Does the depth of informality influence welfare in urban Sub-Saharan Africa?

We explore the relationship between household welfare and informality, measuring household informality as the share of members’ activities (hours worked or income) without social insurance. We discretize these measures into four bins or portfolios and assess their influence on consumption, as a measure of welfare. Cross-sectional regressions for five urban Sub-Saharan African countries reveal a non-linear relationship between the depth of informality and household welfare. A mixed formality household portfolio has at least the same welfare as a fully formal one. Using panel data for Nigeria, we assess household switches in informality portfolios, accounting for the selection on unobservables, and find it explains most welfare differences. Switching informality portfolios does not change welfare trajectories, with the notable exception of welfare gains for fully informal households becoming fully formal. From a policy perspective, our results suggest that policies incentivizing the formalization of the marginal worker may not result in perceivable welfare effects.

[1]  D. V. D. Walle,et al.  Headship and Poverty in Africa , 2021, The World Bank Economic Review.

[2]  K. Sen,et al.  Informal work in sub-Saharan Africa: Dead end or stepping-stone? , 2021, IZA Journal of Development and Migration.

[3]  Gabriel Ulyssea.  Informality: Causes and Consequences for Development , 2020, Annual Review of Economics.

[4]  A. Mobarak,et al.  Migration Costs and Observational Returns to Migration in the Developing World , 2020, Journal of Monetary Economics.

[5]  Héctor Gutiérrez Rufrancos.  Are There Gains to Joining a Union? Evidence from Mexico , 2019, British Journal of Industrial Relations.

[6]  Jochen Kluve,et al.  The Effectiveness of Interventions to Reduce Informality in Low- and Middle Income Countries , 2019, World Development.

[7]  Q. Nguyen,et al.  Ensuring universal social protection for the future of work , 2019, Transfer: European Review of Labour and Research.

[8]  Alwyn Young.  Channeling Fisher: Randomization Tests and the Statistical Insignificance of Seemingly Significant Experimental Results* , 2018, The Quarterly Journal of Economics.

[9]  Rudi Rocha,et al.  Do lower taxes reduce informality? Evidence from Brazil , 2018, Journal of Development Economics.

[10]  Andrew Goodman-Bacon.  Difference-in-Differences with Variation in Treatment Timing , 2018, Journal of Econometrics.

[11]  Gabriel Ulyssea.  Firms, Informality, and Development: Theory and Evidence from Brazil , 2018, American Economic Review.

[12]  Liyang Sun,et al.  Estimating Dynamic Treatment Effects in Event Studies With Heterogeneous Treatment Effects , 2018, Journal of Econometrics.

[13]  S. Nataraj,et al.  Strict duality and overlapping productivity distributions between formal and informal firms , 2018, Journal of Development Economics.

[14]  Pedro H. C. Sant'Anna,et al.  Difference-in-Differences with Multiple Time Periods , 2018, Journal of Econometrics.

[15]  S. Hess,et al.  Randomization Inference with Stata: A Guide and Software , 2017 .

[16]  F. Roubaud,et al.  Informal Versus Formal: A Panel Data Analysis of Earnings Gaps in Madagascar , 2016, SSRN Electronic Journal.

[17]  Paolo Falco.  Does risk matter for occupational choices? Experimental evidence from an African labour market☆ , 2014 .

[18]  A. Shleifer,et al.  Informality and Development , 2014 .

[19]  Fabián Slonimczyk.  Informal employment in emerging and transition economies , 2014, IZA World of Labor.

[20]  B. Olken,et al.  The Missing "Missing Middle" , 2014 .

[21]  L. Bellmann,et al.  Indicative and Updated Estimates of the Collective Bargaining Premium in Germany , 2014, SSRN Electronic Journal.

[22]  F. Teal,et al.  The returns to formality and informality in urban Africa , 2011 .

[23]  I. Marinescu,et al.  Informality and the expansion of social protection programs: evidence from Mexico. , 2011, Journal of health economics.

[24]  A. Shleifer,et al.  The Unofficial Economy and Economic Development , 2008 .

[25]  W. Maloney,et al.  Comparative Analysis of Labor Market Dynamics Using Markov Processes: An Application to Informality , 2007, SSRN Electronic Journal.

[26]  S. Dercon,et al.  Risk-sharing networks and insurance against illness , 2006 .

[27]  D. Posel,et al.  Labour migration and households: A reconsideration of the effects of the social pension on labour supply in South Africa , 2006 .

[28]  J. Burns,et al.  Social assistance, gender, and the aged in South Africa , 2005 .

[29]  E. Duflo.  Grandmothers and Granddaughters: Old-Age Pensions and Intrahousehold Allocation in South Africa , 2003 .

[30]  Douglas L. Miller,et al.  Public Policy and Extended Families : Evidence from Pensions in South Africa , 2003 .

[31]  Dan Anderberg.  Voluntary income sharing and the design of unemployment insurance , 2003 .

[32]  O. Attanasio,et al.  Tests of income pooling in household decisions , 2002 .

[33]  Stefan Dercon,et al.  Income Risk, Coping Strategies, and Safety Nets , 2002 .

[34]  E. Duflo,et al.  How Much Should We Trust Differences-in-Differences Estimates? , 2001 .

[35]  Joanna K. Swaffield.  Does Measurement Error Bias Fixed‐effects Estimates of the Union Wage Effect? , 2001 .

[36]  X. Gong,et al.  Mobility in the Urban Labor Market: A Panel Data Analysis for Mexico , 2000, Economic Development and Cultural Change.

[37]  Jill Tiefenthaler.  The sectoral labor supply of married couples in Brazil: Testing the unitary model of household behavior , 1999 .

[38]  W. Maloney.  Does Informality Imply Segmentation in Urban Labor Markets? Evidence from Sectoral Transitions in Mexico , 1999 .

[39]  P. Gertler,et al.  Insuring Consumption Against Illness , 1997, The American economic review.

[40]  J. Hoddinott,et al.  Does Female Income Share Influence Household Expenditures? Evidence from Cote d'Ivoire , 1995 .

[41]  Richard B. Freeman,et al.  Longitudinal Analyses of the Effects of Trade Unions , 1983, Journal of Labor Economics.

[42]  O. Amponsah,et al.  Urban informalities in sub-Saharan Africa (SSA): A solution for or barrier against sustainable city development , 2022, World Development.

[43]  E. Duflo.  Child Health and Household Resources in South Africa: Evidence from the Old Age Pension Program , 2000, The American economic review.

[44]  Duncan C. Thomas.  Intra-household resource allocation: an inferential approach , 1990 .