This extract from a new REDI3x3 book proposes a constructive way to approach the possible ‘formalisation’ of the informal sector. A common impulse is to reduce formalisation to regulating and taxing informal enterprises – two blunt instruments that can be destructive. Formalisation must rather be seen as a means to aid the quest for better livelihoods for more people and stronger, more self-standing informal enterprises. Smart formalisation can be pursued with a ‘formalisation menu’.
What happens when a previously unregulated labour market is regulated? After the introduction of minimum wages and mandatory employment contracts for domestic workers, wages increased markedly while neither employment nor hours worked declined; some formalisation of working conditions also occurred. All these occurred despite a lack of monitoring and enforcement, suggesting that such actions (often costly) are not essential for regulation to have a significant impact on informal employment conditions, at least in the short run.