Earnings determinants for self-employed women and men in the informal economy: the case of Bogota, Colombia.

• Author: Tomal, Annette

Introduction

Every nation, regardless of its level of development, has an informal economy; what varies is the degree of informality present in each economy. Informal economic activity represents a large proportion of the Gross Domestic Product (GDP) in developing countries: between thirty-nine and seventy-six percent in African countries, twenty-five to sixty percent in Central and South America, and thirty-eight to seventy percent in most of Asia. By comparison, that proportion is between eight and thirty percent in Organization for Economic Cooperation and Development countries. (1)

Over the last three decades, an increasing proportion of the world's population is earning a living through self-employment in the informal economy, primarily due to dramatic increases in urbanization and the resulting rise in poverty in those areas. (2) Because of the prevalence of informal economic activity throughout the world, learning more about entrepreneurs in the informal economy can help nonprofit organizations and governments in their efforts to understand that economy and the determinants of profitability. Accordingly, this study seeks to measure the earnings gap between self-employed men and women and to identify the earnings determinants of each group in the informal economy of Bogota, Colombia.

Background

Each day, millions of Colombians earn a living by working in the informal economy. In fact, half of the Colombian labor force works in that country's informal economy. (3) Indeed, the informal economic sector of Colombia has seen increasing proportions of both men and women, rising from 60 percent of women and 54 percent of men in 1984 to 61.6 percent of women and 60.4 percent of men in 2000. (4)

In the Colombian labor force, there is a pattern among workers over time, which is often referred to as the life-cycle theory. According to this concept, many young workers begin in the informal sector as domestic servants and unpaid family workers. As they acquire work experience, they move into the formal sector as salaried employees. In their later years, they might return to the informal sector as either self-employed or small-business owners. (5) Data on the Colombian labor force validates this theory. In 2000, for example, when analyzing the age distribution of workers within different economic sectors, formal workers were relatively young; almost forty percent of all formal workers were ages twenty to twenty-nine. The largest sectors covering workers ages thirty to thirty-nine were informal salaried large firm (almost thirty-five percent of workers in that sector) and informal self-employed (about thirty percent of all self-employed). The largest sector covering workers ages forty to forty-nine was informal business owner (approximately thirty percent of all workers in that category) (6)

Colombia's informal economic sector is heterogeneous; it encompasses direct subsistence workers (self-employed, unpaid family workers, and domestic servants who are usually the lowest paid workers), (7) informal salaried workers, and informal entrepreneurs. The direct subsistence group has a higher proportion of women and lower educational and earnings levels; the self-employed in this group are often street and market-stall vendors. (8) About fifty-five percent of workers in Colombia's informal economy are self-employed. In fact, almost all self-employed workers in the entire economy (ninety-two percent) belong to the informal sector. (9)

In describing the urban informal economy of Colombia, it is helpful to discuss the legal aspects arising from the activities of these self-employed micro-entrepreneurs who sell their goods in the street, an area often referred to as "public space." Much of that business is prohibited by law. Under Article 5 of Law 9a of 1989 (Urban Reform Law), public space is defined as public property for the "satisfaction of collective urban needs." Some examples include areas used for the circulation of pedestrian and vehicular traffic, public recreation, and basic public services. (10) Micro-entrepreneurs who conduct their business in these areas can have their inventory confiscated and retained by local police (Decree 446 of 1990). (11) If so, an ambulant vendor--one who does not operate from a fixed location--can go through an official process to try to reclaim his/her inventory which includes: (1) completing a form declaring the seizure/confiscation of their merchandise; (2) providing a written assessment with evidence in the form of a rebuttal to the confiscation of their merchandise; and, (3) a verdict is rendered on whether or not to return the merchandise. (12) Merchandise that is not returned is sold at a public auction. A vendor selling in a fixed public space location may have a permit issued by a local authority to sell their merchandise at that location. If so, the government has the authority to relocate the vendor:

when a local authority proposes to recover a public space occupied by an ambulant vendor who holds a license or an authorization given by the government, then the local authority will design and execute an adequate and reasonable relocation plan for the aforementioned vendors in a manner that reconciles in practice the conflict of interests. (13) Vendors hold this right under confianza legitima (legal agreement), a term that refers to a vendor's fight to be relocated. The Popular Sales Fund can assist them with this process. The rights that fall under confianza legitima are not applicable to ambulant sellers. (14)

Theory and Methods

For any study on the informal economy, it is imperative to make three clarifications. First, it is necessary to define the use of the term informality. Second, it is necessary to identify the conceptual approach(es) that will be applied. Finally, it is important to specify the sub-sector that is being considered. These three clarifications--definition, conceptual approach, and sub-sector--helps one avoid confusion on a subject that can be broadly discussed without consistent articulation.

This study defines informality as non-registration with the Chamber of Commerce. Thus, all of the self-employed men and women in this study were defined as informal because their business activities were not registered with the Bogota Chamber of Commerce. (15)

Various conceptual approaches to the informal sector have developed over the last several decades. They include the dualistic, legalist, structuralist, and entrepreneurial approaches. (16) This study relies primarily on the legalist and entrepreneurial approaches for definition and conceptual framework, respectively. (17) The legalist approach focuses on regulatory framework, where legal status is the defining element for formal and informal businesses. (18) As economist Carmen Elisa Florez points out, "[a]lthough the origin of the informal economy may have been a response to insufficient job creation, it expands in response to excess regulation of the economy, inadequate labor and economic legislation, and insufficient bureaucracy." (19) The legalist approach, therefore, explains the informal economy as a reaction to excessive government licensing requirements and regulations for the small entrepreneur. (20) The entrepreneurial approach views the informal sector as unregulated and dynamic, consisting of small-scale entrepreneurs. Here, market inefficiencies are considered the impetus for the informal economy. Such activities may be broadly integrated with the formal sector and include the self-employed. (21)

In Colombia, the informal economy consists of six sub-sectors: small-business owners, small-business workers, large-business workers, unpaid family workers, domestic servants, and own-account workers. (22) The main focus here is on two of the defined sub-sectors within the informal economy: own-account workers and small-business owners. Own-account workers are self-employed, and unlike small-business owners, work alone.

Data

The source for the data was self-employed men and women (both own-account workers and small-business owners) in Bogota, Colombia, whose business activities were not registered with the Chamber of Commerce and were, therefore, considered part of the...