/ 19 February 2020

The informal economy is necessary to deal with the unemployment crisis

Many informal subcontractors have found work extending houses in areas like Sharpeville.
Informal subcontractors extending houses in Sharpeville.


South Africa’s joblessness woes are getting worse by the day, leaving many people to eke out a living on the margins of the formal economy. Barely two months into 2020 five companies announced planned job cuts that will affect more than 9 000 people. This adds to the thousands of jobs lost in 2019, which saw the unemployment rate climb to a level last seen 17 years ago. 

Unemployment weakens the broader economy through lower aggregate demand and it affects individuals and families, especially those who don’t have a safety net to see them through protracted periods of no income. 

As the economy struggles to create jobs and undergoes structural transformation, people will turn to the informal sector or small businesses. Informal employment and enterprises are regarded as a crucial activity for absorbing those who cannot find jobs in the formal economy. Informal employment as a proportion of total employment constitutes about 78% to 82% in Sub-Saharan African and South Asia in comparison with South Africa’s 36%. 

Whereas other countries with similar socioeconomic conditions to South Africa embrace informality, job seekers and the public in this country seem to dislike the policy stance to support informality. South Africa, with a glaring combination of low informal employment, high unemployment and low income per-capita, stands out as an anomaly. The rate of entry into informal employment is not consistent with the rate of joblessness. Scholars attribute this anomaly to the historical limitations on black entrepreneurial activity, the dominance and penetration of large formal chain stores into the traditional informal activity markets, perceptions of earning incomes below a decent wage, social grants as an alternative income source for the unemployed and strict municipal regulations. 

It is common practice to find law enforcement authorities, sometimes under pressure from private property owners, impounding the goods of informal street traders for violating trading licence requirements. Many street traders found themselves on the receiving end of the law during a Jo’burg metropolitan municipality operation in which unlicensed traders’ stock was confiscated, including that of a young man who created a job for himself by selling sandwiches at a popular Sandton intersection. The Sandton incident generated a social media uproar because the authorities were regarded as insensitive to the plight of unemployed youth and self-contradictory in its call for people to be self-employed. Releasing impounded goods comes at a hefty fine of R3 200, an amount many informal traders cannot afford, let alone the loss of income from not being allowed to operate. 

Undeniably, trading regulations have to be enforced, but at the same time, the law must be designed to benefit both the weak and the powerful. Street trading (formal and informal) is not allowed in all high end market corridors in the big cities, depriving a large section of the population from accessing these markets. Ironically, the large property and store owners who are antagonistic towards informal businesses operators are thriving in traditional informal enterprise markets through township shopping malls. Local zoning ordinances only allow informality on the outskirts of core central business districts where foot traffic is less. The reality however is that people are always going to follow the market. 

Informal trading and employment activities are more diverse and some have a certain level of sophistication to complement the seemingly exclusive upmarket office and shopping corridors. Sophisticated or innovative informal activities not only offer opportunities for employment creation and decent wages, but present prospects for the businesses to formalise and later occupy vacant office and shopping spaces in the city centres. 

Informality is part of the bigger ecosystem and should be embraced. The fruit and vegetable, cold drink and newspaper hawkers at the intersections that we see as nuisances are sales channels for farmers, refreshment and media companies. Through their endeavours, school fees are paid and with their daily takings they buy a loaf bread from a local retailer who goes on to pay workers’ salaries and suppliers. 

South Africa has no choice but to accept that informality will remain a crucial employment option for many people. Traditional sectors that absorbed unskilled labour in mining and agriculture are waning. It will be some time before the education sector can produce wholly skilled workforce to take up jobs in the modern formal economy. Until then local authorities will need to contend with occupation of public spaces by job seekers. Regulations must be relaxed and space must be opened proactively in an orderly manner to provide and increase access to market opportunities. Otherwise the burden of unemployment will remain a government responsibility.

Eddie Rakabe is a researcher, writer and economist.