BARRERAS DE ENTRADA Y SALIDA

In explaining urban unemployment in migration equilibrium, the Harris-Todaro (1970) model posits that due to the existence of minimum wages determined by institutional forces, a migrant entering the modern sector may not be absorbed at the prevailing urban real wage, that is, each migrant has only a ‘probability’ of obtaining modern sector job.

There remains a time gap between the entry of a migrant in the urban labour force and his securing formal sector job. This implies that those not managing to secure modern sector employment are left to remain unemployed and search for employment. The job search strategy specified in the probabilistic models of Harberger (1971), Mincer (1976), Gramlich (1976) and Stiglitz (1982) allow for unemploy ment and full time search.

The role of informal sector in the urban labour market is latent in Todaro (1969) where he suggests that migrants find temporary employment in the urban ‘traditional sector’ before their eventual attainment of urban ‘modern sector’ job. Cole and Sanders (1983) introduce the informal sector in the Harris-Todaro (1970) model and emphasize that much of the migration takes place with the informal sector, not the modern sector as the intended destination. Those with adequate human capital migrate to the formal sector while others migrate to the informal sector. They argue that all informal sector migrants get employed. Therefore, the traditional view postulates that migrants not getting jobs in the formal sector are automatically employed in the informal sector, and in migration equilibrium, there does not exist any open unemployment in the urban sector³⁰.

30 See the models of Datta Chaudhuri (1989) and Grinols (1991). However, the Todaro (1969) model earlier had hinted that those who do not find employment in the formal sector accept temporary unemployment rather than menial jobs.

Page | 71 However, contrary to the traditional wisdom, empirical evidences³¹ do indicate

simultaneous existence of open unemployment and informal sector in developing countries. This calls for an explanation regarding the nature of unemployment and the factors responsible for the inability of the informal sector to sop up the residual labour force causing unemployment. Theoretical exposition on unemployment in the presence of informal sector depicts it as voluntary or involuntary. Voluntary unemployment is a supply side phenomenon where workers prefer remaining unemployed to being employed in the informal sector. Involuntary unemployment arises when workers are willing to accept informal jobs but are unable to find one. It is the latter type of unemployment that is more thought- provoking since it contradicts the conventional wisdom regarding the

‘free-entry’ nature of the informal sector that disallows open unemployment.

The earliest explanation for the existence of open unemployment in the presence of wage flexibility in the informal sector has been provided by Fields (1975). He posits a trade off between informal sector employment and search for formal sector jobs. Those aspiring for formal sector employment have two options for job-search: either they can get some informal employment with flexible work hours and tenure and search for formal sector job in the remaining hours of the day when they are not working or, they can remain unemployed and devote their full time for seeking job in the formal sector. The greater effectiveness of search from being unemployed than informally employed and access to non-earned income may induce workers to choose to be unemployed.

Unemployment in this case is essentially voluntary in nature.

31 In South Africa, the informal sector absorbs only 19% of the workforce, which is a very small proportion by developing country standards and open unemployment is more common. During the period 1995-2003, the labour force grew by over 5 % per annum, wage employment rose by 1.8 % per annum, self-employment grew by 5.1 % per annum, and unemployment grew by above 9 % per annum (Kingdon and Knight, 2001, 2005). In Latin America, according to the ILO, the overall average unemployment rates have risen from 9.1 % in 1995 to 11.1 % in 1999, while several studies estimate the number of informal workers at between 20 and 35 % of the urban economically active population (Portes and Schauffler, 1993). The 2000/2001 Labour Force Survey in Tanzania shows that the unemployment rate had increased by 1.5 points from 3.6 % in 1990/91 to 5.1 points in 2000/2001.

Page | 72 However, there are several evidences that indicate that unemployment is neither always

voluntary nor is the informal sector a free-entry zone as commonly perceived, rather conspicuous barriers to entry exist, which deter the unemployed from entering the sector (Banerjee, 1986; Kingdon and Knight, 2001). In a study of South Africa, Gandhi-Kingdon and Knight (2001) find that the unemployed are substantially worse-off than the informal sector workers in terms of income, living conditions and happiness. One may argue that the unemployed may be prepared to endure temporary penury and unhappiness to allow full time search and thus optimize their ‘inter-temporal search strategy’. This rationale is also consistent with voluntary unemployment. However, their study shows that only 9% of the unemployed searched full-time (35 or more hours) for work in the reference week, and 68% spent no more than 10 hours in job-search. This rules out the possibility that unemployment is a supply side phenomenon and suggests that limited scope for entering the informal sector may have pushed many workers into unemployment.

Nonetheless, minimal attention has been devoted in the literature to analyse and explain the phenomenon of involuntary unemployment and the deterrents for entry into informal sector in developing countries. Whatever studies do exist have mostly been carried out with respect to South Africa, typical with remarkably high open unemployment level despite the persistence of an informal sector. From those studies, three broad reasons that dissuade the unemployed from entering into the informal sector may be envisaged: first, lack of resources to enter the upper-tier informal sector, secondly, inhibitions and impediments to be engaged in self-employment and thirdly, wage rigidity in the informal wage employment.

In Zimbabwe, entry into the productive segment of the informal sector is restricted by lack of skills and capital. Voluntary entry is possible mostly for the erstwhile formal sector workers who had accumulated experience, knowledge, and skills (Jenkins and Knight, 2002). Even for the educated young people it becomes difficult to be successful in self-employment, so that they prefer unemployment, in case they could not find formal sector jobs.

Page | 73 The hindrances to self-employment in South Africa may be classified as profit barriers

where individuals do not view an informal activity as being able to generate profit, capital barriers that restrict an individuals’ access to funds, skill barriers in terms of technical or entrepreneurial skills, future-limiting barriers which arise when informal work today limits an individual’s opportunity to access formal employment in the future, lack of infrastructure, limited role of the government in assisting the unemployed and hidden cost barriers that include formal or informal restrictions and criminal activities (Skinner, 2005; Cichello, 2005; The Western Cape Provincial Economic Review &

Outlook, 2007). Moreover, the subjugation of entrepreneurial activities under apartheid and the allied inhibition of entrepreneurial skills and social networks, and excessively restrictive bye-laws contribute to high entry barriers in South Africa (Chandra et al, 2002). Cichello et al. (2005) also identify the risk of impending business failure, high cost of transport and jealousy within the community as key deterrents in Khayelitsha, South Africa.

Wage rigidity in the informal sector can be explained in three ways. First, it is observed in many developing countries the informal sector consists of several subcontract firms that produce various parts and semi-processed components for the parent formal sector firms. These activities are typically characterized by small scale and among others a low-wage rate suppressed by the parent firms. The informal sectors workers do not get more than their reservation wages. Secondly, several authors (e.g. Banerjee, 1986, Gandhi-Kingdon and Knight, 2001) have noted that many activities in the so-called informal sector of developing countries are highly stratified, requiring skills, experience and contacts, with identifiable barriers to entry. For example, petty trading often has highly structured labour and product markets with considerable costs of entry. Even when skill and capital are not required, entry can be difficult because of the presence of cohesive networks, which exercise control over location and zone of operation. Finally, unemployment of unskilled labour may also arise if the workers are paid their nutritional efficiency wage that maximizes the profits of their employers even though the workers are willing to work at a lower wage which is equal to their reservation wage.

Page | 74 Apart from entry barriers and wage rigidity, the association between informal sector and

unemployment has been analysed in terms of economic development with the help of the theoretical framework developed in the Lewis (1954) model. Following the model, two stages of the development process can be identified for an economy with labour mobility and market-clearing: first, the labour-surplus stage and second, the labour-scarce stage;

beyond the turning point, a shortage of labour begins to raise both urban real wages and rural real incomes more rapidly. In an economy where the turning point is being approached, the proportion of the labour force in free-entry informal activities declines while the more productive informal sector remains unchanged. On the other hand, where the turning point is receding, the free-entry informal sector and open unemployment together have to absorb the growing residual labour force. South Africa and Zimbabwe, characterized by fast labour force growth in relation to slow economic growth appear to be moving further away from the turning point and therefore show evidences of simultaneous existence of informal sector and open unemployment (Ruffer and Knight, 2007; Knight, 2007).

A common conjecture is that growth can drastically curb unemployment. But globalisation-led growth leads to a complex problem. There is a soaring demand for skilled workers while a large pool of the unskilled labour remains ‘unemployable’. The phenomenon of ‘unsatisfied demand’ coexists alongside ‘an incredible surplus of labour power’. In many cases, like for example, Argentina, the revenues brought in through the privatisation process and the inflow of foreign investment did not go towards strengthening the country’s productive base, instead, priority was put on the financial and speculative sector. This led to a gradual contraction of industry and agriculture, aggravated by the opening of the economy to more competitive imports. Many people who had only informal sector jobs fell into perpetual unemployment.

Trade liberalisation, the most important ingredient of the globalisation process, exposes formal enterprises to increased foreign competition, which respond by reducing labour costs by cutting worker benefits, replacing permanent workers with part-time labour, or subcontracting with establishments in the informal sector, including self-employed

Page | 75 micro-entrepreneurs. Alternatively, they may also dismiss workers who subsequently

seek employment in the informal sector. In many cases, an exceptionally large number of retrenched workers create considerable pressure on the already existing informal labour market, with the outcome of a pool of unemployed workers.

In the theoretical literature, Gupta (1993) first formalized the simultaneous existence of the informal sector and open unemployment in urban areas. Later, Chaudhuri (2000) and Chaudhuri et al. (2006) have also explained open unemployment in the urban sector despite the presence of the urban informal sector. It becomes imperative to examine the consequences of alternative development policies, particularly on the open unemployment in the urban sector within the backdrop of the simultaneous existence of the informal sector and open unemployment in the urban sector. In the subsequent sections we first present the Gupta (1993) and Chaudhuri (2000) models separately and then make a comparative analysis of different development policies on open unemployment in the urban area as found in these two models.