2 1705 DEVELOPMENT BRIEF Number 64 The Wodd Bank November 1995 Formal and informal sectors. Winners and losers Informal employment tends to swell during adjustment, as work- Workers suffer during the wrenching transition from a ers laid off in the formal sector seek failed development strategy, even if in the long run new jobs, and women and other household members find outside they benefit from the change hueodmmesfn usd employment to help offset declines in household income. T he poor may find it espe- no longer economically viable. Al- Workers in the informal sector cially difficult to cope with most no adjusting economy entirely have generally fared better than the falls in wages and em- escapes a temporary decline in real those in formal employment during ployment that tend to occur during wages and increase in unemploy- major transformations. In Poland the transition. Sometimes women ment, but the size and duration of informal sector wages were initially are disproportionately affected. both effects differ from country to several times higher than formal And the pain can be deeply felt if country. What ultimately makes the sector wages-in part because the transition is accompanied by re- difference is how many new jobs workers and employers operating cession or if the renewal of growth are created and how quickly-and in the informal sector were earning takes longer than expected. that depends on the speed and high profits outside the taxed credibility of reform. economy, and in part because these Who bears the burden Among workers who remain workers were moving into new, of major changes? employed, the effects of reforms profitable sectors where demand Most households depend largely on can vary greatly. Table I looks at was extremely high. In parts of their incomes from work. Therefore who wins and who loses in transi- Sub-Saharan Africa, too-for household living standards during tions. Workers are grouped by example, in Cote d'Ivoire-adjust- periods of major change are their participation in the formal ment hit workers in the formal closely-though not exclusively- or the informal labor market, public sector harder than those in tied to what happens in the labor place of residence (urban or agriculture and informal urban market. But looking at wages alone rural), sex, and skill level. The employment. But in much of Latin can be deceptive because other fac- effects of transition on each America self-employed urban tors influence current standards of group are compared with the workers-particularly those in the living, such as labor force participa- effects on the average worker informal sector-saw their position tion rates, rates of personal saving, across the four broad categories erode relative to that of formal the variety and quality of products of countries. wage workers. During the 1981-83 consumed, and formal and informal income transfers.* The demand for labor has fallen Table 1 Impact of reform on workers in the four major reform patterns in almost all episodes of transition Industrial Latin Sub-Saharan Asian and adjustment (except perhaps in Type of worker postsocialist American African agrarian those of China and Viet Nam) as a Formal sector - + result of some combination of Informal sector + - + + Urban + - - + macroeconomic decline and labor Ural + + Rural -+ + + redeployment. The reduction is Women +/- - - + most pronounced in sectors that are Skilled urban + + + + Unskilled urban Note: A plus sign indicates a gain, and a minus sign a loss, relative to the average worker. A YFor more details, see World Bank. Worl d Developmnent Re port 1995: Workers in an Integrating World, New York: Oxford plus/minus sign indicates an ambiguous outcome. University Press, 1995. Source: World Bank, World Development Report 1995, New York: Oxford University Press, 1995. recession in Brazil, for example, the mal activities. Women were further correlation between skill levels and ratio of formal to informal sector in- affected by a shift in resources away the probability of sliding into pov- comes increased by 7%. In the from food crop agriculture-where erty. The relative position of Asian countries, even though for- women predominate-toward cash manual workers and low-skilled mal sector workers may have lost crops. Women played a distinct role clerical staff, often with only a voca- ground relative to informal sector during the transition in Asian coun- tional education or less, has deterio- workers, the welfare of both groups tries as well. Although Vietnamese rated more than that of any other has risen in absolute terms. women faced particular challenges group during the transition, * Rural and urban areas. In almost resulting from the collapse of whereas returns to education in- all countries the poor are most childcare services provided by co- creased sharply in Poland and numerous-and poorest-in rural operatives, their overall position Slovenia. In some market econo- areas. But poor rural households improved in line with economic mies, such as Chile and Mexico, the have often benefited from adjust- growth, and female-headed house- relative wage structure has also ment. In Ghana agricultural real holds are now no poorer than those shifted in favor of the more highly wages rose by 27%, whereas wages headed by men. skilled, possibly as a consequence in nontradable-goods sectors The evidence on the effect of ad- of trade liberalization. In Mongolia (mainly commerce) declined by justment on women in the formerly and Viet Nam the largest wage about 22% following adjustment. centrally planned economies is gains have taken place in the boom- In Latin America and Asia the rural mixed, but their situation is clearly ing services sector. population also benefited in rela- not as gloomy as is usually Severe shocks to the economy can tive terms during the adjustment portrayed. Studies in the Czech thus create opportunities for some period, even though poverty re- Republic and Slovenia indicate workers and have wrenching effects mains concentrated in rural areas. that, when individual characteris- on others. Transformation follows Only in the formerly centrally tics are controlled for, women have diverse patterns in different coun- planned economies of Europe do actually gained relative to men in tries, but it always involves a rural households appear to have both wages and employment, marked acceleration in the destruc- suffered more in relative terms either because women are better tion of unviable jobs and the cre- during the transition, as policies educated (and returns to education ation of new ones. That process is of agricultural protection were have risen) or because they almost always accompanied by discontinued. disproportionately occupy jobs in macroeconomic decline, requiring a * Women. In Latin American ad- sectors that have been hurt less reduction in the demand for labor justment episodes the hourly earn- by labor demand shocks, especially and a fall in real wages. The net ef- ings of women declined even more services and labor-intensive fects are often large drops in labor dramatically than those of men, industries. incomes, rising unemployment, and partly because women were con- * Skilled and unskilled workers. a shift from the formal to the infor- centrated in the informal sector and The burden of adjustment falls most mal sector. Even the best-designed in hard-hit low-paying sectors such heavily on the unskilled and un- reform produces gainers and losers as apparel. But women in poor educated in both formerly centrally in the short term, with losers par- households also exhibited strong planned and market economies in ticularly concentrated among the increases in labor force participa- transition. These workers are more unskilled and formal sector workers tion-what is often called the vulnerable to structural change be- in urban areas. Moving the added worker effect. In Ghana cause they are less able to adjust to economy as quickly as possible to women working in the informal a changing environment and to take the new growth path is key to limit- sector also saw their wages decline, advantage of new job opportunities. ing welfare losses, whereas giving as excess labor released from for- In formerly centrally planned up halfway hits poor workers mal employment moved into infor- economies there is a strong inverse hardest. Drereopment Briefs are issued by the World Bank to inform the media, business, academic, and government policy communites about development policy analyses and results from the Bank's research activities. They are drawn from the work of individual Bank researchers and do not necessarily represent the views of the World Bankand its member countries-and should not thereforebe attributedI to theWorld Bank or its affiliates. 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