the distribution of resources and income. Distribution is about “who gets what,” not simply a question of how much people earn but how it is earned. The latter involves the identification of “who” owns what factor of production and the basis for the returns that the “owner” receives for their use. It requires an understanding of the channels of distribution, including how the “owners” of factors of production relate to those who depend on them for employment. Since, for a given level of output, wages and profit income share the value added from production, the owners of capital and labor find themselves at opposite sides of the equation; institutional factors have an influence over the ways in which this distributions is shaped.


During the past three decades, privatization programs and the emphasis on market solutions to resource allocation have fostered private ownership while muting any discussion on alternative forms of ownership. The overwhelming imposition of neoliberal policies has discouraged the analysis of the links between ownership of factors of production and the distribution of income/resources, bargaining power and risk. Perhaps it’s time to resume this debate,6 and to connect it to our understanding of informality.
Privatization programs across countries have represented an enormous shift of ownership of resources from public to private hands. Although public ownership in the past might have created problems of democratic control and efficiency, it is clear that the shift of resources to private hands takes away the possibility of an improved democratic management of collective resources. With weak and often undeveloped fiscal systems, many governments in developing countries have been left with no revenue to deal with social expenditures, contributing to the inability of the state to provide social protection and public services under increasing informalization. In addition, privatization programs have contributed to the accumulation of capital in large firms and powerful financial interests in many countries, often at the level of TNCs, which have often profited enormously from the transfer of ownership into private hands (Hovey, 1996), leaving the large proportion of the population increasingly into informalized employment –and thus contributing to growing inequalities.
At the level of the informal economy, a focus on distribution requires an institutional analysis of the prevailing forms of production and distribution. This can help explain the pervasive heterogeneity of informalized activities --in terms of earnings and social composition and of the degree of vulnerability and bargaining power of informal workers. Far from being uniform, the informal economy parallels its formal counterpart in terms of organizational forms and capital/labor divides. For example, the predominant modes fall at least in four main categories: a) the use of hired labor in a typically capitalist firm ; b) self-employment and the use of family labor; c) cooperative forms of production; and d) hybrid forms combining different institutional and distributional arrangements.
The presence of these different production arrangements in the informal economy has been analyzed quite extensively (Benería and Roldán, 1987; Portes and Castells, 1989; ILO 2002; Rossell 2002; Freeman 2000). A large proportion of the labor working in precarious and informalized activities in developing countries fall under #b and #d categories. At a more basic level, and as noted earlier, it is important to distinguish between activities that represent subsistence or survival work and those that are connected to a process of accumulation. The first include some of the poorest social groups, surviving for example on the meager sales that street vending can generate. Likewise, some micro-enterprises can barely provide returns beyond survival. The second include a variety of forms of production that range from self-sustaining firms to successful sources of accumulation. The same can be said for cooperative forms of production.
Wage labor in informalized settings is also subject to variations related to labor conditions such as the type of work (time or piece work, part time or full time, with or without contract), the form of employment (direct contact with employer, subcontracting, family member, etc.), the legal/illegal divides (minimum wages paid vs. various degrees of illegality for example), and market destination (local, regional/nationals, foreign, or combinations among them). Income distribution reflects the differences between these various arrangements and between wage income and hybrid forms of payment to labor. It also reflects the surplus income generated by self-employment and the ownership of means of production on the other.
Thus, the nature of payments received by the workers is affected by their placement in the different productive forms and by their relative bargaining power. Those with few labor resources and assets and also dependent on the employer for raw materials, equipment and other inputs are likely to have less bargaining power than those who own capital, equipment and other resources. Workers with low skill levels, short work contracts and/or dependent on a single contractor or employer may be especially vulnerable, and their low bargaining power is likely to affect their incomes and working conditions. The variability in all the above factors explains the fact that the informal economy can also include a very dynamic and high earnings sector.
5) Finally, certain groups of workers, by virtue of their work location as well as socially- ascribed positions in society and within the household are tend to be confined within the most precarious jobs and informalized working conditions. These is the case with many women who, due to their household activities, low mobility, lack of alternatives and social norms have little bargaining power over their earnings and working conditions and economic security. The relationship between income and capability is an important subject that Sen and others have explored extensively (Sen 1992; Nussbaum 2003). It is one that is strongly affected by ownership of assets, level of education, age (e.g. child workers or older workers), location (working at home or with others in a workplace), gender and by other parameters. Some of these factors are not clearly tangible, such as the degree of self-esteem, ability to be assertive, and consciousness about one’s own interests. Most of them are shaped by gender constructions and related to social norms and educational upbringing. Given women’s concentration around the household and their lack of access to networks, female home-based workers tend to be at the low end of the labor hierarchy and of income scales.4 They are also likely to have little or no employment security and are more vulnerable to the fluctuations of flexible markets.
Whether or not a worker is able to translate his/her earnings into capability functioning also depends upon the structure of household relations and decision making processes and not just on the terms of employment, earnings and their variability. Each worker allocates his/her labor between production for own and family subsistence and reproduction and participation in market production. As feminists have often pointed out, at the fundamental level, women’s role in the labor market is linked to their role in household work and social reproduction, but in ways that are neither uniform nor straightforward. Home based work in particular, enables women to resolve the contradictions between women’s socially defined roles as wives, mothers, and daughters on the one hand and the demand for cheap, flexible labor needs of capitalist economic growth on the other. This form of employment reconciles the productive and reproductive roles such as childcare and market work thereby maintaining the notion that the “ owner of labor is free in the sense that he/she can accept or reject work and even from sector to another…but ultimately, he/she takes responsibility for her/his survival and reproduction’’ (Foley and Michl 1999).
Thus, it is no surprise then that, first, women are disproportionally represented among home based workers across countries and, second, home based work has increased in all regions (Benería 2001). In the following section, we explore the key dimensions of economic insecurity and worker vulnerability in Bolivia and Ecuador. We first examine how neoliberal economic policies imposed on the government of Ecuador and the resulting rapid market integration into the global economy has led to the growth in the precariousness of jobs and increased vulnerability of those with little or no resources (other than their own labor) to help smoothen their consumption. We further demonstrates the “spillover” mechanisms through which insecurity associated with informality of work shift some elements of market risk and volatility onto the household and their members, particularly women. Intrahousehold dynamics, particularly power relations and household division of labor, are important in assessing the distribution of the risk burden among members of the household.





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