Employment in India's informal sector: size, patterns, growth and determinants

Abstract

In a developing country like India, the formal sector is a coveted employment destination. However, in the present scenario, the formal sector is unable to absorb the entire workforce. In view of these labour demand constraints in the formal sector, this paper sets out to explore the opportunities for the promotion of informal sector employment. It measures employment trends and patterns in the informal sector in India and estimates the sector's employment determinants using a large and nationally representative sample of individual data. The estimation also tests the hypothesis that the determinants of informal sector employment vary with the states’ development levels. Our findings reveal that individuals without any general or technical education have a greater probability of entering the informal sector. As education increases, this probability decreases in all the states irrespective of their development level. In some cases, results for the underdeveloped states contrast with the developing and developed states. For instance, individuals in the Other Backward Classes (OBC) category who always stay in the same employment catchment area have a greater probability of finding a job in the informal sector in the developed and developing states, while they have no exposure to finding a job in the informal sector in the underdeveloped states. Education (both general and technical) and migration are the main policy variables for the promotion of employment.

Keywords:

• informal sector employment
• informal employment
• developing states
• underdeveloped states

JEL classification:

• O17
• J21

Acknowledgements

This paper is a part of the author's doctoral dissertation. The author is very grateful to his Ph.D. supervisor Prof. M. R. Narayana for his valuable and constructive suggestions at various stages of the development of this paper. The author is also thankful to B. P. Vani for her useful comments. The author is grateful to the organizer and audience of the international conference on ‘The Informal Sector and Informal Employment: Statistical Measurement, Economic Implications and Public Policies’ held by the Vietnam Academy of Social Scinece (VASS), 6–7 May 2010, in Hanoi, Vietnam, and also to the anonymous referees. However, the usual disclaimers apply.