Low Quality of Employment in Asian MICs: Role of Informal Sector

Guntur Sugiyarto
Senior Economist, Asian Development Bank, Workshop on SOCIAL INCLUSIVENESS IN ASIAS EMERGING MIDDLE INCOME COUNTRIES. Jakarta, Indonesia. 13 September 2011

*) The views expressed here are those of the author and do not necessarily reflect the views or policies of the ADB.
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Why we should care about informality? Undesirable characteristics..

Small activities and face more barriers to growth, preventing them from offering high-quality jobs, goods and services. Act as a buffer for workers losing their jobs during difficult times, further depressing their already low job quality (..lower income, less job security, lack of access to a range of social benefits and fewer possibilities to participate in formal education and training programs). Lack of capacity to generate sufficient profits to reward innovation and risk-taking essential for a long-term growth. Estimate: up to 2 percentage points of average economic growth lost due to informality in the LM.
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About 500 million workers in Asia and Pacific are in informal sector

499, Million 74%

178 Million, 26%

Informal
Formal

Note: Average of reporting countries in ADB DMCs. Derived from KILM, ILO 2011 3

Asia exhibited high informality

Share of Informal employment to total employment by country groups (%)
High Income-Non-OECD

High Income-OECD

Middle Income

Low Income
0 10 20 30 40 50 60 70 80 90

Note: Average of reporting countries in ADB DMCs. Derived from KILM, ILO 2011 4

And an increasing trend persistently high!

2000
High Income 9%

2009
High Income 8%

Low Income 23%

Low Income 20%

Middle Income 68%

Middle Income 72%

Note: Average of reporting countries in ADB DMCs. Derived from KILM, ILO 2011 5

Negatively link to GDP per capita..

5.0

4.5

JAP HKG AUS SIN NZL BRU MAL

KOR

4.0 gdp per cap (log)

3.5

MLD RMI KZA FIJ SAM PHI TAJ

THA AZE TON GEO INO MON PAK NEP BHU VIE CAM BAN LAO IND

3.0

ARM SRI

2.5

KGZ

2.0 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 100.0 informal (% of employed)

Note: Average of reporting countries in ADB DMCs. Derived from KILM , ILO and WDI (2011).

More prevalent in lower income groups but with a different pattern

60.0 52.2

Own-account worker

50.0

Contributing family worker

38.3 40.0 36.1 37.3 21.7 20.2

30.0 21.2 20.0 11.1 9.7 5.4 10.0

30.5

0.0

2000

2009

2000

2009

2000

2009

Low Income

Middle Income

High Income

Note: Average of reporting countries in ADB DMCs. Derived from KILM, ILO 2011 7

3.3

Own-account and contributing family workers share declines very slowly.. Self employed more dominant.
80 70 60 50
Percent

High income countries

40

Middle income countries

30 20 10 0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Note: Average of reporting countries in ADB DMCs. Derived from KILM, ILO 2011 8

2007

Doing Business and Informal Employment

Correlation coefficient Ease of doing business index (1=most business-friendly regulations) Business regulatory environment rating (1=low to 6=high) Firing cost (weeks of wages) Policies for social inclusion/equity cluster average (1=low to 6=high) Start-up procedures to register a business (number) Cost of business start-up procedures (% of GNI per capita) 0.6623 Significance Level 0.0000***

-0.4466 0.3743 -0.1966

0.0723* 0.0497** 0.4344

informal sector problems: high cost of firing worker, costly starting up and difficulty in doing business. results of high tax burden, red tape and business irregularity.

0.2331 0.4619

0.2070 0.0078***

Note: Derived from reporting countries of ADB DMCs.

Social Status and Informal Employment

.strong (negative) relationship between level of education and incidence of informality (literacy and primary completion rates) this has consequences for productivity, upgrading and capacity to absorb new knowledge and technologies.
Public spending on education, total (% of GDP)
Public spending on education, total (% of government expenditure) Health expenditure per capita, PPP (constant 2005 international $) Literacy rate, adult total (% of people ages 15 and above) Primary completion rate, total (% of relevant age group) Ratio of young literate females to males (% ages 15-24) Correlation Coefficient -0.2386 -0.0350 Significance Level 0.1885 0.8493

-0.7280

0.0000***

-0.6388

0.0006***

-0.4299

0.0224**

-0.4741

0.0166**

Note: Derived from reporting countries of ADB DMCs.

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Governance and Informal Employment

informality links to high tax burden, red tape and regulatory problems that represent a weak governance. tax and tariff system are highly related to informality.
Labor tax and contributions (% of commercial profits)
Tariff rate, applied, weighted mean, all products (%) Time to prepare and pay taxes (hours) Total tax rate (% of commercial profits) Correlation Significance Coefficient Level -0.2156 0.2440 0.5823 0.3965 -0.0071 0.0007*** 0.0246** 0.9694

Note: Derived from reporting countries of ADB DMCs.

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Informal Employment in Indonesia

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Informal employment by sectorcommon across sectors

100.0 90.0 80.0

86.7

91.4 85.1

70.0
60.0

Percent

50.0 40.0 30.0 20.0 10.0 -

41.9 24.2

44.2

38.9 40.6

19.4

1993

2000

2010

Agriculture
Source: Calculated from Sakernas. 13

Manufacture

Services

Informal employment by gendermore prevalent among women

80.0 70.0

67.3 57.8 54.6

64.5 58.0

62.6

60.0

50.0 Percent

40.0

30.0

20.0

10.0

1993

2000

2010

Male
Source: Calculated from Sakernas. 14

Female

Informal employment by locationmore dominant in rural

80.0

72.0
70.0 60.0 50.0 Percent 40.0 30.0 20.0 10.0 -

71.5

74.1

35.2

37.0

39.6

1993 Urban
Source: Calculated from Sakernas. 15

2000 Rural

2010

Informal employment by Educationmore dominant among less educated

90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 -

81.9 74.0 66.7 54.6 74.8 67.5 59.2 54.1 37.9 32.7 26.2 9.7 10.7 73.9

Percent

9.5

1993
Less than Primary
Source: Calculated from Sakernas.
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2000
Primary Junior Secondary Senior Secondary

2010
Tertiary

Average monthly wage gap lower for informal and wider gap..
1600 1400

Wage employee Self-employed

1200

1000
000 Rp

800

600

400

200

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Source: Calculated from Sakernas. 17

Who get the formal job in crisis?

Multinomial logit model: examine the probability of being employed in formal sector during crisis times.
Main results: Higher Educated are more likely to get a formal job. Younger entrants tend to work in formal sector. Women have less chance to work in formal sector and more chance to be unemployed. Hence: Education, Age and Gender play a key role in getting formal job.
Indicators
Formal

1999
Unemployed Formal

2009
Unemployed

Primary Jun. Secondary Sen. Secondary Tertiary Female Urban HH head Age 15 24 Age 50 64 Age 65 +

0.041 0.117 0.324 0.718 -0.006 0.216 0.114 0.017 -0.084 -0.146

0.001 0.002 0.005 0.008 0.000 0.002 -0.003 0.003 -0.003 -0.159

0.088 0.178 0.346 0.758 0.026 0.210 0.098 0.032 -0.044 -0.071

0.002 0.003 0.008 0.011 0.000 0.002 -0.004 0.005 -0.005 -0.202

Married
Separated Student Constant

-0.097
-0.072 -0.297 -0.262

-0.005
-0.003 -0.002 -0.008

-0.056
-0.073 -0.157 -0.43

-0.009
-0.004 -0.005 -0.015

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GOI Key Policy Measures

Decentralization Minimum Wage Severance Pay
Adverse Impacts:
A cross-country survey comparing labor regulation rigidity, Indonesia ranked 157 out of 181 countries. Compared with its neighbors in the East Asia and Pacific, Indonesia ranked 23 out of 24 countries with no other country in the region has firing costs as expensive as Indonesia (WB 2011).

De Jure (Normative) rigid labor market: Adverse Impacts

Driving away new investments (good firms), which are more likely to generate good jobs. Encouraging existing (and new firms) to hire workers in short and less permanent terms. Creating more uncertainties, worsening governance (corruption) issue and investment climate. Discouraging existing firms to expand and improve the quality of working relationship. Lowering overall potential growth.
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Concluding Remarks
The economy needs to grow faster and generate more good jobs to cater the growing number of labor force and to improve the overall quality of employment. As the LM is very fragmented, improving the quality of employment must include addressing informality and underutilization issues, in addition to gender, urbanity etc. LM flexibility (rigid and expensive regulations) makes workers always bearing the costs of any economic downturns. As the existing growth does not guarantee for quality employments, a separate policy intervention is needed to improve the quality of employment. Workers and employers are trapped in lose-lose situation and reforming the LM only will not solve the problem. A more comprehensive reform is needed including improving the investment climate and revamping the industrial policy since it has performed very weak and more importantly has not generated good jobs.

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Thank You and Comments are Welcome!

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Key Policy Challenges

Creating good jobs Economic growth only is not enough: not always translated into job expansion and poverty reduction. Additional Policies needed: ADBs framework of inclusive growth. ADB, ILO and IDB identified the building blocks of economic growth and employment. Employment creation: development of productive employment and decent work, as well as employment for low and unskilled workers (i.e. labor intensive project to generate the highest multiplier and return on investment. See ILO, 2010) and other public work programs to create temporary employment.
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Labor Market Policies

Increasing labor productivity to increase employment and wages that would be beneficial to workers. Improving industrial relation of unions and collective bargaining to maximize aggregate utility. Improving labor quality at entry, including improving education and training to reduce skill mismatch and to improve workers skill and competitiveness. Reforming regulations and increasing the role of public employment services to improve labor market outcomes.

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Social Protection and Programs

Social protection to formal sector only will miss target. Need to move to a combination of different social insurances. Developing informal and formal social system such as unemployment benefits, better public services, and microfinance. Three cluster systems of social programs: Social assistance and protection, Community empowerment, and Micro and small enterprise development.

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