Providing Opportunities for Informal Sector Participants in Sri Lanka

Nisha Arunatilake Institute of Policy Studies December 2004 1

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 2

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 3

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 4

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 5

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 6

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 7

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 8

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 9

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 10

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%) 11

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%) 12

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%) 13

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%) 14

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 15

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 16

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 17

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? 18

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 21

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 22

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