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Providing Opportunities for Informal Sector Participants in Sri Lanka

Nisha ArunatilakeInstitute of Policy Studies

December 2004

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Motivation Providing Social Security to people

in the informal sector Strategies for protection from risks

- health insurance schemes, micro finance schemes, old age protection, etc.

Strategies for risk prevention- policy reforms for improving returns to

livelihoods, - Minimizing variability of incomes

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Objective of the study To better understand the

determinants of informal sector participation in Sri Lanka in order to identify areas where risk prevention is needed

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Background – Formal Sector

The Formal Sector This comprises employment in:

the government sector, the corporate sector,large private sector establishments and the estate sector

Around one-third of the employed in the country are in the formal sector

Wage setting takes place through collective bargaining or tripartite wages boards

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Background – Informal Sector Data on the informal sector are

scarce The sector comprises

Activities in agriculture, fishing, livestock rearing, small and medium scale enterprises, petty traders, and other small commerce, industry and service occupations

Wages, for the large part are determined by market forces

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Background – Unemployed Unemployment rates have come down in

the country since early 90s. However, the structure of the unemployed

is of concern to policy makers Unemployment rates are highest among the youth,

the educated and females The period of unemployment is more than a year for

75% of the unemployed 80% are first time job seekers

Also anecdotal evidence suggests large-scale under-employment

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Background – Social Protection

Labour legislation has provided for job and income security through several avenues EPF; ETF – Superannuating benefits TEWA – control lay-offs and retrenchment of

workers Gratuity Pension funds for farmers and fishermen Other income support and self-employment

promotion programs

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Background – Social Protection Issues:

Coverage is mostly for workers in the formal sector

Social Protection programs available for the informal sector workers not well functioning due to improper planning, resource constraints, politicization

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Model Assumes that sector participation is

determined by two factors: Rationing by the labour market

Influenced by labour market conditions, selection criteria of potential employers (e.g., education, skills, experience, etc.)

Individual preferences Influenced by expected income and other individual,

household, community characteristics Both Rationing and Individual preferences

are governed by opportunities available to individuals

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Data and Study sample Data: Sri Lanka Integrated Survey

(1999/2000) which collected data from 7,500 hhs in 500 communities

Sample restricted to 16-60 year olds labour force participants Estate workers removed

Resulting Sample – 11,950 individuals

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Classification of the sample by economic activity Salaried employed in the public sector 1,808(15%) Salaried employed in the private sector 2,048 (17%) Wage employed 3,039 (25%)

Individuals engaged in farm/ non-farm casual labour and those providing personal services

Self Employed 3,042 (25%) Individuals engaged in businesses, own farm

activities or fishing Both wage and self employed 280 (2%) Unemployed 1,733 (15%)

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The Informal Sector Sample Wage Employed

Casual non-farm workers (72%), casual farm workers (23%), personal services (5%)

Self Employed Own farm activities (60%), petty

businesses/ trade or manufacturing (36%), major businesses/ trade or manufacturing (2%), fishing (4%)

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Explanatory Variables Individual Characteristics

Male (72%); Age (34.15); HH head (57%) Married (56%); never married (40%); Other

(4%) Education

Less than primary (12%); Secondary (49%); More than secondary (39%)

Training Professional (12%); Technical (3%);

Vocational (4%)

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Explanatory Variables – contd. HH characteristics

No. of kids (1.22); No. of Elders (0.32); member working abroad (16%); Assets – financial or mobile (Rs. 60,000)

Location Western (26%); Central (14%); Southern (14%);

Northern and Eastern (11%); North Western (13%); North Central (7%); Uva (6%); Sabaragamuwa (9%)

Community Charateristics Time to market (21.69 min); Time to main road

(7.32 min); Access to electricity (62%); Community unemployment rate (14.81%)

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Results – multinomial logit Older educated males are more likely to be

in public salaried employment The younger individuals with somewhat

similar education levels and with less family obligations are more likely to be unemployed

Informal sector workers are similar to those in the public sector in most respect except in their educational level

Informal sector workers are more likely to come from provinces outside the Western province and from rural areas

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Results – multinomial logit contd

The private sector salaried individuals come from wealthier families. They are fairly well educated (although not as much as the public salaried and the unemployed). They are mostly from the Western Province

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Results - logit Unemployed Vs Private salaried

Having a professional qualification decreases the likelihood of being unemployed

Obtaining most professional qualifications are expensive, and requires English

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Results - logit Unemployed Vs Informal Sector

workers Unemployed are more likely to be

technically qualified Unexpected: most technical training

programmes are targeted to promote self-employment

Less access to technical training due to financial, geographical, time constraints?

Lack of complementary assets to make use of training?

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Results – multinomial logit, informal sector

Compared to wage employed, self employed are older, heads of households, coming from slightly wealthier families

Suggests that older (more experienced) individuals with higher family obligations are more likely to start self-employment projects.

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Policy Implications Results suggests several areas needing

attention of policy makers: Job creation, especially in provinces outside

the Western Province More equitable development across regions Improve access to credit and infrastructure Education Reform

Formal education is not market oriented Access to training needs to be improved (financial/

geographical) Quality of formal and tertiary education

questionable?

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Results (relative to public salaried) contd. Location

Private salaried were less likely to be in all provinces other than the Western Province

Informal sector workers were more likely to be in all other provinces (except N & E) than the Western Province

Unemployed were less likely to be in Northern & Eastern, North Central and Uva provinces than the Western Province

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Results (relative to public salaried) contd. Community Characteristics

Time to market or road didn’t have a significant effect on sector participation

Individuals in all other sectors had less access to electricity compared to the public sector

Individuals in private salaried and informal sectors were less likely to come from communities with high unemployment rates

The unemployed are more likely to come from communities with high unemployed rates

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