The Economics of Human Resources in the Informal Economy

Nonexistent Rules in the Informal Economy

The informal economy operates in a very different way from the formal economy. Whereas the latter is structured and governed by laws and regulations, the former operates pretty much on the rules made by individual players and in a “make as you go” manner wherein on the spot rules and by the job rules are the norm.

Thus, human resources in the informal economy are managed differently from the formal economy. For instance, workers in the informal sector do not have health benefits, social security, salaries that are paid into bank accounts or even job security since they are hired for short-term work as well as are expected to work according to the norms of the employer rather than any adherence to Federal or State rules.

Economics of Employment in the Informal Economy

This means that the economic aspect of managing human resources in the informal economy is based on the immediate demand and how much supply of labour is there at that particular moment. As an example, think of a construction site where the Mason and the Contractors hire labour for the day or a week and at times, for a month.

Indeed, such hiring is always for the immediate need and not out of any long-term commitment from the employers. Thus, the term daily wage workers are used to describe the employment of casual labourers on a short term basis.

Daily wage workers are paid at the end of the day, and they do not earn anything if they do not turn up for work the next day. Thus, they neither have the luxury of taking leaves nor have the protection of social security benefits to see them “through a rainy day”.

Indeed, daily wage workers are usually those who live on the margins of the economy in a very precarious situation, and this is the reason some contemporary sociologists and economists refer to them as the Precariat Class or those whose work and lives are precarious and who migrate from other places to places where work is available.

The Emergence of the Precariat Class

Indeed, a key feature of the economics of human resources in the informal economy is that labour is always on the move searching for places where work is available, and hence, they owe no allegiance to any particular place.

This makes the task of regulating the informal economy as well as putting in place safeguards to such Precariat to protect them from the vagaries of seasonal employment that much more difficult.

Talking about seasonal employment, the economics of the informal economy is such that employment is always determined on a seasonal basis wherein if the contractor has a need for a particular month or two, he or she hires the workers, and if they do not have any need during a particular month, they simply do not hire anyone.

Multiple Layers of Intermediaries

In addition, the informal economy is also characterized by multiple layers of intermediaries and middle persons wherein it is often difficult to trace the actual hirer of the workers. For instance, a construction site might have a contractor who subcontracts the work to a Mason. The Mason, in turn, might outsource the work to another intermediary whose job is to find the workers who are needed.

This person might then contact the actual manager of the workers who can mobilize such workers from either his native place or through contacts with other labour providers.

This maze of intermediaries means that the workers get a fraction of the wages that formal economy workers earn. As the various intermediaries take their cuts, eventually, the workers get a raw deal.

This is also known as arbitrage of employment wherein intermediaries hire those workers who are cheaper from a particular place or from a subcontractor who can provide cheap labour and send them to sites where labour is expensive. The difference in the daily wages between these two places is what the arbitrage or the profit is for the eventual hirer.

Labour Pools are more Important than Individual Workers

As mentioned earlier, these aspects of the informal economy mean that labour is always on the move and has precarious employment that is seasonal in nature. Thus, this Precariat neither has a fixed place of residence nor do they have consistent work throughout the year.

The economics of the human resources in the informal economy is such that individual workers matter less than the combined labour pool from which such workers are hired. Further, with no protections, the workers too flit from site to site as well as from contractor to contractor thereby having no identity documents or address proofs leading to them being included in any governmental schemes that are much more challenging.

The Gig Economy and the Future

Indeed, while all this is usually mentioned about physical work labourers, the emerging digital economy or the sharing or the gig economy might work on similar lines in the future. In other words, while these are early days for Uber drivers and Task Rabbit workers, in the future, they might too be in a situation akin to the daily wage labourers without any permanent benefits or the luxury of protections from the seasonal nature of their work.

In conclusion, the economics of human resources in the informal economy are such that work is flexible and employment is fungible - meaning that nothing is permanent and the only imperatives are the need to cut costs and make profits in as short time as possible by all the stakeholders.


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