Development Roast

What’s the Story on Gender and Informality?

Women in the informal sector generate much lower incomes than other population groups in Bolivia, and it is natural for the development community to want to help this group through specific policy initiatives targeted at this group. Indeed, I have been hired to study the problem and come up with gender and sector specific policy recommendations on how to help informal business women grow their micro-enterprises and become formal (1) 5 4 3 1.

Unfortunately, I have come to the conclusion that most such initiatives would be either wrong, ineffective, or counter-productive.

First of all, the high levels of informality in Bolivia are not so much due to exclusion as to avoidance. To become formal and stay formal, firms have to go through a tremendous amount of absurd paperwork and then they get hit with an effective tax rate on profits, which is close to 80% (2) 2. Few firms find that the benefits of becoming formal would outweigh the costs, and econometric estimations confirm strongly diminishing returns to scale, and often negative effects of becoming formal (1) 5 4 3 1. This means that it is typically much more profitable to spawn multiple identical informal micro-enterprises than to let one enterprise grow into a medium-sized formal enterprise. This logic obviously applies to both men and women, but it is particularly strong in the sector of commerce (due to the transaction tax imposed on all formally traded goods), which is dominated by women.

In order to reduce informality, it would therefore be necessary to dramatically simplify bureaucratic procedures, reduce effective tax rates, and introduce some benefits of formality. It is the correct long-run solution, but in the short run it would appear to benefit the male dominated formal sector rather than the female dominated informal sector, which is why it is difficult to sell to the development community.

Second problem: The gender wage gaps are much more pronounced in the formal sector than in the informal sector. Indeed, once controlling for differences in inputs (hours worked, education levels, and productive capital) there are no gender differences in productivity among micro-entrepreneurs (1) 5 4 3 1, whereas there is a substantial gender wage gap among the better educated in the formal sector, even after controlling for differences in education (see Figure 1 below).

Figure 1: Education and wages in urban Bolivia, by activity and gender 2005
Source: Andersen & Muriel (2007). See footnote (1) 5 4 3 1.

For example, in the health sector, both men and women on average have a bit more than 15 years of education, but women earn only half as much as men. In contrast, men and women in the hotel and restaurant sector earn the same level of incomes despite the fact that women have 2.3 years less education, on average.

For men there is a clear positive relationship between education and earnings. The occupations which require high levels of education also pay correspondingly high salaries. This relationship is much less clear in the case of women. For example, women working in health and formal services with around 15 years of education earn pretty much the same as women working in urban agriculture with half that level of education. This implies that the returns to education are smaller for women than for men. If we were to implement policies that improve the incomes of informal women with low levels of education, we would further undermine the returns to education for women, with likely negative dynamic effects on women's education levels.

My conclusion is therefore that in order to sustainably increase productivity and reduce informality, especially among women, we should avoid specific policies targeted at the productivity of informal women, since that would further distort incentives. Instead we should focus on removing the obstacles for women in the formal sector. One gender specific obstacle is the generous labor law, which is intended to protect women, but instead acts to make the hiring of women a very risky proposition compared to the hiring of a similarly qualified man. Another formal sector obstacle, which is particularly binding for women, is the rigid working hours, which can be diminished both by making working hours more flexible and by providing free public child care.

Instead of providing more of the cute sector-specific patches, which are so popular with the development community, we should concentrate on true, long-run solutions, which provides the right incentives for all people, no matter what their gender, ethnicity, location or talents.

Heard of any ways to address gender and informality issues? Leave a reply below.

 (*) Director, Institute for Advanced Development Studies, La Paz, Bolivia. The author happily receives comments at the following e-mail:

(1) See the study "Informality and Productivity in Bolivia: A Gender Differentiated Empirical Analysis 6" commissioned by the World Bank.
(2) World Development Indicators.

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