Does the depth of informality influence welfare in urban Sub-Saharan Africa?

Abstract

We explore the relationship between household welfare and informality, measuring household informality as the share of members’ activities (hours worked or income) without social insurance. We discretize these measures into four bins or portfolios and assess their influence on consumption, as a measure for welfare. Cross-sectional regressions for five urban Sub-Saharan Africa countries reveal a non-linear relationship between the depth of informality and household welfare. A mixed formality household portfolio has at least the same welfare as a fully formal one. Using panel data for Nigeria, we assess household switches in informality portfolios, accounting for selection on unobservables and find it explains most welfare differences. Switching informality portfolios does not change welfare trajectories, with the notable exception of welfare gains for fully informal households becoming fully formal. From a policy perspective, our results suggest that policies incentivizing the formalization of the marginal worker may not result in perceivable welfare effects.