Is the informal economy becoming the answer to unemployment?

The informal economy is increasingly emerging as a significant solution to South Africa's unemployment crisis, according to Annelene Dippenaar, chief business officer at Shop2Shop. As formal-sector employment dwindles, more South Africans, particularly young people, are turning to informal businesses and trade for income. The informal economy absorbed 34,000 unemployed youth in the second quarter, with trade being the largest industry to gain jobs, adding 70,000 new positions.

Dippenaar emphasizes that the informal economy has become the shock absorber for the formal economy. As formal hiring contracts, people still need income and may start hustling through starting a business or becoming informally employed. The financial technology platform highlighted that entrepreneurial skills such as inventory management, demand forecasting, working-capital management, credit management, pricing, procurement, and relationship-building are crucial for success in the informal economy.

However, the growth of the informal sector faces several barriers. High costs of digital payments, inadequate working capital terms, and a cumbersome compliance burden are limiting factors. The Reserve Bank aims to reduce transaction costs through the Payments Ecosystem Modernisation programme, which could significantly support the adoption of digital payments by small entrepreneurs.

Informal retail needs businesses to receive small amounts over days rather than large sums over months, but most financial products cater to formal businesses.

Consumer spending habits also impact informal traders. Households prioritize immediate needs over long-term purchases, requiring traders to manage cash and digital payments and balance expenses paid in cash or digitally. Additionally, the margin has shifted, with traders selling groceries now competing for price against formal retailers with superior buying power.