ORIGINAL ARTICLE Open Access The Informal Labour Market In .
Shonchoy and Junankar IZA Journal of Labor & Development 2014, 3:9http://www.izajold.com/content/3/1/9ORIGINAL ARTICLEOpen AccessThe informal labour market in India: transitory orpermanent employment for migrants?Abu S Shonchoy2* and PN Raja Junankar1* Correspondence:parves.shonchoy@gmail.com2Institute of Developing Economies- Japan External Trade Organization(IDE-JETRO) and University of Tokyo,Tokyo, JapanFull list of author information isavailable at the end of the articleAbstractThis paper studies the characteristics of the workers in the informal economy andwhether internal migrants treat this sector as a temporary location before movingon to the organised or formal sector to improve their lifetime income and livingconditions. We limit our study to the Indian urban (non-agricultural) sector andstudy the characteristics of the household heads that belong to the informal sector(self-employed and informal wage workers) and the formal sector. We find thathousehold heads that are less educated, come from poorer households, and/or arein lower social groups (castes and religions) are more likely to be in the informalsector. In addition, our results show strong evidence that the longer a rural migranthousehold head has been working in the urban areas, ceteris paribus, the more likelythat individual has moved out of the informal wage sector. These results support thehypothesis that, for internal migrants, the informal wage labour market is a steppingstone to a secured life in the formal sector.JEL codes: 017; J15; J61; J42.Keywords: Informal labour markets; Migrant; Caste; Religion1. IntroductionIn most developing countries, there is a large sector of the economy that is called theinformal sector or the unorganized sector. Employment in the informal labour marketplays an important role in most developing economies. Very broadly, the informallabour market consists of workers in the informal sector, plus casual workers in theformal sector. The informal labour market is a very large part of the agricultural sector,but is also a significant part of the urban sector. There is a difference between employment in the formal sector and the informal sector in terms of the conditions of work,whether workers are subject to government taxes, have access to social security or insurance, are casual or contract workers, and whether or not they receive the minimumwages1.The informal economy is a very important sector of the Indian economy. The NationalCouncil of Applied Economic Research estimates that the informal sector-“unorganizedsector”-generates about 62% of GDP, 50% of national savings and 40% of national exports(ILO 2002), p. 30. In terms of employment, the informal economy provides for about55% of total employment (International Labour Organisation 2002), p. 142. Urban areas(especially large cities) attract numerous migrants from both the rural areas and fromsmaller urban towns and cities in the hope of a better life. 2014 Shonchoy and Junankar; licensee Springer. This is an Open Access article distributed under the terms of the CreativeCommons Attribution License (http://creativecommons.org/licenses/by/2.0), which permits unrestricted use, distribution, andreproduction in any medium, provided the original work is properly credited.
Shonchoy and Junankar IZA Journal of Labor & Development 2014, 3:9http://www.izajold.com/content/3/1/9The Indian labour market can be conceived of as a segmented market. One segmentis the formal sector composed of workers who have salaried work, good working conditions, and are employed in organised business. The other segment is the informaleconomy consisting of small self-employed traders and business people, and casualworkers in the informal or formal sectors. Some individuals are born into wealthyfamilies who own large businesses and hence are in the formal sector by right of birth.Others who are born with parents from the professional classes would almost certainlyhave education from good schools and universities, and have a network of contacts thatwould ensure their joining the ranks of the employed in the formal sector. Some individuals may have built up sufficient assets over time to set up small businesses andhence enter the formal sector. However, most workers in the formal sector enter thesector through their educational achievements, or by birth (children of rich people) andthrough social networks. For someone who comes from a disadvantageous background(either in terms of income or belonging to a socially backward caste or religion) theonly way to enter the formal sector is via education in “good” schools3 or universities.Even with a good education, entry into the formal sector is often based on family connections. The Indian government has for some time had a policy of positive discrimination for the Dalits, and as a result they may have a higher probability of finding ajob in the formal (government) sector. Migrants (especially from rural areas) who comeinto urban areas would likely have to work in the informal sector for some time beforethey build good networks enabling them to move into the formal sector.The literature on the role of the informal sector in developing countries has oscillatedbetween treating the informal sector as a backward sector that is holding back economic development to a dynamic sector that is helping to develop the economy rapidlywithout straining foreign currency balances and with relatively low demands for (real)capital goods (see Mazumdar (1976), Weeks (1975), Bromley (1978), Gerxhani (2004))4.The informal sector is considered to be a pre-capitalist form of production comparedto the formal sector which is a profit maximising capitalist sector. There is a large volume of literature on rural–urban migration (see, Harris and Todaro (1970)) thatexamines migrants arriving in the city and initially finding work in the informal sector,then moving on to better paid work in the formal sector. Fields (2009) developed anearly model of the informal sector as a “way station” along the path toward a formaljob in urban areas (De Mel et al. (2010)) which has been followed by others. This viewof the informal sector as a temporary abode for migrants has been disputed (amongothers) by Mazumdar (1976). The debate has also ranged over whether informal sectorworkers are living in poor conditions with low incomes, or whether some of the informal sector workers are there out of choice and have a comfortable life (see Meng 2001,Perry 2007). Some individuals may have employment in the formal sector and work inthe informal sector as well.Given the setup of the urban labour market in India, some of the important issues toinvestigate are (1) whether individuals working in the informal sector are migrants andwhether they move out of the informal sector into the formal sector after a few years;(2) whether they are from disadvantaged social and ethnic groups who do not havesocial networks to enter the formal sector; and finally (3) whether those with low levelsof education and skills are unable to enter formal sector employment and have to findlow paid works in the informal sector (Mitra (2004, 2008)).Page 2 of 27
Shonchoy and Junankar IZA Journal of Labor & Development 2014, 3:9http://www.izajold.com/content/3/1/9This paper is interested in studying the characteristics of the workers in the informaleconomy and whether migrants treat this sector as a permanent base or only as a temporary location before moving on to the organised or formal sector to improve their lifetimeincome and lifestyle. We limit our study to the Indian urban (non-agricultural) sector andstudy the characteristics of the household heads that belong to the informal sector(self-employed and informal wage workers) and the formal sector. We find that memberswho come from the lower social groups (castes and religions) are more likely to be in theinformal sector. We distinguish between migrants in urban location who came from ruralareas and those who came from other urban areas. We find that rural migrant’s likelihoodof staying in the informal wage labour sector is inversely related to the length of time arural migrant spends in an urban area.In Section 2 below, we clarify the definition of informal labour markets and brieflyreview the literature; Section 3 provides a detailed discussion of the properties of theurban informal sector in India; Section 4 discusses the lexicographic preferences thatpeople have over formal sector, self-employment, and informal wage labour; Section 5sets up an econometric model for estimating the probability of working in the informalsector and provides some results, while Section 6 provides results using a multivariatelogit model; Section 7 concludes with a summary of the results. In general, we findthat the longer the duration of a migrant in the urban sector the more likely s/he willhave moved out of the informal sector.2. The informal labour market: definitions and a review of some earlierstudiesIn the developing country context, the informal sector is sometimes defined interms of the activities of the enterprises (ILO, 1972) and sometimes in terms ofthe kind of work done by individuals as employees or as self-employed people(Hart, 1973). There exists great heterogeneity in informality: there is the “intra-firmmargin where firms may be partly formal and partly informal, the inter-sectoralmargin between formal and informal firms, and the inter-sectoral margin of formaland informal workers operating through the labour market” Perry et al. (2007).The International Labour Organisation (1972) characterised the informal sector as:(a) Ease of entry(b) Reliance on indigenous resources(c) Family ownership of enterprise(d) Small scale of operation, often defined in terms of hired workers less than (say) ten(e) Labour-intensive methods of production and adapted technology(f ) Skills acquired outside the formal school system(g) Unregulated and competitive marketsWhereas the formal sector was characterised by:(a) Difficult entry(b) Frequent reliance on overseas resources(c) Corporate ownershipPage 3 of 27
Shonchoy and Junankar IZA Journal of Labor & Development 2014, 3:9http://www.izajold.com/content/3/1/9(d) Large scale of operation(e) Capital-intensive and often imported technology(f ) Formally acquired skills, often expatriate(g) Protected markets (through tariffs, quotas, and licenses)Hart (1973) discussed the informal sector in terms of the working conditions of theindividuals and whether they worked for wages with good conditions or informally asself-employed workers. Informal activities included:(a) Farming, market gardening, self employed artisans, shoemakers, tailors, etc.(b) Working in construction, housing, road building(c) Small scale distribution, e.g. petty traders, street hawkers, etc.(d) Other services, e.g. barbers, shoe-shiners etc.(e) Beggars(f ) Illegal activities like drug pushingFormal sector income earning activities included:(a) Public sector wage earners(b) Private sector wage earners (on permanent contracts, not casual workers)Sengupta (2009), p. 3 defined the informal economy thus:2.1 Informal sectorThe unorganised sector consists of all unincorporated private enterprises ownedby individuals or households engaged in the sale and production of goods andservices operated on a proprietary or partnership basis and with less than ten totalworkers.2.2 Informal worker/employmentUnorganised workers consist of those working in the unorganised sector or households,excluding regular workers with social security benefits provided by employers and theworkers in the formal sector without any employment and social security benefitsprovided by employers.2.3 Informal economyThe informal sector and its workers plus the informal workers in the formal sectorconstitute the informal economy.3. The Indian informal labour market: some background informationA recent report of the National Commission for Enterprises in the Unorganised Sectorby the Government of India (Sengupta 2009) found that 86% of the total employmentin 2004–2005 was in the informal sector. Further, the agricultural sector consistedalmost entirely of informal workers. The non-agricultural workers in the informalsector were 36.5% of the total, most of whom were self-employed. From 1999–2000 toPage 4 of 27
Shonchoy and Junankar IZA Journal of Labor & Development 2014, 3:9http://www.izajold.com/content/3/1/92004–2005 most of the increase in employment in the formal sector consisted of informal workers (Sengupta 2009, p.14). The NSSO (2012), p ii document found that in2009–2010 in the non-agriculture sector, nearly 71% of the workers in rural areas and67% in urban areas worked in the informal sector. It found that the informal sectoractivities are concentrated mainly in the manufacturing, construction, wholesale andretail trades, and transport, storage and communication industries.Our study used data from the India Human Development Survey (IHDS) 2005, conducted by the Inter-university Consortium for Political and Social Research, Ann Arbor,Michigan, USA. The survey is a nationally representative, multi-topic survey of 41,554households in 1,503 villages and 971 urban neighbourhoods across India. The data sethas detailed information on household employment by industry and occupation, anddetailed information about household characteristics including age, education, ethnicity,religion, and migration status. In this study we have limited our analysis to workers inthe urban sector who are not engaged in any agricultural activities.Our data-set consisted of 12,056 heads of households for whom we had data on theirage, education, marital status, gender, religion, caste, income source, assets, migrationstatus and years since migration into the urban sector.We define the urban informal sector as artisans, petty traders, small business people (whodo not hire any labour), and non-agricultural casual workers in the informal or formalsectors. The informal sector consists of the self-employed and informal wage labour. Wedefine self-employment as petty traders who do not hire any workers and those in the organised trade/business category who do not hire any workers. Note that this is a stricterdefinition than that suggested by, for example, Sengupta (2009). The informal wage labourcategory covers those who are in the informal sector but are not self-employed, i.e., theartisans, and non-agricultural labourers who are casually employed. The formal sectorconsists of salaried employees, professionals, and organised trade/business people who hireworkers. In our study we limited our analysis to only the heads of the representative households. The summary statistics of our sample is depicted in Table 1.It is interesting to notice the industry and occupational distribution of the formal andinformal sectors of the economy in our sample data (see Figure 1). Most of the informalwage labour is in manufacturing, construction, wholesale and retail trades, restaurants, andhotels, and in community, social and personal services. Self-employment is concentrated(not surprisingly) in the wholesale and retail trades, restaurants, and hotels. Informal wagelabour is concentrated in occupations: production and related workers, transport equipmentoperators and labourers (presumably unskilled workers) (see Figure 2).If we look at the distribution of migrants moving into these sectors, (see Figure 3) wefind that 61% of the migrants work in the formal sector; almost 10% are self-employedentrepreneurs and 29% are informal wage workers.A high proportion of migrants (28%) are working primarily in the community,personal and social services, 23% in wholesale and retail trades, restaurants and hotels,and 28% in manufacturing (see Figure 4).A high proportion of migrants (30%) are employed as production and relatedworkers, transport equipment operators and labourers while almost 29% are sales andservice workers (see Figure 5). It is interesting to note that the main income source formigrants (50.14%) is salaried employment; another 21.09% are in non-agriculturallabour (see Figures 6).Page 5 of 27
Shonchoy and Junankar IZA Journal of Labor & Development 2014, 3:9http://www.izajold.com/content/3/1/9Page 6 of 27Table 1 Summary statisticsMaleRural to urban ural to urban migration duration4.3373.5954.023(9.077)(8.355)(8.787)Income (in 12.299)(12.169)Size of the ed0.9840.9830.984(0.124)(0.128)(0.126)Primary dary culation ry )(0.413)(0.361)Father's Occupation: ther's Occupation: r's Occupation: Clerk0.1080.0360.079(0.311)(0.186)(0.270)Father's Occupation: Sales0.1320.1890.155(0.338)(0.392)(0.362)Father's Occupation: s Occupation: Agro0.3520.3410.347(0.478)(0.474)(0.476)Father's Occupation: Labourer0.1550.2840.207(0.362)(0.451)(0.405)
Shonchoy and Junankar IZA Journal of Labor & Development 2014, 3:9http://www.izajold.com/content/3/1/9Page 7 of 27Table 1 Summary statistics (Continued)Father's Education: PrimaryFather's Education: SecondaryFather's Education: TertiaryFather's Education: .201)6962509412056The caste and religion breakdown for the formal and informal sectors (self-employedand informal wage labour) show interesting patterns. As one would suspect, Brahminsand people belong to high caste are more likely to be in the formal sector, compared tothe lower social castes and Muslims. If we divert our attention to the distribution ofpeople by caste and religion based on the principal source of household income, asdepicted in Table 2, we see that Brahmins and people belong to high caste are morelikely to be salaried workers or professionals, whilst Dalits and Muslims are more likelyto be non-agricultural labourers or artisans (see Figure 7).When we look at the distribution of occupations by caste and religion, as depicted inTable 3, we note that Brahmins and high caste people are more likely to be in thehigher level occupations, while Dalits and Muslims are more likely to be in the lowerlevel occupations.Figure 1 Distribution of employment across industries.
Shonchoy and Junankar IZA Journal of Labor & Development 2014, 3:9http://www.izajold.com/content/3/1/9Figure 2 Distribution of households across occupations.Figure 3 Employment category based on migration status.Page 8 of 27
Shonchoy and Junankar IZA Journal of Labor & Development 2014, 3:9http://www.izajold.com/content/3/1/9Figure 4 Migrants by industry.Figure 5 Migrants by occupation.Page 9 of 27
Shonchoy and Junankar IZA Journal of Labor & Development 2014, 3:9http://www.izajold.com/content/3/1/9Page 10 of 27Figure 6 Migrants and income source.4. The informal economy: some analytical featuresWe assume that individuals would, in general, prefer to work in the formal sector,either as employees or as owners/managers5. This is based on the idea that the formalsector provides a better life not only in terms of present and future income, but also interms of better working conditions (e.g., security of tenure, social security benefits,access to unions, safer working conditions). If they are unable to enter the form
workers in the formal sector without any employment and social security benefits provided by employers. 2.3 Informal economy The informal sector and its workers plus the informal workers in the formal sector constitute the informal economy. 3. The Indian informal labour market: some background information
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