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Informal is the new formal

25 Feb 2020

If we stop measuring informal work by formal employment’s standards, there’s a very new and exciting conversation to be had. 

While the ‘gig economy’ represents the novelty of self-employment in countries in the USA, it’s a matter of survival in SA. With both job landscape and marketplace ravaged by slow economic growth, unemployment and rising costs of living, informal employment is the new formal.

This was the theme behind Liberty’s latest LibX Agile event, aimed at thought leaders in the entrepreneurship and financial advice spaces, hosted in January.

“In tough times like these, entrepreneurship rises when formal employment sinks,” said foresight strategist and economist Bronwyn Williams at the LibX event. “In SA, it’s estimated that SME businesses make up a full 90% of all formally registered businesses and they provide employment to about 60% of our labour force and contributes roughly 34% of GDP. Furthermore, the national development plan aims for SMEs to contribute a full 90% of future job growth over the next decade.”

However, SMEs are only the tip of the informal sector iceberg. South Africa’s Quarterly Labour Force Survey, counts diverse occupations from mineworkers and shebeen operators to construction workers, waitrons, plumbers and electricians plus practisers of traditional medicine in the informal sector. As Williams noted, one in six South Africans are ‘employed’ by the informal sector.

A country in two minds

Warring opinions emerge when talk turns to the rise and rise of self-employment. For Liberty's Managing Executive of Customer & Adviser Experience, Johan Minnie, it’s an unequivocally positive silver lining to South Africa’s current dire straits.

“The fact of the matter is, formal employment is declining. South Africa has a 29% unemployment rate at this time, that is the second highest ever in this country. But there’s a flipside to that. In short, the people of South Africa are becoming more and more entrepreneurial. When you think about economic growth in this country, it’s going to come from entrepreneurs,” said Minnie.

Luckily for Minnie and South Africa, the informal ‘shadow economy’ is booming, worth approximately R100 billion per annum.

However, informal employment is seen as incredibly vulnerable when looked at from a traditional employee mindset. Unguarded by law and regulation, informally employed and self-employed individuals do not have the luxury of company-subsidised medical aid and retirement funds or the guarantee of a monthly pay check when truly vulnerable. They are not guaranteed sick days, maternity and paternity leave or annual pay raises when inflation goes up.

Changing the conversation

It is a case of comparing apples with oranges in many cases. Many arguments lambasting informal employment as a viable source of income stem from comparing informal to formal employment on formal jobs’ terms, when in fact the two are different enough to warrant a new kind of conversation.

“Salaried workers could now very well be less secure than freelancers and entrepreneurs,” said Williams. “Self-employed workers may lack pension and medical benefits, but they can spread their paycheck risk between more clients and companies. On the other hand, a salaried worker’s fate is tied to their single employer’s fate.”

With retrenchment figures being what they are now – not to mention the growing uncertainty surrounding formal employment’s perks - such as the NHI's likely disruption of medical aids and proposed bailout plans for state-owned enterprises eyeing pension fund coffers – just how secure is that single employer’s fate really?

Financially more formal

One of the stronger old arguments against informal employment was the lack of financial backing the average SME and entrepreneur enjoyed. However, this tide, too, is turning. Insurance for loss of income, for example, was something only salaried formally employed people could traditionally access. Not anymore. In fact, accessing insurance protection against retrenchment can be far more difficult and expensive than insuring the average SME.

Liberty has even taken this conversation one step further by recently launching its Income Protector Enhancement, specifically for ‘side hustles’, freelance workers, startups and the rest of the gig economy. The new and improved Income Protector is Liberty’s way of supporting where the times seem to be heading in South Africa’s employment space, according to Minnie.

“There’s never been a more desperate need than now for entrepreneurs to come to the fore and help us grow the economy. As financial advisers, there’s a responsibility on us to help aid growth. While people are not going to create more formal employment, we need to do our bit to see that entrepreneurs are being assisted in being successful. That they can grow and thrive. It’s about starting that conversation.”

Liberty Group Ltd. is a registered Long-Term Insurer, and an Authorised Financial Services Provider (FAIS no 2409). Terms and Conditions apply.

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Liberty Group Limited (Reg. no 1957/002788/06) is a licensed Insurer and an Authorised Financial Services Provider (no 2409).