Although there is (mixed) theoretical evidence suggesting a link between formal sector employment and informal sector employment, very little is known about the exact nature of such a relationship. Theoretically, a negative relationship is expected between employment in the informal sector and employment in the formal sector, as these are (plausibly) 'substitute' activities in the labor market.
Background to the Study
Furthermore, the growth (or decline) of the informal sector has essentially been linked to the decline (or growth) of the formal sector economy. The informal sector contributes significantly to job creation and production growth in Africa and Latin America.
Research Problem
Research Objectives
Research Methodology
Thesis Organisation
Limitations of the Study
Therefore, a balanced panel is obtained and they are all sub-Saharan countries (except Mauritius as an island economy, but part of SADC). These agreements between selected African countries resulted in negative net exports, hence the choice of exports instead of net exports.
Introduction
The Dualist Approach
The Dual Labour Market
The issue of dualism focused on the labor market (eg employment in the informal sector and employment in the formal sector). Employees and employers leave the formal sector and join the informal because of reduced opportunities for work or profit in the formal sector economy.
Training
The management incompetence and lack of experience were the main reasons for informal sector failure (Nattrass and Glass, 1986). The failure of informal business begins with a lack of planning and execution.. if the plans are not revised to take into account contingencies of the operation.
The Structuralist Approach
Trade Liberalisation
The development of the informal sector revolves around whether this sector is specialized in the production of tradable or non-tradable goods. Increased production in the informal sector enables companies to take advantage of a growing export market.
Unemployment
The unemployment rate is the most commonly used measure of the state of an economy. Changes in unemployment and the share of employment in the formal and informal sectors explain most of the changes in inequality, while changes in wage differentials in the formal and informal sectors explain less of the changes in inequality (Kingdon and Knight, 2000) .
Skill-Biased Technological Progress
Firms in the formal sector tend to downsize by laying off workers in order to reduce their operating costs (Kingdon and Knight, 2005). Ishengoma and Kappel explain that, "an increase in a country's economic growth rate does not automatically result in the movement of workers from the IS to the formal sector." The demand for labor rests on the relationship between output and profit.
The Legalist Approach
Tax Evasion
Wedel explains, "even if members appear to work primarily in business or private organizations, a group's economic power and influence can derive greatly from its ability to engage with the public sector while simultaneously accessing its advantages for the survival of their business." The informal sector will continue to operate informally as long as government rules and regulations stifle private enterprise. Wedel said: “state officials have used their positions to promote private interests in the informal sector economy by establishing non-governmental bodies that incorporate state resources.
The Continuum Approach
Linkage Between Informal and Formal Sector Economies
The debate has revolved around the question of how capital accumulation occurs in the informal sector. Inclusion in this context means that when the formal sector flourishes, the informal sector remains on the periphery and does not develop.
The Micro-Business Enterprises Approach
Limited Labour Absorption
The amount of labor absorption in the formal sector is therefore not determined by the availability of labor itself, but by the availability of capital for this sector. Geithman and Landers (1973) further argued that the remaining labor supply, which fails to find employment in the formal sector due to the occurrence of capital shortages, is forced to seek employment in the labor-intensive informal sector. Labor forced to look for work in the informal sector can be absorbed there in two ways: either as 'wage labour' or as 'disguised unemployment' (Santana, 2002).
According to Geithman and Landers (1973), surviving informal sector firms control informal sector employment and a greater number of workers in the rapidly growing informal sector are poor.
Todaro-Lewis Model Approach
Rural-Urban Migration
The resulting increase in the size of the urban population requires public assistance and increases inequality. According to Bromley (1979), the expansion of the informal sector depends on the growth of the formal sector and the supply of labor. This essentially means that the volume of employment in the informal sector will increase with the growth of employment in the formal sector because a complementary relationship prevails.
Rural migrants differ in their skill endowment from that of formal sector workers, thus causing a change in the overall (labour) composition of the urban economy.
Conclusion
The response of the informal sector depends on workers, who often move into informal sector employment when employment in the formal sector could not keep pace with the growth of the urban workforce; that is, surplus labor contributes to the increase in informal sector employment. But the formal and the informal are often dynamically linked: more formal sector employment and urbanization result in more informal sector employment. The formal sector is considered superior to the informal sector and these two types of sectors result in economic dualism that includes informal sector employment and formal sector employment.
The next chapter attempts to examine the contemporary literature to determine the validity of the hypothesis that reduced employment in the formal sector and increased trade liberalization lead to increased employment in the informal sector.
Introduction
A Review of Selected Contemporary Literature
- Formal Sector (Un)employment
- Slower Economic Growth
- Globalisation
- Labour Market Legislation
According to Jha (2009), the formal sector is assumed to appropriate part of the surplus generated in the informal sector. As people struggle to find employment in the formal sector of the economy, they are eventually pushed into informal sector employment. People laid off during economic downturns fit into informal sector employment (Fox, Betchrman, Chandra, Eifert, & Adams, 2009).
A direct result of trade liberalization is the increase in the size of the informal sector.
Conclusion
With respect to the informal sector, a minimum wage in the formal sector has a negative impact on informal sector wages and a positive impact on informal sector employment. Gindling and Terrell (2002: 5) further stated that "the increase in employment in the informal sector occurred because of an increase in the number of part-time workers." Therefore, the "response of employers in the formal private sector to increases in the minimum wage is to increase the number and hours worked of full-time workers by bringing in some part-time to full-time and laying off some part-time workers, which appears to be in the move into the informal sector to find work.” (Habib-Mintz. People laid off during economic downturns fit into informal sector employment (Fox, et al., 2009).
Employment in the informal sector still absorbs part of the growing labor force that cannot be employed in the more productive and better-paid formal sector.
Introduction
Model Specification
Mathematical Model
Econometric Model
In (natural) log4 form, the slope coefficients indicate the percentage change in yit for a percentage change in each χit, ceteris paribus. The expectation is a negative relationship between employment in the informal sector and employment in the formal sector (since these activities are reliable substitutes), i.e. a negative sign for all β1 coefficients, and a positive relationship between employment in the informal sector and exports (since exports stimulated in reliably both formal and informal sector employment), i.e. a positive sign for all β2 coefficients.
Panel Data Econometric Methodology
- All Coefficients Constant Across Time and Countries
- Slope Coefficients Constant but the Intercept Varies Across Countries
- Slope Coefficients Constant but the Intercept Varies Across Countries and Over Time
- All Coefficients Vary Across Countries
The assumption is that the intercept and slope coefficients are all identical for the six countries. Gujarati states that “one way to account for the 'individuality' of each country or cross-sectional unit is to vary the intercept for each country, but still assume that the slope coefficient between countries is constant. ” The fixed effects model shown by equation (iii) allows the intercept to vary across countries by adding m-1 differential intercept dummies to the model. Since we have six countries, only five dummies will be used to avoid falling into the trap of dummy variables (i.e. the situation of perfect collinearity that arises when using m dummies and including an intercept term ).
After using a restricted model (equation ii) and unrestricted model (equation iii), the restricted F-test will be used to examine whether the restricted R2r and the unrestricted R2ur are statistically equal (ie the difference between the two R2 -values are statistically insignificant).
Multicollinearity
Gujarati stated that “if one or more of the γ coefficients are statistically significant, this will tell us that one or more slope coefficients are different from the base group”. But if all differential intercept coefficients and all differential slope coefficients are statistically significant, we can conclude that informal sector employment in all countries is statistically different from that in the base country (South Africa), both in intercept and slope terms. Time series data show that employment and exports in the formal sector are likely to be highly collinear.
According to Gujarati, multicollinearity is essentially a data scarcity problem, and sometimes we have no choice about the data we have available for empirical analysis.
Empirical Results and Discussion of Findings
Intercept and Slope Constant Over Time and Across Countries
The estimated β2 coefficients (0.897) and (1.078) from equations (1.1) and (1.2), respectively, show that with an increase in employment in the formal sector by 1 percent, the estimated increase in employment in the informal sector would amount to 0.897 percent and 1.079 percent, respectively. The estimated coefficient β3 (-0.329) for exports indicates that employment in the informal sector will decrease by 0.329 percent, ceteris paribus, if exports increase by 1 percent. However, Kučera (2008b) states that more employment in the formal sector and urbanization leads to more employment in the informal sector.
We therefore reject the null hypothesis and conclude that informal sector employment is (possibly) positively related to formal sector employment and negatively related to exports.
Slope Coefficients Constant but the Intercept Varies Across Countries and Over Time
The intercepts in model 2.1 for South Africa, Namibia, Zambia, Botswana and Mauritius are statistically different from each other, but Kenya is statistically the same as South Africa. However, the increased R2 value should not be surprising since we have more variables in models (2.1) and (2.2). As the regression results of models (2.5) and (2.6) show, the intercept coefficients are statistically insignificant, taking into account time-based effects.
This may indicate that there are no statistically significant time-based effects with regard to informal sector employment.
Slope Coefficients Constant but the Intercept Varies Across Countries and Over Time
All Coefficients Vary Across Countries
Ratio Transformation as a Remedy for Multicollinearity
As formal sector employment and exports grow over time, they are likely to be correlated. 5 The conversion of informal and formal sector employment is to examine the contribution of each sector in terms of the total population of each country during the study period. This chapter described the econometric analysis of the relationship between informal sector employment and formal sector employment.
The expectation was a negative relationship between informal sector employment and formal sector employment (since these activities are likely to be substitute activities in the labor market), and therefore a negative sign for all β1 coefficients, and a positive relationship between informal sector employment and exports (as exports stimulate plausibly both formal and informal sector employment), and therefore a positive sign for all the β2 coefficients.
Introduction
Summary of Findings
Working paper, National Bureau of Economic Research (NBER) and Center for Research on Pension and Welfare Policy (CERP), Massachusetts. Working paper, National Bureau of Economic Research (NBER) and Center for Research on Pension and Welfare Policy (CERP), Massachusetts. Working paper, Economic and Social Policy Division, United Nations Economic Commission for Africa (ECA) and Institute for the Study of Labor (IZA), Washington. 2001) The Impact of Globalization on the Informal Sector in Africa.
Working Paper, Department of Economic and Social Policy, United Nations Economic Commission for Africa (ECA) and Institute for the Study of Labor (IZA), Washington.
Regression Output
Regression
