The Empirical Economics Letters, 5(5): (September 2006)

ISSN 1681 8997

Female Labor Force Participation in Informal Sector: an Ordered Logit Approach

Oktay kszler, Serap Palaz, and Ali Rza zdemir
Balikesir University, Bandrma Faculty of Economics and Business Administration, 10200, Turkey Email: oksuzler@balikesir.edu.tr
Abstract: This paper investigates labor force participation decision of women in informal sector using a survey data conducted in Gnen1 where the number of informally working women is quite large and engaged in artisan production. For this purpose, a theoretical labor supply model for female in informal sector is developed and an ordered logit model is employed. The empirical results suggest that wage, education, economic status of family, marital status, location and childcare responsibilities appeared to be important in womens decision to supply labor. The results also suggest a backward- bending labor supply of female in informal sector. Keywords: Female informal sector, labor supply, ordered logit JEL Classification: J22, C35, J20

1. Introduction Female employment in informal sector is recorded as 71.2 % in Turkey. (Trk-i, 2006; 10). This high participation can be explained by transformation of Turkish economy from agriculture to industrial that accompanied by fast urbanization. Female labor force participation was 72 % in 1955 and declined to 27 % in 2005. Moving to urban areas left females no choice but working at home based. Because, industrial sectors create more work opportunities for men, the traditional and patriarchal beliefs and values that hold women back are more prevalent in urban than in rural areas and women are still accepted as homemakers and mothers rather than breadwinners (Bulutay and Tat, 2002:19). However, informal sector has many disadvantages such as, (1) lower income compared to formal sector, (2) no employment based benefits or protection, (3) remain isolated from other workers and therefore to be less well organized and have less voice vis--vis employers and public authorities than other workers, (4) work patterns penetrates their family life, separates them from social communication (5) no laws regulating and securing
Gnen is a town located Western part of Turkey with population of 71,804. A previous version of this paper was presented at the 2nd Economics Business and Management Conference, esme zmir Turkey June 16-18, 2006. We would like to thank to conference participators for their comments.
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the quality and quantity of female labor performed at homes (ILO, 2002:12; Esim and Sims, 2000; SIS, 2004; Hattatoglu and Isik, 2005, Turk-is, 2006). If there are aforementioned disadvantages, why then high participation of female in informal sector? This question motivated many studies that investigated the nature and concept of informal sector in Turkey (Cinar, 1994; Ozar, 1998; Keles, 1998; Kasnakoglu and Yayla, 1998; Tansel, 2000; Esim and Sims, 2000; Bulutay and Tasti, 2004). However, these studies lack an analysis of the issue empirically due to unavailable data. Fortunantly, Municipal Government of City of Gnen2 conducted a survey in 2004 among the females who engaged in artisan production in their homes. Using this micro level data, this paper explores the determinants of female participation for this informal sector by employing an ordered logit model. Specifically, the role of wage, education, kids and marital status are investigated. The remainder of this paper is as follows. The theoretical model is presented in section 2. The data and methodology are described in section 3. The findings of the estimated models are explained in section 4. The final section draws conclusions. 2. Theoretical Underpinings Beckers (1965) pioneering work on household production has led to many studies done regarding allocation of time. Beckers paper considers the time allocation across many goods and primarily analyses the comparative statistics of changes in efficiency of work place production, and household consumption and production (Wetzell, 2003). He emphasizes the importance of allocation and efficiency of non-working time which is quite important for working females. In a similar vein, we set up a model that describes labor supply behavior of female workers in informal sector. An individual utility function can be postulated as:

Max

U = u ( Y , L ) subject

to L + H = 24

Y = w.H + OSI L = 24 H , L = Lesiure Time

Where Y= Total income is the sum of income earned in informal sector and other income (if available), H= Hours worked in informal sector per day, W= Wage rate in informal
2

Gnen and surrounding areas, located western part of Anatolia, are known as famous handcrafting activities such as needlework, embroidery, needle lace, weaving and basket-making

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sector, L= Leisure Time3, OSI= Other income includes retirement benefits, earnings from agricultural activities, income of spouse working in formal sector. Solving in the constraint for H and substituting the results into the objective function yields,

U = u(wH + OI, 24 H )
Differentiating with respect to H yields a single first order condition

(1)

U U U (1) = 0 Z w+ = L H Y

(2)

The implicit function theorem allows us to this individual supply of working hours (H) with a differentiable function. It implicitly describes how females ideal level of H varies with the parameters of choice problem. H*= f(w, OSI) (3)

Using the implicit function differentiation rule we can determine qualitatively how this individuals ideal working hours varies with wage rate. The affect of a change in wage rate on females working hours can be characterized using implicit function rule. H*w = Zw/-ZH Writing out two partial derivatives of H leads to following terms:
2U U 2U Hw + ( H ) + Y LY H Z / w Y 2 = = w Z / H 2U 2U 2U 2U w2 + ( w) + ( w) + YL LY Y L2

(4)

(5)

The first order conditions result shows that working time (H) may fall or rise with wage. Since the first order conditions characterize the utility maximization, the sign of the partial
3

In this case, leisure time is devoted not only for pleasure but also for taking care of kids, housekeeping activities etc. in this special example.

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derivative in denominator is unambiguously negative. The first term in numerator is also unambiguously negative because under the strict concavity assumption there exists diminishing marginal utility of income. The next term of the numerator however, is unambiguously positive because the marginal utility of wage income is positive. The last term may be positive or negative according to whether the derivative of the cross-partial term, ULY, is positive or negative. Therefore, the net effect of wage is ambiguous. Besides wage rate and other source of income, some other factors could also affect the working hours in informal sector, such as the other job opportunities (OJO), reason to work (RFW), level of education (EDU), other sources of income(OSI), having kids(KID), and marital status(MAS) (see Table 1). When all of these factors are taken into account, the labor supply function (H) can be written in a most general form as;

H i = f(

+ ,-

+
i

+ ,i

WGE i , OSI

OJO i , RFW i , EDU

, KID i , MAS

(6)

The rationality and expected signs of these variables are explained as follows: Starting with the wage rate, it is expected that substitution effect dominates income effect in the low level of working hours and it becomes reverse at high levels. High working hours leaves fewer hours for leisure. Since leisure time is devoted to cleaning, cooking, and taking care of kids besides pleasure, marginal benefit of low leisure time will be great that causes a weaker substitution affect that is dominated by income effect. Therefore, expected sign of the wage effect is ambiguous. The second variable, other job opportunities (OJO)4 is expected to be a negative sign. Because, the individuals who live in big areas in terms of population compared to ones live in small ones, have got more other job opportunities and thus expected to participate less in home based works. The third variable, reason to work (RFW),5 measures the level of the necessity of working as home based. Participating in home-based economic activities could be due to various reasons. It could be contribution to family living expenses or the primary source of income for the family. Therefore, it is expected that as the degree of the necessity to participate in home-based works increases,
The survey is conducted in Gnen and surrounding areas. According to the population number these areas coded in an ordered fashion from 1 to 5. High number shows more developed area means more job opportunities in formal sectors. 5 RFW variable comes from the Why do you work? question. It measures the necessity of work in an ordered fashion from low to high.
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the higher the number of hours supplied will be. The fourth variable takes the education (EDU) into account. In this particular case, those who continue education after elementary school can develop better their skills in artisan production. Because, not continuing education induced them to work in farms which lead them to lose abilities to make artisan Table 1: The Definition of the Variables Variables LSE: ( Working hours in one day) WGE (Wage per hour) Measurement Categorical; 1: 2-4 hours (low), 2: 6-7 hours (middle) , 3: 8 and more (high) Categorical; 1: less than 0,21 Nkrs, 2: 0,22-0,30 Nkrs, 3: 0,31-0,40 Nkrs, 4: 0,40 -0,50 Nkrs, 5: 0,50 -0,70 Nkrs, 6: 0,70 -1 NTL , 7: more than 1 NTL If Wage is less than 0.21 Nkrs then it is 1, otherwise 0 If Wage is between 0.22-0.30 then it is 1, otherwise 0 If Wage is between 0.31-0.40 then it is 1, otherwise 0 If Wage is between 0,41-0.50 then it is 1, otherwise 0 If Wage is between 0.51-0.70 then it is 1, otherwise 0 If Wage is between 0.71-1.00 then it is 1, otherwise 0 If Wage is more than 1.00 then it is 1, otherwise 0 Polychotomous; 1: very poor, 2: poor, 3: good, 4: very good 5: highly developed Polychotomous; 1: pleasure, 2: other, 3:contribution to family expenditures, 4:Main source of family income Dummy; 1: if middle school and more elementary education of Dummy; 1: yes 0: no Dummy; 1: yes 0: no Dummy; 1: married 0: single or divorced 0: only

WGE1 WGE2 WGE3 WGE4 WGE5 WGE6 WGE7 OJO: (Other Job Opportunities: Level of development in the area where the survey conducted) RFW (Reason For Work: Why participate in informal sector) EDU: ( Education level) OSI: (Other Income) KID: Children MAS: Marital Status Source

Note: (1) WGE (wage) is calculated as follows: First, monthly income transformed from discrete to continuous variable and divided into monthly working hours. Wage calculated as a continues variable. Since it is an ordered model variables must be discrete and ordered. Therefore it transformed in to a discrete variable. (2) Nkrs: New Kuru, NTL New Turkish Lira. (1NTL=100 Nkr).

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production. The fifth variable measures the effect of the accessibility of other sources of income (OSI) which could induce females to work less number of hours in home based works6. The sixth variables measures the effect of kids (KID)7 on female labor supply, which is another important factor that forces women to participate less work in artisan production. The last variable investigates the effect of marital status of the females (MAS). It is expected that married females participate more in home-based works because they are mostly housewife whose time and activities conveniently suits with this types of jobs. Compared to unmarried females who have more chances to work in formal sectors, married females are accustomed to stay home and take care of many household activities. Therefore, this variable is expected to have positive sign. 3. Data and Methodology The data for this study were collected in 2004 through a questionnaire8 on 840 female home based workers engaging artisan production; embroidery, weaving and basket-making in Gnen area where these kinds of works are very common. Table 1 presents each variable, its operalization, and the scale type that was used for measurement. In many economic applications, the dependent variable is discrete and represents an outcome of a choice between a finite set of alternatives. A number of qualitative response models deal with this characteristic of the dependent variable (Amemiya, 1981; Greene, 1997). Further, in some applications, there are multinomial choice variables that are naturally ordered. In this application, naturally ordered female labor supply is used as dependent variable. Even though the underlying dependent variable is continuous, only the discrete responses are observed. Therefore, it is appropriate to employ an ordered logit modeling framework to analyze female labor participation in this study. The model employed by Zavoina and McElvey (1975), as discussed by Greene (1997), was also used in this study. A descriptive statistics of data is given in Appendix.
6

As is observed in many studies that women are still accepted as homemakers and mothers rather than breadwinners in rural areas and only a minority of women are able to control their own economic lives. The majority of females appears to be the economic minority and generally economically depended on men (World Bank, 1993; Ozar and Gunluk-Senesen, 1998; Kocak, 1999).

Since survey does not ask the age of the children, only a dummy is used other wise an ordered children age variable could have been added to model.
8

The Survey is conducted by Municipal Government of City of Gnen.

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The ordered logit model is built around a latent regression, where yi* is the unobserved dependent variable, x a vector of explanatory variables, an unknown parameter, vector and the error term.

y i* = ' x i + i
Instead of yi*, the following is observed.

(7)

y = 1 y = 2 y = 3 ... y = J

if if if if

0 y* p 1 1 y* p 2 2 y* p 3
j1

y*

Where y is the hours of work in a day, u is the vector of unknown threshold parameters, estimated with the vector, is assumed to have a standard logistic distribution. Consequently; Pr[ yi = j ] = Pr[ y* is in the j th range ] Hence the probability of observing an outcome may be written: Pr [yi = j] = F[j - `xi ] F [j-1- `xi] Where F(.) = exp(.)/[1+exp(.)]. This implies that:
Pr[ yi = j ] = 1 1+ e
u j + ` xi

(8)

1 1+ e
u j 1 + ` xi

(9)

The above equation can be used to derive a likelihood function and, subsequently, maximum likelihood estimates of and. Female labor supply is estimated in this way. 4. Empirical Results Using an ordered logit model, the basic maximum likelihood estimation results for female labor supply are shown in Table 2. The results show that the chosen labor supply equation (6) provides a satisfactory explanation for the determinants of female labor force

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participation. Similarly, 2 and log likelihood diagnostic statistics are also acceptable. The interpretation of the estimated coefficients of ordered logit equation requires certain amount of care though. A positive coefficient represents that an increase in the logs of the odds ratio or informally higher values of the explanatory variables imply higher working hours in informal sector. The opposite is true for negatively signed coefficients (Sawkins et al., 1997). Table 2: Ordered Logit Results (dependent variable=labor supply) Variable WGE WGE1 WGE2 WGE3 WGE4 WGE5 WGE7 OJO MODEL 1 Coefficientt -.6678*** 2.536*** 3.667*** 2.337*** 1.649*** .1414 -.7735* -.2511** MODEL 2 Coefficient Variable RFW EDU OSI KID MAS Log likelihood Pseudo R2 LR chi2 MODEL 1 Cofficient .3220*** .5400*** -.4772*** -.7200*** .8015*** -721.7969 0.1615 278,04 MODEL 2 Coefficient .3180*** .5799*** -.4107*** -.5831** .71425*** -684,692 0.1930 332.27

-.1285

Note: z= the ratio of coefficient to the standard error. A pseudo t statistics. * implies significance at 10, 5 and 1% levels. (WGE6 dropped due to multicollienarity), number of observations is 786.

Overall, the estimation results provide significant and interpretable coefficients of the variables. The effect of wage is estimated in model 1 and model 2 separately. Model 1 uses a single wage variable which is ordered from low to high and is found to be negatively affecting labor supply. Model 2 uses seven wage variables in the form of dummies that allows to see the effect of increase in wage on labor supply at the different levels of the wage spectrum. The result indicates that when wages increases at the lower end of the wage spectrum, it has a positive and big effect on labor supply (the substitution effect dominates income effect). This effect diminishes at higher levels of wage even becomes negative suggesting a backward-bending labor supply curve (the income effect dominates substitution effect). This implies that at the low and middle levels of wage range, the primary role of higher wages is to increase labor supply. In contrast, at the higher wage levels individuals reallocate their time towards housekeeping activities. One explanation for this is that they are maximizing utility over time and the marginal benefit of leisure time

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is higher than ordinary people. Because, they do lots of necessities in their leisure time, may be no time for enjoyment. Marginal effect indicates the same result as reported in table 4. As wage rate increases probability of working low hours increases and probability of working high hours decreases. The effect of wage is robust to different specification of the model. For space purposes not reported here. This negative wage effect is also consistent with the finding of Hills (1983) study on female labor force participation in developing and developed countries of informal sector. The availability of other job opportunities (OJO) is found to be negatively affecting labor supply in informal sector and it is statistically significant in model 2. That is, if there are more other formal jobs opportunities, then individuals prefer to participate less in informal sector. It suggests that informal sector is considered as inferior. Marginal effects results also show that higher other jobs opportunities lowers the probability of providing higher labor supply, reported in Table 3. RFW variable have the expected positive sign and statistically significant. As the necessity of working increases, probability of being in the high labor supply becomes more than in being the medium labor supply (see table 3). Table 3: The Marginal Effects Low Labor Medium High Supply Labor Labor Supply Supply Coeff. Coeffi. Coeff. -.3449*** .2101*** .5550*** OJO -.4296*** .2940*** .7236*** RFW -.3958*** .0876*** .4835*** EDU -.2733*** .0867*** .3601*** OSI -0.0302 0.0042 0.0259 KID 0.18278 -0.068 -.1146** MAS Low Labor Medium High Labor Supply Labor Supply Supply Coeff. Coeffi. Coeff. .0547*** -.0692*** -.1178*** .0870*** .1165*** -.1653*** -.0098* -.0448*** .0125** .0567*** 0.0053 .1124***

WGE1 WGE2 WGE3 WGE4 WGE5 WGE7

-.0111* -.0759** -0.0015 -.1150** .0531** .1122***

Note: Low labor supply 2-4 hours a day, medium labor supply 5-7 hours a day and high labor more than 7 hours a day. *, ** and *** indicate significance at 10, 5 and levels. WGE6 dropped due to multicollienarity.

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Education dummy has the expected positive sign and statistically significant. Education increases the probability of working more, suggesting that continuation education after elementary school leads to be more in informal sector as expected. This result confirms that education helps to build confidence for women to participate artisan production work. These results are in accordance with the micro level evidence from Turkey and other countries (Psacharopoulos and Tzannatos, 1991; Kasnakoglu and Dayioglu, 1996; Ozar and Gunluk-senesen, 1998; Tansel, 2000; 1996). Participation in informal sector is found to be effected by availability of other income. This variable (OSI) has the expected negative sign and statistically significant. Female who has other source of income engages less in to informal sector. KID variable appears to be significant and has the expected negative sign. Marginal effects results indicate that having kids decrease the probability of being in the high labor supply group about 11% (see table 4). The presence of children affects women decision to work. Because affordable child care facilities (outside the family) are very rare in Gnen area and also a great majority of women share the view that children are best looked after by their own mother (Ozar and Gunluk-senesen, 1998: 322). Marital status (MAS) is found to be positive and statistically significant as well. This result is consistent with the study of Gallaway and Bernasek (2002) which examines the determinants of labor force participation in informal sector in Indonesia. They found that being married significantly affect the decision of women to participate into informal sector because married women have difficulties to find job outside home due to social roles that require them to priorities domestic roles. 6. Conclusion This study investigated labor force participation decisions of women working at home based in Gnen, Turkey using a survey data. For this purpose, a theoretical labor supply model for female in informal sector is developed and an ordered logit model is employed. All the coefficients of theoretical model come out as significant with expected signs suggesting a backward-bending labor supply curve. The estimation results suggest that wage, education, location, economic status of family, childcare responsibilities and marital status are very important factors in determining womens decision to work at home based in informal sector. Women, who earn more,

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allocate less time for work. Those who have post elementary school education, are more likely to allocate more time in home-based works because they stay at home instead of working in farms so that they can develop their skills in artisan production. The ones who live in relatively less developed areas are more likely to have spare time in doing home based works because they have difficulties in finding decent jobs in the labor market. The females who are in the low-income families or do not have other sources of income are more likely to supply more labor in home based works. Being poor forces them to work but not outside because they have dominant social roles such as wives and mothers. Married women are more likely to take home based jobs as a result of social roles that require them to prioritize domestic roles. In addition, the responsibilities attributed to women by cultural and traditional values such as looking after children and household duties make females prefer home based works but this role leads to lower amount of time spent for work. These results are consistent with Feminists view that explains women as being marginalized to home-based works of the informal sector. The overall results of the study imply that the policy makers should help women by providing childcare facilities so that they are able to work outside in a formal environment which would provide better working conditions and higher earnings. References Amemiya, 1981, Qualitative Response Models: A Survey, Journal of Economic Literature 194: 483-536. Becker, G., 1965, A Theory of the Allocation of Time, Economic Journal, 75, 493-517. Bulutay T. and E. Tasti 2004, Informal Sector in the Turkish labour market, Turkish Economic Association Dissusion Paper, 2004/22, http://www.tek.org.tr. Cinar, M., 1994, Unskilled urban migrant women and disguised employment: Homeworking women in Istanbul, Turkey, World Development, 22:3, 369-380. Esim S. and Sims, M., 2000, Home-based work in Turkey: Issues and strategies for organizing, The International Journal of Sociology and Social Policy, 20: 9/10, 95-105. Gallaway, H.J., Bernasek, A., Gender and Informal Sector Employment in Indonesia, Journal of Economic Issues, Vol. 36, pp.313 Greene, W. 1997, Econometric Analysis, Upper Saddle River: Prentice Hall.

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Hattatoglu D., and Isik, S. N., 2005, Ev-Eksenli alma, Kreselleme ve rgtlenme, TRK- Dergisi Dosya Eki. Hill, M. A., 1983, Female labor force participation in developing and developed countries consideration of the informal sector, The Review of Economics and Statistics, 65: 3, 459468. ILO, 2002, Women and Men in the Informal Economy: A Statistical Picture, Employment sector, International Labor Organization, Geneva. Kasnakoglu Z. and M. Dayioglu, 1996, Education and the Labour Market Participation of Women in Turkey in Bulutay T. (ed.) Education and the Labour Market in Turkey, State Institutes of Statistics, Ankara. Kasnakoglu Z. and Yayla, M., 1998, Unrecorded economy in Turkey, in (ed.), T. Bulutay, Informal Sector (I), Ankara: State Institute of Statistics, Printing Division, 49-86. Keles, R., 1998, City, urbanization and informal sector, in (ed.), T. Bulutay, Informal Sector (I), Ankara: State Institute of Statistics, Printing Division, 1-22. Kocak, S., 1999, Gender Discrimination in the Turkish Labour Market, Unpublished PhD Thesis, De Montfort University, England. Ozar S. and G. Gunluk-Senesen, 1998, Determinants of Female (non) Participation in the Urban labour Force in Turkey, Metu Studies in Development, 25:2, 311-328. Ozar, S., 1998, The employment aspects of the informal sector, in (ed.), T. Bulutay, Informal Sector (II), Ankara: State Institute of Statistics, Printing Division, 175-203. Psacharopoulos, G. and Z. Tzannatos, 1991, Female Labour Force Participation and Education, in G. Psacharopoulos (ed.), Essays in Equity, Poverty and Growth, Pergamon Press, New York. Sawkins, W.J., Seaman T. P., and Williams C.S., 1997, Church attendance in Great Britain: An ordered logit approach, Applied Economics, 29: 2, February 1. SIS, 2004, National Action Plan of Turkey-Women, http://www.die.gov.tr/CIN/nationalAction-Plan-of-Turkey-women.htm, 15/08/2004. Tansel, A., 2000, Wage earners, self employed and gender in the informal sector in Turkey, ERF Working Paper Series, Working paper 0102, Egypt.

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Tansel, A., 1996, Self Employment, wage Employment and Returns to Education for Urban Men and Women, in T. Bulutay (ed.), Education and the Labour Market in Turkey, The State Institute of statistics, Printing Division, Ankara, 175-205. Trk-i, 2006, Kadin Emegi Platformu Komisyon Raporlari, http://www.turkis.org.tr/ icerik/ kepkomrap.doc. 19/07/2006 Wetzell D.L., 2003, Three Papers in Labor Economics, PhD Dissertation Michigian State University. World Bank, (1993), Turkey Women in Development, a World Bank Country Study, Washington, D.C. Zavoina, R. and McElvey, W.,1975, A Statistical Model for the Analysis of Ordinal Level Dependent Variables, Journal of Mathematical Sociology, 103-20. Appendix: Descriptive Statistics of the Data Variable LSE WGE WGE1 WGE2 WGE3 WGE4 WGE5 WGE6 WGE7 OJO RFW EDU OSI KID MAS Obs 804 804 804 804 804 804 804 804 804 804 804 803 787 804 804 Mean 1.940299 3.543532 .130597 .1504975 .2835821 .1517413 .1318408 .0671642 .0845771 4.329602 3.090796 .2054795 .6658196 .8532338 .8159204 Standard deviation .8132881 1.737247 .3371688 .357781 .451017 .3589933 .3385282 .2504619 .2784246 .7565863 .6680504 .4043034 .4720031 .3540929 .3877903 Min 1 1 0 0 0 0 0 0 0 1 1 0 0 0 0 Max 3 7 1 1 1 1 1 1 1 5 4 1 1 1 1