Can training programs reduce informality?

Principal investigator: 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 the intervention: Guayaquil, Ecuador

Sample size: 385 items

Sector: Labor market

Type of intervention: Educational Program

Primary variable of interest: Economic development

Evaluation method: Experimental Evaluation (RCT)

Policy Problem

The term "informal sector" was coined in the 70s by the International Labour Organization. According to Hart (1973), there are several 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, defined informality through the characteristics of individuals: “people who work for or own businesses that do not have any legal operating registration and workers who do not have social security or employment ties”.

Informality is a phenomenon that presents negative consequences from a social point of view, since it keeps its agents in minimal conditions of development. In addition to the fact that informal workers lack the protection of labor laws, preventing access to social security, for example (Centrálogo, Bertranou & Casanova, 2015). Furthermore, informality also results in economic damage, since its practice is linked to tax evasion, as there is a reduction in tax revenue due to the evasion of taxes related to activities carried out in the formal sector, according to Ares. et al (2017). Furthermore, informal businesses 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 rate 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 employed people (Torresano and Christiansen, 2014). And these figures 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 aspects, since informal workers have low qualifications compared to those working in the formal market. Therefore, these individuals are not hired because they lack commercial strategies to add value to the product without lowering the price and revenue, because they are unaware of techniques for attracting and retaining clients, and also because they are unfamiliar with laws, principles of financial planning and administration, among other aspects. This is also a cause of the increasing inequality between the conditions of formal and informal markets.

Therefore, there is a need to create educational programs in the business sector that 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 rate of informality in Ecuador, an educational program was developed for the economic and comprehensive development of informal vendors, based on the production of new knowledge and tools to improve the quality of life of these workers and, consequently, lead them to the formal sector.

The program will last 7 weeks and will consist of two groups, one group receiving training focused on marketing and the other on sales. The training sessions for the capacity-building program followed this structure:

Tabela 1Structure of training programs

Week	Sales	Marketing
Week 1	Product features and benefits	The brand
Week 2	Purchase motivators	Trademark registration
Week 3	Customer types	Marketing mix concept
Week 4	AIDA Technique*	Marketing mix for informal markets
Week 5	SPIN technique**	Marketing mix in service
Week 6	Cost of sales	Value added
Week 7	Sales clinics	Consumer reviews

Methodology Details

For the research, an experimental evaluation was used, in which the authors were able to create panel data from the individuals, following them for 7 weeks.

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

The behavior of the individuals was constantly evaluated over time. The authors worked with 55 people, equally distributed between the two groups, which, although seemingly a small number, is considered to be a significant portion of the sample size in experimental studies. Since there will be 7 evaluation sessions during the study, the sample will consist of 385 individuals (55 people x 7 sessions), a number greater than the previously established population sample size.

In the marketing group, 70% of participants are men, while in the sales group, men represent 52%. Ecuadorian nationals fill all the positions in the marketing group, but in the sales group, Ecuadorians represent 78% and Venezuelans 11%. Regarding the educational level of participants in the marketing group, 52% have completed high school, 35% have completed elementary school, and only 4% have completed higher education. In the sales group, 22% have completed high school, 50% have completed elementary school, and 22% have completed higher education. Thus, it is evident that informal workers have a low level of qualification in both groups. In both groups, the age range with the highest percentage is 50 years or older.

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 showed a notable increase, as did the average income, where individuals experienced an increase in sales ranging from $30 to $159 between week 1 and week 7. However, in the sales program, the results show that there was not such a large increase in qualification, and regarding 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 on both groups. When evaluating the program as a whole, fixed effects estimates suggest 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 informal sector workers.

Lessons in Public Policy

Because of the negative economic and social consequences of informality in the labor market, there is a need to implement public policies aimed at both increasing the income of these workers and raising awareness of the disadvantages of informality. versus the advantages of formality. To mitigate 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 guide them into the formal sector.

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