The Formal-Informal Labor Nexus and Growth in Bangladesh · 2017. 4. 2. · The Formal-Informal...

The Formal-Informal Labor Nexus and Growth in Bangladesh

Workshop on “Formal-Informal Labor Nexus and Bangladesh’s Growth” Bangladesh Institute of Development Studies (BIDS)

Dhaka : March 28, 2017

Krishna Kumar (RAND), Minhaj Mahmud (BIGD), Shanthi Nataraj (RAND), Italo Gutierrez (RAND), Farzana Munshi (BRAC University),

Prodyumna Goutam (RAND)

We Thank the Various Organizations That Made This Research Possible

•  UK Department for International Development (DfID), Institute for the Study of Labor, Germany, (IZA), for funding the initial study

•  BIGD for hosting the inception workshop held in March 2015 and for help in collecting the worker survey data

•  World Bank for funding a follow-on project, including the employer-employee survey

•  ERG for help in collecting the employer-employee survey data •  BIDS and BIGD for hosting this workshop •  Our advisory panel: Professor Dr. Shamsul Alam, Dr. Sultan Hafeez

Rahman, Dr. Rushidan Islam Rahman, Dr. Mustafizur Rahman, Dr. Kazi Ali Toufique

•  Participants of the inception workshop held in March 2015 •  Kumar acknowledges additional support from the Rosenfeld Program

on Asian Development at the Pardee RAND Graduate School

One View of Informality Characterizes the Sector as Stagnant, Unproductive

Source: LaPorta and Shleifer (2014)

Per-Capita GDP Has Grown Substantially in Bangladesh

0

100

200

300

400

500

600

700

800

0 10 20 30 40 50 60 70 80 90

100

2002 2005 2010

Per-C

apita

GD

P (C

onst

ant 2

010

USD

)

Perc

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orm

al E

mpl

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Formal Employment GDP

Source: World Bank DataBank.

But the Share of Formal Employment Has Remained Stubbornly Low

Sources: World Bank DataBank and authors’ calculations based on Bangladesh Labour Force Surveys.

0

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2002 2005 2010

Per-C

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Perc

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mpl

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Formal Employment GDP

Alternative View Characterizes Informal Sector as Dynamic

•  Allows entrepreneurship

•  Providing flexible work hours/locations

•  Provides supply links to the formal sector

•  Predicts that the informal sector will exist (maybe even thrive) as the economy develops (formal and informal labor are complements)

Motivation for Research Agenda •  Are less productive than formal firms

•  Pay their workers less

•  May not give their workers the benefits to which they are entitled

If the informal sector is here to stay, could it be an important source of growth?

And what policies might improve conditions for informal firms and workers?

We Addressed These Questions Through Several Approaches

•  Analyzing the links between export-led growth and formal and informal employment, using data from the Labour Force Surveys (LFS)

•  Examining whether workers are “locked in” to informal employment, and how much they value specific benefits of formality, through a survey of informal and formal workers

•  Examining preferences of employers as well as employees at small, informal firms through a matched employer-employee survey

The Inception Workshop Helped Shape Our View of Informality as a Continuum

Safe working conditions

Minimum wage Sick leave

Paid holidays

Maternity leave

Termination notice

Written contract Pension

LFS Worker Survey

Formal Regular paid employee Paid employee in private entity

Paid employee in government

Informal Day laborer/casual worker Day laborer/casual worker

Seasonal worker Seasonal worker

Domestic worker Domestic worker

Self-employed Employer Self-employed / business owner, no employees

Business owner, hiring only family members

Business owner, hiring at least 1 paid worker

Family helpers Unpaid family member Paid or unpaid family member working in a HH business

As of 2010, 15% of Working Adults Are Formally Employed

Population Aged 15-65 90.7 million

Economically Active

55.0 million

Employed 52.8 million

Formal (15%) 7.9 million

Informal (23%) 12.2 million

Family (22%) 11.8 million

Self-Employed (41%)

21.0 million

Unemployed 2.2 million

Economically Inactive

35.7 million

Source: Bangladesh Labour Force Survey, 2010

Total population in 2010 149 million

How Do Growth Opportunities Affect Formal, Informal, Family and Self Employment?

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Ln(F

orm

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10 15 20 25Ln(BGD Exp OECD - Total)

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1012

1416

Ln(In

form

al e

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68

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Ln(U

npai

d em

ploy

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68

1012

1416

Ln(S

elf e

mpl

oym

ent)


How Do Growth Opportunities Affect Formal, Informal, Family and Self Employment?

68

1012

14

Ln(F

orm

al e

mpl

oym

ent)


68

1012

1416

Ln(In

form

al e

mpl

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68

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Ln(U

npai

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68

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Ln(S

elf e

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Estimated relationship between export-led growth and levels, shares of employment

We Considered Both Direct and Indirect Effects of Export-Led Growth

2002 2005 2010

Export (billion, 2010 US$) 5.9 9.1 16.7

Direct Demand (billion, 2010 US$) 6.1 9.5 17.5

Indirect Demand (billion, 2010 US$) 7.4 10.5 20.3

Formal Employment (million) 6.1 6.6 7.9

Informal Employment (million) 9.5 10.1 12.5

Unpaid Employment (million) 8.1 10.3 11.8

Self Employment (million) 20 20 21.9

Source: Bangladesh Labour Force Survey, 2002, 2005, 2010

•  Used supply chain linkages to account for how export opportunities propagate through the economy

We Then Examine Relationship Between Exports and Each Type of Employment at the Individual Level

•  Probability of working in each type of employment as a function of total demand (direct + indirect)

Empijt =α +βTotDemjt +γXijt +δk +εijtEmpjt = 1 if individual i is employed in sector j at time t, 0 otherwise TotDemjt = demand for goods from sector j at time t that are induced by Bangladesh exports to OECD Xijt = individual characteristics (age, gender, education) δk = control for broad sectoral effects

•  Concern that demand for Bangladesh exports may be endogenous

•  Use India’s exports to OECD, along with India’s IO table, as an instrument

Formal Informal Family SelfEmployed

Ln(TotalDemand) 0.0154 -0.0388*** 0.00647 0.0169**

(0.0135) (0.00929) (0.00999) (0.00856)

ObservaIons 190,685 190,685 190,685 190,685

FirstStageF-test 31.72 31.72 31.72 31.72

Growth is Associated with a Shift from Informal Employment to Self-Employment

Robust standard errors in parentheses. Standard errors clustered at the consolidated IO sector level. *** p

Formal Informal FamilySelf

Employed

Ln(TotalDemand)-Men 0.0140 -0.0470*** 0.0229** 0.0101

(0.0129) (0.0105) (0.00985) (0.00912)

Ln(TotalDemand)-Women 0.0200 -0.0107 -0.0495*** 0.0402***

(0.0183) (0.0103) (0.0154) (0.0111)

ObservaIons 190,685 190,685 190,685 190,685

Women are More Likely to Move into Self-Employment…


Formal Informal FamilySelf

EmployedLn(TotalDemand)–NoClassARained 0.00175 -0.0598*** 0.0180* 0.0400***

(0.0134) (0.00882) (0.0105) (0.00971)

Ln(TotalDemand)–Class1-5 0.0177 -0.0368*** 0.00215 0.0169**(0.0138) (0.00872) (0.0105) (0.00833)

Ln(TotalDemand)–Class6-9 0.0286** -0.0213** -0.00586 -0.00142(0.0141) (0.00868) (0.0108) (0.00840)

Ln(TotalDemand)–Secondary 0.0288 -0.0124 -0.00203 -0.0143(0.0241) (0.0110) (0.0101) (0.0127)

Ln(TotalDemand)–Graduate 0.0283 -0.00620 0.00754 -0.0297(0.0475) (0.0171) (0.00559) (0.0317)

ObservaIons 190,685 190,685 190,685 190,685

…As Are Less Educated Workers


Discussion and Policy Implications •  Sectoral growth is associated with a decline in informal wage

employment

•  But also with an increase in self-employment as well as formal employment

•  Women are particularly likely to be self-employed rather than unpaid family helpers in fast-growing sectors

•  Those with higher levels of education are likely to move to formal employment, those with lower levels of education to self-employment

•  Policies to aid such entrepreneurship, especially among women are likely to be helpful

•  This analysis does not tell us whether individual workers are moving between sectors è we conducted a worker survey

We welcome your comments. Thank you!

The Formal-Informal Labor Nexus and Growth in Bangladesh · 2017. 4. 2. · The Formal-Informal...

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