World trade has expanded significantly in recent years, making a major contribution to global growth. Economic growth has not led to a corresponding improvement in working conditions and living standards for many workers. In developing countries, job creation has largely taken place in the informal economy, where around 60 per cent of workers are employed.

Most of the workers in the informal economy have almost no job security, low incomes and no social protection, with limited opportunities to benefit from globalization.

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.

The report analyzes how well-designed trade and decent-work friendly policies can complement each other so as to promote sustainable development and growing prosperity in developing countries.

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A joint study of the International Labour Office and the Secretariat of the World Trade Organization

CONTENTS
Acknowledgements ....................................................................... 5
Foreword .......................................................................................... 7
CHAPTER 1: Globalization and informality
in times of crisis ........................................................................ 21
A. Labour markets in open developing economies .......................................21
B. Key facts on globalization, trade and informal employment
in developing countries .................................................................................25
C. Improving social equity and effi ciency by battling informality ..............37
CHAPTER 2: Varieties of informality .................................... 39
A. Three views of the informal economy .........................................................39
B. A unifying model: multi-segmented labour markets .................................43
C. Defi nitions: making informality concepts operational ..............................51
D. The crux of measurement ...............................................................................54
CHAPTER 3: Openness to trade and informality ................ 59
A. How does trade opening affect informal employment and wages? ......59
B. What does the evidence tell us ? ..................................................................67
CHAPTER 4: Impact of informality on trade and growth .. 87
A. How does informality shape macroeconomic performance? .................87
B. Informality and macroeconomic performance: empirical evidence .....91
CHAPTER 5: Economic resilience:
dynamics of informality ......................................................... 101
A. Transmission mechanisms of shocks in informal labour markets ......101
B. Informality and business cycles .................................................................104
C. Capital fl ows and informality .......................................................................108
CHAPTER 6: Globalization and informal employment:
an empirical assessment ........................................................113
A. Setting the stage ............................................................................................113
B. The impact of globalization on informal employment ............................119
C. Does informal employment lock countries into trade patterns? ..........123
CHAPTER 7: Robust policies for an uncertain world ....... 127
A. Formalization of fi rms ...................................................................................128
B. Supporting transitions from informal jobs to formal employment ......134
C. Employment-friendly trade policies ...........................................................140
D. Coherence between trade and labour market policy .............................143
References ............................................................................... 149

EXECUTIVE SUMMARY
Globalization has had a limited effect in reducing labour market vulnerabilities in many developing economies...

Over the past decade, world trade has expanded significantly. By 2007, global trade had reached more than 60 per cent of world GDP, compared with less than 30 per cent in the mid-1980s. Few would contest that increased trade has contributed to global growth and job creation.

However, strong growth in the global economy has not, so far, led to a corresponding improvement in working conditions and living standards for many. Absolute poverty has declined, thanks to the economic dynamism of recent years, the efforts of private companies, migrant workers and their remittances and the international development community.

Nevertheless, in many instances, labour market conditions and the quality of employment growth have not improved to the same degree. In many developing economies job creation has mainly taken place in the informal economy, where around 60 per cent of workers fi nd income opportunities. However, the informal economy is characterized by less job security, lower incomes, an absence of access to a range of social benefi ts and fewer possibilities to participate in formal education and training programmes – in short, the absence of key ingredients of decent work opportunities. ...

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