Can training programs reduce informality?

Responsible researcher: Eduarda Miller de Figueiredo

Article title: BUSINESS TRAINING PROGRAM FOR THE INFORMAL SECTOR: ECONOMETRIC DETERMINATION

Article authors: Beatriz A. Loor, Jorge L. Delgado, Jesus R. Melendez, Ana E. Dumaguala and Greg A. Ramirez

Location of intervention: Guayaquil, Ecuador

Sample size: 385 elements

Sector: Job Market

Type of intervention: Educational Program

Variable of main interest: Economic Development

Evaluation method: Experimental Evaluation (RCT)

Policy Problem

The term “informal sector” was given in the 1970s by the International Labor Organization. According to Hart (1973), there are some divisions of labor, where the informal sector presents illegal productive activities, with legal proceedings under labor laws. During the 17th International Conference of Labor Statisticians (ICLS), in 2003, informality was defined through the characteristics of individuals: “people who work or own businesses that do not have any legal registration of operations and workers who do not have a social security link or employment relationship”.

Informality is a phenomenon that presents negative consequences from a social point of view, as it keeps its agents in minimum development conditions. In addition to the fact that its informal workers do not have protection under labor laws, not allowing access to social security, for example (Centrálogo, Bertranou & Casanova, 2015). Furthermore, informality also results in damage from an economic point of view, since its practice is linked to tax evasion, since there is a reduction in tax revenue due to tax evasion related to activities when carried out in the formal sector, according to Ares et al (2017). Furthermore, informal companies have high costs and therefore cannot be sustained in the long term, given the lack of private and public support (Djankov et al ., 2002).

Assessment Context

Ecuador is one of the countries with development problems and a high level of informality, equivalent to 33% of GDP. The most representative Gross Value Added in Ecuador comes from Guayaquil, corresponding to 22%. This is one of the most commercial cities, where 47% of the city's income comes from informal activities, exceeding the 45.97% of people employed (Torresano and Christiansen, 2014). And these values ​​continue to increase.

These high percentages demonstrate the need for programs and actions aimed at reducing this practice, in which education is one of the most important plans, given that informal jobs have low qualifications compared to those working in the formal market. Therefore, they are individuals who are not hired because they lack commercial strategies to add value to the product without reducing the price and its revenue, because they are unaware of techniques for attracting and retaining customers and, in addition, because they do not know laws, principles of financial planning and administration, among other aspects. This is also a cause of increasing inequality between formal and informal market conditions.

Therefore, there is a need to create educational programs in the business area, which aim to increase the income of workers in the informal sector and raise awareness of the disadvantages of informality versus the advantages of formality.

Policy Details

Seeking to reduce the informality rate in Ecuador, an educational program was developed for the economic and integral development of informal sellers, based on the production of new knowledge and tools to improve the quality of life of these workers and, consequently, lead them to the sector formal.

The program will last 7 weeks and will consist of two groups, where one group had training focused on the marketing area and the other on the sales area. The training program’s training followed the following structure:

Table 1 : Structure of training programs

Methodology Details

To carry out the research, an experimental evaluation was used, in which the authors managed to create panel data on individuals, monitoring them for 7 weeks.

The research design contains three phases. The preliminary phase (F1) was the selection of two groups of people from the informal business sector in the city of Gayaquil, Ecuador. Phase two (F2) consisted of applying a questionnaire to assess knowledge of sales and marketing techniques, enabling the creation of educational programs for each group. Finally, phase three (F3) assesses which training area is most suitable for the economic development of informal workers.

Individuals' behavior was constantly evaluated over time. The authors worked with 55 people, distributed equally between the two groups, where even though it appears to be a small number, it is claimed that in experimental studies the sample is measured by the entire panel. As there will be 7 evaluation sessions during the study, the sample will consist of 385 elements (55 people x 7 sessions), a higher number than the previously established population sample.

In the marketing group, 70% of participants are men, while in the sales group the gender represents 52%. Ecuadorian nationality fills all vacancies in the marketing group, but in the sales group, Ecuadorians represent 78% and Venezuelans 11%. Regarding the education of the participants in the marketing group, 52% had secondary education, 35% attended primary education and only 4% attended higher education. In the sales group, 22% completed secondary education, 50% completed primary education and 22% completed higher education. Thus, it is clear that informal workers have a low level of qualification in both groups. In both groups, the age group with the highest percentage is 50 years and over.

Fixed-effects and random-effects panel data models were estimated for each area of ​​specialization. Thus, the variable of interest is economic development, represented by the average daily income of informal vendors.

Main Results

The results demonstrate that in the marketing group, the average qualification had a notable growth, as well as the average income, where individuals had an increase in sales that varied from $30 to $159 between week 1 and week 7. However, in the program of sales, the results show that there was not such a large growth in qualification and, in relation to sales, the initial average was $14 and at the end of the program it was $13. Therefore, a greater increase in revenue was observed in marketing than in sales.

Isolated econometric estimates demonstrated that the program had a positive impact for both groups. When evaluating the program together, the fixed effects estimates suggested that it was not possible to determine a significant differentiation between the areas of specialization. However, random effects estimates indicate that both areas had a significant and positive impact on the development of informal workers. Furthermore, the random effects model establishes that the marketing program had the greatest impact on workers in the informal sector.

Public Policy Lessons

Because of the negative consequences from an economic and social point of view that arise from informality in the labor market, there is a need to increase public policies that aim both to increase the income of these workers and to develop awareness of the disadvantages of informality versus the advantages of formality. To reduce these consequences, the results of this study suggest that a good strategy would be to develop an educational program for these individuals, producing new knowledge and tools to improve their qualifications and lead them to the formal sector.

Reference : OOR, BA et al. Business training program for the informal sector: Econometric determination. Espacios Magazine, v. 40, p. 33, 2019.