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Neoliberalism, Globalization, and the Magnification of the Informal Economy

China Manufacturing trend to move from coastal to inland area because the cost is growth

This article is part 3 of a 4-part essay about the informal economy by Pascale Joassart, co-producer of "City Rising: The Informal Economy." Read Part 1, Part 2 and Part 4.

Understanding Contemporary Informality: The Rise of Neoliberalism

Experts somewhat disagree about the specific reasons why individuals resort to unreported and unprotected work in the United States today. Most argue that it is because they are barred from formal jobs due to immigration status, racism, sexism, or lack of marketable skills, including education or professional experience. Others believe that people join the informal economy because it offers more flexibility and an escape from excessive and costly regulations. The majority, however, agree that the existence and growth of the informal economy is tied to structural changes that have drastically altered the way the economy operates. Beginning in the 1970s, two major transformations — globalization and neoliberalism — simultaneously created a growing demand for informal labor and a rising supply of people willing to work informally.

By 1973, after a record period of growth, the economy was in crisis again, mostly because of rising oil prices. The policy pendulum shifted against government intervention. Neoliberal ideology, promoted by economists critical of Keynesianism and later embraced by Thatcher and Reagan, was growing in popularity. It rested on the idea that governments should stay out of markets because markets were presumably much more efficient at allocating resources and generating economic growth, which would ultimately lift all boats. In that context, the role of the state was redirected away from regulating the economy, protecting workers, and providing a social safety net, towards supporting businesses, attracting investors, and promoting free trade. The social contract that had been in place since the New Deal and was solidified during the 1960s was over.

One of many service stations in the Portland area carrying signs reflecting the gasoline shortage
One of many service stations in the Portland area carrying signs reflecting the gasoline shortage |  Environmental Protection Agency
President Reagan shakes hands with Bill Clinton in the Rose Garden during signing ceremony for HR 1720 Welfare Reform Act of 1988, October 13, 1988.
President Reagan shakes hands with Bill Clinton in the Rose Garden during signing ceremony for HR 1720 Welfare Reform Act of 1988, October 13, 1988.

An important aspect of neoliberalism is the relentless attack on social welfare programs, which continues to this day. It started with the Reagan administration, but kept unfolding with subsequent administrations, including under President Clinton who signed the 1994 welfare reform into law, imposing time limits on benefits, shifting fiscal responsibility from federal to state governments, and promoting a “work first” approach that has increased the supply of lower-skilled workers looking for work. As a result, “workfare” effectively replaced “welfare” in an attempt to “encourage work and self-sufficiency.” This has been particularly damaging and punitive for welfare recipients living in areas with limited access to formal jobs, most of whom are single mothers with childcare responsibility. Many end up taking part-time and poorly regulated jobs or engaging in other informal economic activities like street vending or domestic work. Today, the Trump administration’s proposed budget cuts to housing assistance, Medicaid and Food Stamps, along with new work requirements, are likely to push even more people in the informal economy, regardless of their ability to work. 

Another aspect of neoliberalism is the attack on regulations and unions that are seen as causing higher costs of production and hindering economic growth. Union participation rates continuously declined since the 1950s dropping form 33% to just above 10% of wage and salary workers today. The removal of certain work place safety and labor regulations, the reduction in enforcement of existing laws, and the decline in unions, have created a climate that enables formal businesses to avoid applicable regulations and rely on informal labor without penalties.

Workers of the Palace Hotel - part of Marriott Hotels - are on strike in October 2018 in San Francisco to fight for higher wages, workplace security and job safety.
Workers of the Palace Hotel - part of Marriott Hotels - are on strike in October 2018 in San Francisco to fight for higher wages, workplace security and job safety. Creative Commons / Bastian Greshake Tzovaras
Union membership in US 1930-2010
Union membership in U.S. 1930-2010 |  Source for 1930 to 2000 from Union Membership Trends in the United States. Source for 2005 and 2010 numbers (wage and salary workers only) from Bureau of Labor Statistics

Interestingly, as we have been generally deregulating our economy, some regulations – those that tend to criminalize the poor and immigrants – seem to be getting stricter. The 1980s and 1990s saw an increase in anti-immigrant sentiment and an arbitrary use of immigration laws to criminalize and intimidate certain workers. Today, there seems to be stronger anti-immigrant sentiments than ever before, as illustrated by attacks on immigrants from certain countries, deportations, family separation, continued militarization of the border, and wall proposals. This climate is giving employers a license to ignore existing labor laws. Although discrimination based on gender, race, etc. is no longer legal, employers habitually violate minimum wage, overtime pay, and workplace safety laws, particularly when it involves undocumented or highly vulnerable workers who are hesitant to demand that these laws be enforced.

Globalization: Increased Competition and the Race to the Bottom

Not only did neoliberalism redefine the role of the state, it also intensified the speed and depth of globalization, which radically transformed the economy. Trade liberalization policies in the 1970s and 80s, along with new transportation and communication technologies, facilitated the global integration of the economy. This meant that a large share of manufacturing and services could be outsourced more easily to places where labor costs were much lower, while most of the managing, research, financing, logistical, and design jobs remained in the United States and other Global North countries. As a result, the 1980s and 90s was an era of massive downsizing of large corporations, which had provided unionized blue-collar jobs for decades and were now outsourcing and subcontracting many of their activities abroad. This restructured economy is often described as post-Fordism; in contrast to the centralized large-scale production illustrated by the Ford factories, production was now heavily decentralized and spread around the globe.

While Fordism had contributed to the rise of the middle-class, post-Fordism was linked to its disappearance and the emergence of a so-called hour-glass economy characterized by inequality. Flexibility, just-in-time, and streamlining became the order of the day. Corporations, which had become transnational, benefited from having a much more flexible and disposable labor force. To keep costs down, they relied on two main strategies: relocation (if the work could be done at a lower cost elsewhere) or informalization (if the work needed to stay here). The latter is especially relevant to the service industry in which jobs like cleaning, cooking, and taking care of the young, sick and elderly cannot be exported. Increasingly, corporations have turned to sub-contractors and temp agencies that hire workers informally – shifting the risk and responsibility away from employers onto workers. Smaller businesses follow the same approach to remain competitive. Ultimately, profit drives the economy; if there are new ways to increase profit by informalizing the labor force, employers will have an incentive to do so – especially if the chances of getting caught are slim. And in a context where corporate threats to relocate in the Global South are real, the ability of unions and workers to negotiate better contracts or fight for the enforcement of existing regulations is severely limited.

A maquiladora in Tehuacán, Mexico.
A maquiladora in Tehuacán, Mexico.
A California car whose driver offers rides for all three major TNCs.
A California car whose driver offers rides for all three major TNCs.  |  TheTruthAbout​/Creative Commons

While globalization was weakening the power of labor in the United States, it also had severe impacts in the many countries where foreign investments and export-oriented growth strategies destabilized traditional forms of livelihoods. These economic impacts led to a dramatic increase in immigration from the Global South to the United States in the 1980s, which many associate with the informalization of the economy. Compared to Europeans who came in the first large wave of immigration at the turn of the 20th century, these new immigrants found it much more difficult to integrate into the formal economy, in part because of the many regulations now in place but also because of persistent racism and discrimination.

Although goods and capital were allowed to move freely, the movement of people was becoming gradually more restricted. Rather than stopping the flow of migrants, this meant that a growing number were considered undocumented – from less than half a million in 1970 to an estimated 12 million today. Without permission to reside and/or work in the United States, many turned to the informal economy to earn a living and support their families, generating a large supply of informal labor to companies willing to ignore existing regulations. Los Angeles is an ideal place to observe this phenomenon, with immigrants from multiple origins carving spaces for themselves in the local economy as gardeners, construction workers, janitors, nannies, nurses, factory workers, etc. Their labor is very much part of the fabric of the local economy, where informal labor exists in every sector – often in plain sight and right alongside formal labor. Indeed, the local economy would likely collapse without informal workers.

As immigration from the Global South increased, anti-immigrant sentiment flared up, and stricter immigration laws were put in place. Given the continued influx of immigrants, one has to wonder whether stricter immigration laws and the current militarization of the border are not ploys to push these workers in the informal economy and generate a more readily exploitable source of labor than if people were given visas and allowed to work in regular jobs. Could it be that, as a nation, we don’t really want to stop immigration, we just want to be able to continue exploiting immigrants? There is indeed a long and ambivalent history of immigration in this country, with our attitude shifting from welcoming to highly restrictive depending on the economic conditions. Whenever restrictions are tightened, migrants are marginalized and pushed into the informal economy. This may be one of the reasons that informal labor seems to grow during recessions.

Mexican workers await legal employment in the United States, Mexicali, Mexico.
Mexican workers await legal employment in the United States, Mexicali, Mexico. February 8, 1954. |  Los Angeles Times photographic archive, UCLA Library
Holding their assigned numbers, day laborers try for the attention of a homeowner looking for gardening help at the day laborer work site.
Holding their assigned numbers, day laborers try for the attention of a homeowner looking for gardening help at a day laborer work site. |  Mark Boster/Los Angeles Times via Getty Images

Numerous studies highlight the role of immigration in the informal economy. And while immigrants supply most of the labor that fuels it, it is important to note that there must also be a demand for this type of labor – a willingness from employers to avoid regulations – that is linked to the general lack of enforcement of existing regulations and the virtual absence of penalties for employers who break the laws. This brings us back to state and economic restructuring and the underlying role of public policy in creating the conditions for the informalization of labor.

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