Rising 'informality' in formal employment

Mustafa K. Mujeri | Published: June 25, 2018 21:55:52 | Updated: June 25, 2018 21:57:53

There exists a highly dualistic structure in Bangladesh's production sectors; that is, organised activities coexist with large-scale unorganised activities. In fact, informal employment dominates all sectors of the Bangladesh economy. Earnings in informal activities come from a variety of sources, such as subsistence farming or from operating small unincorporated enterprises. Some trade on the streets (hawkers) or in makeshift markets, sell cooked food from kiosks, transport people or goods in rickshaws, push carts or motor bikes, repair clothes and shoes, build dwellings or add extensions to them, scavenge for reusable waste, or provide a range of personal  services  like  hairdressing,  shoe  cleaning, house  cleaning,  and  the  like.  Along with these, there appears to be emerging a rising trend of employment in formal enterprises, in which workers have no formal contract and operate 'below the radar screen' of formal employment provisions and safety legislations.

According to the Bangladesh Bureau of Statistics (BBS) 2016-17 Labour Force Survey, more than 85 per cent of the employed populations are engaged in informal employment: it is 92 per cent for females and 82 per cent for males. There also exist rural-urban differences: in rural areas, informal employment is 88 per cent of total rural employment while similar share is 77 per cent in urban areas. Overall, 51.7 million of the 60.8 million total employed persons in the country are informally employed.

The distribution of informal employment across broad economic sectors does not vary much; it is more than 95 per cent in agriculture, followed by 90 per cent in industry and 72 per cent in services sector. There  is  a  clear  positive  association  between educational  attainment  and  informality of  employment -  the higher the level of education, the more likely that the person would be employed in the formal sector and vice versa. The incidence of informal employment is 52 per cent among persons having tertiary education which rises to 68 per cent for workers having higher secondary education, 81 per cent for secondary level education, 89 per cent for primary-level education and nearly 95 per cent for labourers with no formal education.

Among the labour market analysts, there is an ongoing debate on whether informal employment is a result of competitive market forces or labour market segmentation. It is often argued that none of the above two hypotheses adequately explains informal employment; the informal sector shows a heterogeneous structure. For some workers, the informal sector is an attractive employment opportunity, whereas for others - who are 'rationed out' of the formal sector - the informal sector is the last resort.

One of the key trade-offs in formal-informal segmentation is that informal enterprises face little regulatory bindings, but usually have a higher cost of capital.  In addition, the scale of informal enterprises is limited. Higher capital costs lead to lower capital-labour ratios and, combined with the size limit, this makes informal sector enterprises less attractive to high-ability entrepreneurs, who prefer to move into the formal sector. Job seekers with the lowest ability levels are better-off as wage-earning workers, and individuals with intermediate managerial ability run enterprises in the informal sector.

Research shows that observable inputs into entrepreneurial ability, such as education and experience are positively associated with formality, and formal enterprises tend to be larger. In addition, formalisation is associated with higher capital-labour ratios and greater profits per worker.

One recently emerging aspect of the labour market in Bangladesh is the rising tendency of formal enterprises to hire contract workers. What induces formal entrepreneurs to hire contract workers? The usual suspect is rigid labour regulations. The laws and   regulations   tend   to   be   either   poorly designed or are too complex given the enforcement and financial capacity of relevant agencies. Often, the hiring and firing regulations designed to protect the workers discourage, instead, formal enterprises from hiring regular employees as compliance may be cumbersome and expensive. But there are other factors as well, such as increasing import penetration leading to substitution of regular workers by contract workers due to lower wages of the latter, and out-sourcing with rapid emergence of staffing companies.

In recent years, almost all formal sector enterprises have witnessed an increase in the use of contract workers. And, apparently it is the capital-intensive industries and enterprises that have seen a larger increase in the use of contract workers. This is true especially across large service sector enterprises. Further, remunerations of contract workers are significantly lower than those of regular workers for similar types of jobs.

Are there incentives for bigger enterprises to hire more contract workers than regular ones? There are several factors that work behind such decisions. In addition to lower remunerations, hiring of contract workers help to curb the bargaining power of regular workers keeping their demands for wage hike in check and avoid paying benefits as per labour laws if these workers were employed as regular workers. The contract workers may also be used by the management as alternative workforce to gain strategic advantages against unionised regular workers. In such circumstances, hiring contract workers is a deliberate choice as informalisation by employers of once formal jobs as a strategy works well to lower labour costs and deal with competition.

In general, contract workers have fewer rights and little job security, severance pay, minimum wage, or standards for working conditions.  Moreover, they receive little training as they belong to the volatile workforce. For the economy, the result is low productivity. Ironically, labour informality is largely a consequence of labour laws and regulations whose very aim is to provide workers with protection and benefit.

Overall, labour market policies need to promote the growth of formal employment; and consequently help draw workers out of the informal labour activities. Such policies would provide for occupational upgrading and increased earnings for individuals who switch; and raise aggregate productivity in the formal economy. Further, the rate of formalisation of the workforce may be tied to the shifting demographics of the Bangladeshi society. Changing cohorts in the workforce may be important as the elderly, rural, poorly educated workers are likely to prefer working in the informal sector.

Thus, one important issue in the country's segmented labour market is: Do regular workers experience increasingly vulnerable terms of employment as the pool of contract workers expands? This also raises issues about the sustainability of employment growth driven by growth of contract workers. On the supply side, little is known about whether workers prefer to be hired as contract workers in the organised sector over working in the unorganised sector. Also, important longer-term issues for labour market development are to explore whether contractualisation creates disincentives for the workers to invest in skills as the nature of contractual jobs may not translate investments in skill development into higher wages and job security.

Mustafa K Mujeri is Executive Director, Institute for Inclusive Finance and Development (InM).


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