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Deconstructing Informality: A Response to Vulnerability or an Optimal Choice?

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Listed:
  • Song, Lina

    (University of Nottingham)

  • Appleton, Simon

    (University of Nottingham)

  • Liang, Zhe

    (University of Nottingham)

Abstract

The rapid growth of informal employment in China in recent decades has attracted attention, but to understand its implications, the concept of informality must be deconstructed. We reclassify employment status into three categories: salaried workers who have long-term contracts; the self-employed; and causal workers without long term contracts (working in either the formal or the informal sector). The monthly earnings of the self-employed are much (47%) higher than those casual employees. Self-employment is not necessarily a misfortune and the flexibility it provides may be optimal for some kinds of workers. For example, the self-employed are more likely to be disabled and to have young families. Institutionally, it is still difficult for casual workers and most rural-urban migrant workers to embark on business ownership. Although a large group of rural-urban migrants are employees with longer term contracts, their rural registration (hukou) means they lack the social protection of urban residents. The labour force with rural hukou is more likely to fall into the informal sector and, within that sector, is most likely to be engaged in casual labouring jobs. Policies to support small businesses may be warranted given the detrimental impacts of informality on casual workers. Experimental interventions could be tried along the lines of those used in Peru to provide funds to support entrepreneurial activities by this group to lift themselves out of a poverty trap into more sustainable employment. Skill training, encouragement for innovation, tax credits and reducing institutional constraints on starting up small business should be all considered.

Suggested Citation

  • Song, Lina & Appleton, Simon & Liang, Zhe, 2016. "Deconstructing Informality: A Response to Vulnerability or an Optimal Choice?," IZA Discussion Papers 10100, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp10100
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    References listed on IDEAS

    as
    1. Appleton, Simon & Song, Lina & Xia, Qingjie, 2014. "Understanding Urban Wage Inequality in China 1988–2008: Evidence from Quantile Analysis," World Development, Elsevier, vol. 62(C), pages 1-13.
    2. Appleton, Simon & Knight, John & Song, Lina & Xia, Qingjie, 2002. "Labor retrenchment in China: Determinants and consequences," China Economic Review, Elsevier, vol. 13(2-3), pages 252-275.
    3. Qingjie Xia & Lina Song & Shi Li & Simon Appleton, 2014. "The effect of the state sector on wage inequality in urban China: 1988--2007," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, vol. 12(1), pages 29-45, February.
    4. Simon Appleton & John Knight & Lina Song & Qingjie Xia, 2004. "Contrasting paradigms: segmentation and competitiveness in the formation of the chinese labour market," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, vol. 2(3), pages 185-205.
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    Cited by:

    1. Mayneris, Florian & Poncet, Sandra & Zhang, Tao, 2018. "Improving or disappearing: Firm-level adjustments to minimum wages in China," Journal of Development Economics, Elsevier, vol. 135(C), pages 20-42.

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    More about this item

    Keywords

    informality; vulnerability; self-employment; casual labour; China;
    All these keywords.

    JEL classification:

    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J46 - Labor and Demographic Economics - - Particular Labor Markets - - - Informal Labor Market
    • J48 - Labor and Demographic Economics - - Particular Labor Markets - - - Particular Labor Markets; Public Policy

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