1 DETERMINANTS AND IMPACT OF URBAN INFORMAL SECTOR’S GROWTH ON DEVELOPMENT OF SOUTHERN PUNJAB, (PAKISTAN) By Durdana Qaiser Gillani Roll No. 01 Supervised by Dr. Rana Ejaz Ali Khan Associate Professor & Chairman Department of Economics A thesis Submitted to Department of Economics The Islamia University of Bahawalpur for the partial Fulfillment of the Degree of Doctorate of Philosophy in Economics Session: 2008-11 Department of Economics The Islamia University of Bahawalpur Pakistan
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1
DETERMINANTS AND IMPACT OF URBAN
INFORMAL SECTOR’S GROWTH ON DEVELOPMENT
OF SOUTHERN PUNJAB, (PAKISTAN)
By
Durdana Qaiser Gillani
Roll No. 01
Supervised by
Dr. Rana Ejaz Ali Khan
Associate Professor &
Chairman Department of Economics
A thesis
Submitted to
Department of Economics
The Islamia University of Bahawalpur for the partial Fulfillment of
the Degree of Doctorate of Philosophy in Economics
Session: 2008-11
Department of Economics
The Islamia University of Bahawalpur
Pakistan
2
3
CERTIFICATE
It is hereby certified that wok presented by Durdana Qaiser Gillani D/O Syed Qaiser
Abbas Gillani in the thesis entitled “Determinants and Impact of Urban Informal
Sector‟s Growth on Development of Southern Punjab (Pakistan)” has been
successfully defended and is accepted in its present form as satisfying the requirement
for the degree of Doctor of Philosophy in the Economics in the Department and
Faculty the Islamia University of Bahawalpur.
Dr. RANA EJAZ ALI
Associate Professor of Economics
Supervisor
Department of Economics
The Islamia University of Bahawalpur
4
Dedication
To the humanity of this universe without any discrimination of
gender, cast, creed and religion. To all those who have chastity of
heart and mind, potential to confront the challenges with
transparency, courage to eradicate hypocrisy, urge to survive
through thick and thin and dignified attitude of paying back, bad
with good.
5
Acknowledgement
I have pearls in my eyes to admire the blessings of compassionate and
omnipotent ALLAH because the words are bound, knowledge is limited and time is
short to express His dignity. It is one of the infinite blessings of ALLAH that He
bestowed me with the potential and ability to complete my research work and explore
a tiny part of ocean of knowledge of world.
I would like to thanks to my supervisor Dr. Rana Ejaz Ali Khan (Associate
Professor and Chairman Department of Economic), The Islamic University,
Bahawalpur (IUB) for his kind guidance during my research work.
I would like to thanks Dr. Karamat Ali (Professor of Economic), Ex
Chairman, Department of Economics in The Islamia University of Bahawalpur for his
valuable guidance. I would like to thanks to Dr. Abid Aman Burki (Professor of
Economics), Lahore University of management Sciences for his kind and humble
cooperation.
I am indebted to Dr. Touseef Azid (Professor of Economics), Bahauddin
Zakariya University Multan for his nice cooperation. I would like to thanks Dr.
Shahnawaz Malik (Professor of Economics), Bahauddin Zakariya University Multan
for his nice encouragement.
I offer my humble thanks from the core of my heart to family members
especially my parents and few friends (my valuable assets) who supported me through
out, motivated and kept involved with their active assistance.
Durdana Qaiser Gillani
6
TABLE OF CONTENTS
Contents Page#
Chapter 1: Introduction
1.1 Statement of the Problem 01
1.2 Objectives of the Study 07
1.3 Material and Methods 08
1.4 Organization of the Study 09
Chapter 2: Urban Informal Sector Growth and Development
2.1 Introduction 11
2.2 Urban Informal Sector: An Overview 12
2.3 An Overview of Pakistan‟s Growth and Development 24
2.4 Population, Labour Force and Employment Pattern in Pakistan 30
Economy
2.4.1 Labour Force Participation Rates in Pakistan 32
2.4.2 The Formal Sector, Informal Sector and 33
Employment Trends or Patterns
2.4.3 Pattern of Employment and Hours of Work 38
2.5 Unemployment Situation 39
2.6 Urbanization, Migration and Pakistan Economy 40
2.7 Poverty and Measures 41
2.8 Women and Urban Informal Sector 42
2.9 Concept of Development 43
2.9.1 Three Core Values of Development 44
2.9.2 The Objectives of Development 45
2.10 Basic Indicators of Development 46
2.10.1 Human Indicators and Development 46
2.10.2 Education Training and Employment Situation 49
2.10.3 Literacy Rates 50
2.11 Socio-Indicators and Development 50
7
2.12 Concluding Remarks 51
Chapter 3: Theoretical Framework
3.1 Introduction 53
3.2 Conceptual Framework 53
3.2.1 Labour Supply and Employment 54
3.3 Neo-Classical theory of Labour Supply Decision 55
3.3.1 Neo-Classical Individual Labour Supply 55
3.3.2 Household Labour Supply 63
3.4 The Basic Theory of Human Capital 65
3.5 Theoretical Approaches Towards Urban Informal Sector 68
3.5.1 Dualistic Labour Market Approach 68
3.5.2 Neo-Liberal Approach 69
3.5.3 Structural Articulation Approach 70
3.6 Conclusion 71
Chapter 4: Literature Review
4.1 Introduction 72
4.2 Informal Employment and Classic Theories of Growth and 72
Development
4.3 Review of Empirical Evidence and Urban Informal Sector 77
4.4 Literature Review of Urban Informal Sector in Pakistan 96
4.5 Concluding Remarks 103
Chapter 5: Measuring Urban Informal Sector: Some Basic Issues
5.1 Introduction 105
5.2 Profile of the Study Areas 105
5.2.1 Bahawalpur Division 106
5.2.2 Multan Division 109
5.2.3 Dera Ghazi Khan Division 112
5.3 Sources of Data and Sampling Design 115
5.4 Survey Limitations 118
8
5.5 Determinants of Informal and Formal Sector Employment in 119
Urban Areas
5.5.1 Age of the Participants 119
5.5.2 Education 120
5.5.3 Gender 122
5.5.4 Marital Status 123
5.5.5 Formal Training 124
5.5.6 Parents‟ Educational Status 125
5.5.7 Household Size 126
5.5.8 Family Setup 127
5.5.9 Dependency Ratio 127
5.5.10 Number of Children 128
5.5.11 Number of Male Adolescents 128
5.5.12 Number of Female Adolescents 129
5.5.13 Spouse Participation in Economic Activities 130
5.5.14 Household Value of Assets 130
5.5.15 Rural-Urban Migration 131
5.5.16 Working Hours 132
5.6 Model and Methodological Issues 132
5.6.1 A Descriptive Data Analysis 132
5.6.2 A Multivariate Analysis of Urban Informal Sector Employment 132
5.6.2.1 A Binary Logit Model 134
5.6.2.2 Earnings Functions 136
5.6.3 Specification of Employment Model 137
5.6.3.1 General Model 137
5.6.3.2 Employment Model with Complete Years 138
of Education
5.6.3.3 Employment Model with Different Levels of 138
Education
5.6.3.4 Earnings Functions 139
5.6.3.5 Earnings Function with Different Levels of
Education 139
5.7 Concluding Remarks 142
Chapter 6: Descriptive Analysis of the Urban Informal and Formal
9
Sector in Southern Punjab, Pakistan
6.1 Introduction 143
6.2 Pair wise Correlations Matrix 144
6.3 Urban Informal and Formal Sector Employment: An Elementary 146
Analysis
6.3.1 Age Group and Urban Informal and Formal Sector Employment 146
6.3.2 Education and Urban Informal and Formal Sector Employment 147
6.3.3 Marital Status and Urban Informal and Formal Sector 148
Employment
6.3.4 Sex and Urban Informal and Formal Sector Employment 149
6.3.5 Formal Training and Urban Informal and Formal Sector 150
Employment
6.3.6 Father‟s Educational Status and Urban Informal and Formal 150
Sector Employment
6.3.7 Mother‟s Education and Urban Informal and Formal Sector 151
Employment
6.3.8 Size of Household and Urban Informal and Formal Sector 152
Employment
6.3.9 Number of Dependents and Urban Informal and Formal Sector 154
Employment
6.3.10 Family Setup and Urban Informal and Formal Sector 154
Employment
6.3.11 Number of Children and Urban Informal and Formal Sector 155
Employment
6.3.12 Male Adolescents and Urban Informal and Formal Sector 156
Employment
6.3.13 Female Adolescents and Urban Informal and Formal 157
Sector Employment
6.3.14 Spouse Working and Urban Informal and Formal Sector 158
Employment
6.3.15 Rural-Urban Migration and Urban Informal and Formal Sector 159
Employment
6.3.16 Employment Status and Urban Informal and Formal Sector 160
10
Employment
6.3.17 Sector of Employment and Urban Informal Sector Employment 161
6.3.18 Working Hours and Urban Informal Sector Employment 162
6.4 Descriptive Analysis of Urban Male Informal and Formal Sector 163
In Southern Punjab, Pakistan
6.4.1 Age Group and Urban Male Informal and Formal Sector 163
Employment
6.4.2 Education and Urban Male Informal and Formal Sector 165
Employment
6.4.3 Marital Status and Urban Male Informal and Formal Sector 166
Employment
6.4.4 Formal Training and Urban Male Informal and Formal Sector 166
Employment
6.4.5 Father‟s Educational Status and Urban Male Informal and Formal 167
Sector Employment
6.4.6 Mother‟s Education and Urban Male Informal and Formal Sector 168
Employment
6.4.7 Size of Household and Urban Male Informal and Formal Sector 169
Employment
6.4.8 Number of Dependents and Urban Male Informal and Formal 169
Sector Employment
6.4.9 Family Setup and Urban Male Informal and Formal Sector 171
Employment
6.4.10 Number of Children and Urban Male Informal and Formal Sector 171
Employment
6.4.11 Male Adolescents and Urban Male Informal and Formal 172
Sector Employment
6.4.12 Female Adolescents and Urban Male Informal and Formal 173
Sector Employment
6.4.13 Working Spouse and Urban Male Informal and Formal Sector 174
Employment
11
6.4.14 Rural-Urban Migration and Urban Male Informal & Formal 175
Sector Employment
6.4.15 Employment Status and Urban Male Informal Sector 176
Employment
6.4.16 Sector of Employment and Urban Male Informal and Formal 177
Sector Employment
6.4.17 Working Hours and Urban Male Informal Sector Employment 178
6.5 Descriptive Analysis of Urban Female Informal and Formal Sector 179
6.5.1 Age Group and Urban Female Informal and Formal Sector 179
Employment
6.5.2 Education and Urban Female Informal and Formal Sector 180
Employment
6.5.3 Marital Status and Urban Female Informal and Formal Sector 181
Employment
6.5.4 Formal Training and Urban Female Informal and Formal Sector 183
Employment
6.5.5 Father‟s Education Status and Urban Female Informal and 184
Formal Sector Employment
6.5.6 Mother‟s Education and Urban Female Informal and Formal 185
Sector Employment
6.5.7 Size of Household and Urban Female Informal and Formal 186
Sector Employment
6.5.8 Number of Dependents and Urban Female Informal and Formal 187
Sector Employment
6.5.9 Family Setup and Urban Female Informal and Formal Sector 188
Employment
6.5.10 Number of Children and Urban Female Informal and Formal 189
Sector Employment
6.5.11 Male Adolescents and Urban Female Informal and Formal
190
Sector Employment
6.5.12 Female Adolescents and Urban Female Informal and Formal
191
12
Sector Employment
6.5.13 Working Spouse and Urban Female Informal and Formal Sector 192
Employment
6.5.14 Rural-Urban Migration and Urban Female Informal and Formal 193
Sector Employment
6.5.15 Employment Status and Urban Female Informal and Formal 194
Sector Employment
6.5.16 Sector of Employment and Urban Female Informal Sector 195
Employment
6.5.17 Working Hours and Urban Female Informal Sector Employment 195
6.6 Concluding Remarks 196
Chapter 7: Determinants of Urban Informal Sector Employment: An Analysis
7.1 Introduction 197
7.2 Estimates of Binary Logit Model in Southern Punjab 198
7.3 Estimates of Binary Logit Model in District Bahawalpur 208
7.4 Estimates of Binary Logit Model in District Multan 216
7.5 Estimates of Binary Logit Model in District Dera Ghazi Khan 224
7.6 Concluding Remarks 232
Chapter 8: Earnings Determinants, Development and Urban Informal Sector:
An Analysis
8.1 Introduction 234
8.2 Estimates of Earning Functions of the Participants in Urban Informal 235
Sector in Southern Punjab
8.2.1 Estimates of Earnings Functions of the Participants in Urban 239
Informal Sector in District Bahawalpur
8.2.2 Estimates of Earnings Functions of the Participants in Urban 244
Informal Sector in District Multan
8.2.3 Estimates of Earnings Functions of the Participants in Urban 249
Informal Sector in District Dera Ghazi Khan
13
8.3 Human Development and Urban Informal Sector 253
8.3.1 Development and Urban Informal Sector in Southern Punjab 254
8.3.2 Development and Urban Informal Sector in District Bahawalpur 260
8.3.3 Development and Urban Informal Sector in District Multan 264
8.3.4 Development and Urban Informal Sector 268
in District Dera Ghazi Khan
8.4 Concluding Remarks 272
Chapter 9: Gender Employment in Urban Informal Sector: A Comparison
9.1 Introduction 275
9.2 Binary Logit Estimates of Determinants of Gender Employment 276
and Comparison in Urban Informal Sector in Southern Punjab
9.3 Binary Logit Estimates of Determinants of Gender Employment 288
and Comparison in Urban Informal Sector in District Bahawalpur
9.4 Binary Logit Estimates of Determinants of Gender Employment 299
and Comparison in Urban Informal Sector in District Multan
9.5 Binary Logit Estimates of Determinants of Gender Employment 310
and Comparison in Urban Informal Sector in District Dera Ghazi Khan
2.1 Growth Performance of Key Components of GDP (% Growth at Constant
Factor Cost)
25
2.2 Sectoral Share of the GDP Growth (Percentage Points) 26
2.3 Structure of Savings and Investment (As Percentage of GDP) 27
2.4 Civilian Labour Force, Employed and Unemployed for Pakistan (Million) 31
2.5 Population, Labour Force and Labour Force Participation (LFP) Rates 32
2.6 Employment Percentage in Informal Sector by Regional Gender 35
2.7 Employment Percentages by Major Industry and Gender in Informal Sector 36
2.8 Informal Sector by Major Occupation and Gender in Percentages 37
2.9 Informal Sector by Employment Status and Gender (%) 38
2.10 Hours of Work by Region and Gender (%) 39
2.11 Unemployment in Million by Gender and Region
2.12 Education and Literacy by Gender of Working Age Population (%)
2.13 Literacy Rates in Pakistan and Provinces
39
49
50
5.1 List of Variables Used in the Informal Sector Employment Equations 141
6.1 Pair Wise Correlation Matrix 145
6.2 Distribution of Respondents by Age Groups 146
6.3 Distribution of Respondents by Education 148
6.4 Distribution of Respondents by Marital Status 148
6.5 Distribution of Respondents by Sex 149
6.6 Distribution of Respondents by Formal Training 150
6.7 Distribution of Respondents by Father‟s Educational Status 151
6.8 Distribution of Respondents by Mother‟s Educational Status 151
6.9 Distribution of Respondents by the Size of Household 153
6.10 Distribution of Respondents by Number of Dependents 154
6.11 Distribution of Respondents by Type of Family System 155
6.12 Distribution of Respondents by Number of Children 156
6.13 Distribution of Respondents by Male Adolescents 158
6.14 Distribution of respondents by Female Adolescents 159
15
6.15 Distribution of Respondents by Spouse Participation in Economic Activities. 159 159
6.16 Distribution of Respondents by Rural-urban Migration 159
6.17 Distribution of Respondents by Employment Status 161
6.18 Distribution of Respondents by Sector of Employment 162
6.19 Distribution of Respondents by Working Hours 162
6.20 Distribution of Male Respondents by Age Groups 164
6.21 Distribution of Male Respondents by Levels of Education 165
6.22 Distribution of Male Respondents by Marital Status 166
6.23 Distribution of Male Respondents by Formal Training 167
6.24 Distribution of Male Respondents by Father‟s Educational Status 167
6.25 Distribution of Male Respondents by Mother‟s Educational Status 168
6.26 Distribution of Male Respondents by the Size of Household 169
6.27 Distribution of Male Respondents by Number of Dependents 170
6.28 Distribution of Male Respondents by Type of Family System 171
6.29 Distribution of Male Respondents by Number of Children 172
6.30 Distribution of Male Respondents by Male Adolescents 173
6.31 Distribution of Male Respondents by Female Adolescents 174
6.32 Distribution of Male Respondents by Spouse Participation 175
6.33 Distribution of Male Respondents by Rural-Urban Migration 176
6.34 Distribution of Male Respondents by Employment Status 177
6.35 Distribution of Male Respondents by Sector of Employment 178
6.36 Distribution of Male Respondents by Working Hours 178
6.37 Distribution of Female Respondents by Age Groups 180
6.38 Distribution of Female Respondents by Education 181
6.39 Distribution of Female Respondents by Marital Status 182
6.40 Distribution of Female Respondents by Formal Training 183
6.41 Distribution of Female Respondents by Father‟s Educational Status 184
6.42 Distribution of Female Respondents by Mother‟s Educational Status 185
6.43 Distribution of Female Respondents by the Size of Household 186
6.44 Distribution of Female Respondents by Number of Dependents 187
6.45 Distribution of Female Respondents by Type of Family System 188
6.46 Distribution of Female Respondents by Number of Children 189
6.47 Distribution of Female Respondents by Male Adolescents 190
16
6.48 Distribution of Female Respondents by Female Adolescents 191
6.49 Distribution of Female Respondents by Working Spouse 192
6.50 Distribution of Female Respondents by Rural-Urban Migration 193
6.51 Distribution of Female Respondents by Employment Status 194
6.52 Distribution of Female Respondents by Sector of Employment 195
6.53 Distribution of Female Respondents by Working Hours 195
7.1 Logit Estimates of Determinants of Urban Informal Sector Employment in
Southern Punjab-Probability of Informal Sector Employed (18-64)
206
7.2 Logit Estimates of Determinants of Urban Informal Sector Employment in
Southern Punjab with Different Levels of Education -Probability of Informal
Sector Employed(18-64)
207
7.3 Logit Estimates of Determinants of Urban Informal Sector Employment in
District Bahawalpur-Probability of Informal Sector Employed(18-64)
214
7.4 Logit Estimates of Determinants of Urban Informal Sector Employment in
District Bahawalpur with Different Levels of Education -Probability of Informal
Sector Employed (18-64)
215
7.5 Logit Estimates of determinants of Urban Informal sector employment in
District Multan-Probability of Informal Sector Employed (18-64)
222
7.6 Logit Estimates of Determinants of Urban Informal Sector Employment in
District Multan with Different Levels of Education -Probability of Informal
Sector Employed (18-64)
223
7.7 Logit Estimates of Determinants of Urban Informal Sector Employment in
District Dera Ghazi Khan-Probability of Informal Sector Employed (18-64)
230
7.8 Logit Estimates of Determinants of Urban Informal Sector Employment in
District Multan with Different Levels of Education -Probability of Informal
Sector Employed (18-64)
231
8.1 Earnings Functions of the Participants in Urban Informal Sector in Southern
Punjab
237
8.2 Earnings Functions of the Participants in Urban Informal Sector in Southern
Punjab with Different Levels of Education
238
8.3 Earnings Functions of the Participants in Urban Informal Sector in District
Bahawalpur
242
8.4 Earnings Functions of the Participants in Urban Informal Sector in District 243
17
Bahawalpur with Different Levels of Education
8.5 Earnings Functions of the Participants in Urban Informal Sector in District
Multan
247
8.6 Earnings Functions of the Participants in Urban Informal Sector in District
Multan with Different Levels of Education
248
8.7 Earnings Functions of the Participants in Urban Informal Sector in District
Dera Ghazi Khan
251
8.8 Earnings Functions of the Participants in Urban Informal Sector in District
Dera Ghazi Khan with Different Levels of Education
252
8.9 Economic Capital and Urban Informal Sector in Southern Punjab 255
8.10 Human Capital and Urban Informal Sector in Southern Punjab 257
8.11 Socio-cultural Activities and Urban Informal Sector in Southern Punjab 259
8.12 Economic Capital and the Urban Informal Sector in District Bahawalpur 261
8.13 Human Capital and the Urban Informal Sector in District Bahawalpur 262
8.14 Socio-Cultural Activities and the Urban Informal Sector in District
Bahawalpur
264
8.15 Economic Capital and the Urban Informal Sector in District Multan 265
8.16 Human Capital and Urban Informal Sector in District Multan 266
8.17 Socio- Cultural Activities and Urban Informal Sector in District Multan 267
8.18 Economic Capital and Urban Informal Sector in District Dera Ghazi Khan 269
8.19 Human Capital and Urban Informal Sector in District Dera Ghazi Khan 270
8.20 Socio-Cultural Activities and Urban Informal Sector in District Dera Ghazi Khan 271
9.1 Logit Estimates of Determinants of Gender Employment in Urban Informal
Sector in Southern Punjab -Probability of Informal Sector Employed (18-64)
286
18
9.2 Logit Estimates of Determinants of Gender Employment in Urban Informal
Sector in Southern Punjab with Different Levels of Education -Probability of
Informal Sector Employed (18-64)
287
9.3 Logit Estimates of Determinants of Gender Employment in Urban Informal
Sector in District Bahawalpur-Probability of Informal Sector Employed (18-64)
297
9.4 Logit Estimates of Determinants of Gender Employment in Urban Informal
Sector in District Bahawalpur -Probability of Informal Sector Employed (18-64)
298
9.5 Logit Estimates of Determinants of Gender Employment in Urban Informal
Sector in District Multan-Probability of Informal Sector Employed(18-64)
308
9.6 Logit Estimates of Determinants of Gender Employment in Urban Informal
Sector in District Multan with Different Levels of Education -Probability of
Informal Sector Employed (18-64)
309
9.7 Logit Estimates of Determinants of Gender Employment in Urban Informal
Sector in District Dera Ghazi Khan- Probability of Informal Sector Employed
(18-64)
318
9.8 Logit Estimates of Determinants of Gender Employment in Urban Informal
Sector in District Dera Ghazi Khan with different Levels of Education -
Probability of Informal Sector Employed(18-64)
319
19
LIST OF FIGURES
Fig # Page #
Indifference Curve and Budget Constraints 56
Income and Substitution Effects in Response to Change in Wage Rate 61
ABSTRACT
20
The present study looks at different aspects of the urban informal sector in three
divisions of Southern Punjab, Pakistan. The current study utilizes primary data from
three divisions of Southern Punjab by conducting household survey during 2012.
Theoretically, this research discusses neo-classical theory of labor supply, human
capital theory and approaches towards the urban informal sector. The sample consists
of 1506 participants of the informal and formal sector in the urban areas of three
districts such as Bahawalpur, Multan and Dera Ghazi Khan. The main focus is the
complete analysis of the socio-economic factors of the informal sector participants
who motivate or determine and enhance the growth potential of the urban informal
sector in Southern Punjab, Pakistan. The present study has analyzed the
characteristics of participants of the formal as well as informal sector employed. A
binary Logit model is used in order to estimate the probability of determinants of
urban informal sector employment of total sample along with the gender comparison
in three divisions. In addition, earning functions are estimated including human
capital variables to see the effect on participants‟ earnings. Moreover, the living
standard of the participants of the urban informal sector has been checked from a
Human Development perspective. Human development indicators (i.e. economic,
human and social capital) are used to gauge the relation between poverty and urban
informal sector employment. The study concludes a positive contribution of urban
informal sector in employment creation, income generation and the development of
the participants in Southern Punjab, Pakistan.
Chapter 1
INTRODUCTION
1.1 Statement of the Problem
21
The research conducted in the era of 1950 and 1960 states that the countries
across the world must pass through the process of development which is considered as
successive stages of economic growth. Primarily; it was a theory of economic
development in which the accurate quantity along with saving, investment, and
foreign aid were included. Moreover; these were necessary to make the developing
nations to proceed proactively with an economic growth path which had been
followed by most of the developed countries. Development has thus become
synonymous with rapid, aggregate economic growth.
The linear stages approach was to a great extent supplanted in the 1970s by
two contending schools of thought. The main idea which concentrated on hypotheses
and patterns of structural change used modern economic theory and statistical analysis
trying to depict the interior procedure of structural change that a typical developing
nation must experience in the event that it is to succeed in producing and maintaining
rapid economic growth. The second, the worldwide dependence revolution was more
radical and more political. It saw underdevelopment regarding universal and local
force connections, institutional and structural financial rigidities, and the subsequent
multiplication of dual economies and societies both inside and among the countries of
the world.
Dependence theories had a tendency to stress external and internal institutional
and political constraints on economic development. Accentuation was set on the
requirement for major new policies to eradicate destitution, to give more expanded
employment opportunities, and to reduce income inequalities. These and other
populist purposes were to be achieved inside the setting of developing economy, yet
the economic development essentially was not given grand status agreed to it by their
linear stages and structural change models (Todaro and Smith, 2012).
All through a great part of the 1980s and 1990s, a fourth approach held sway.
This neoclassical (in some cases called neoliberal) counterrevolution in financial
thought accentuated the valuable part of free markets, open economies, and the
privatization of inefficient public enterprises inability to create, as per this theory, is
not because of exploitive external and inward strengths as clarified by dependence
theorists. Maybe, it is essentially the consequence of a lot of government mediation
22
and regulation of the economy. Today's varied approach draws on these points of
view, and the qualities (Todaro and Smith, 2012).
The informal sector represents an imperative part of the economy and suerly
of the labour market in many countries, especially in developing countries. It plays a
pivotal role in creation of employment, production and income generation. The very
sector has the propensity to absorb bulk of the rapidly growing labour force in the
urban areas of countries with high rates of population growth or urbanization.
Informal sector employment provides an essential survival strategy to countries
lacking social safety nets in the form of unemployment insurance or where incomes,
particularly in the public sector, and pensions are low (Hussmanns and Mehran,
2001).
The conventional approach which defines informality rests on a dualistic
model of economy. The major hypothesis of the dualistic model is that surplus labour
can be tranfered from low productive traditional sector to high productive modern
sector to start the development process. Firstly, a theoretical model of development
was presented by Lewis (1954) in a dualistic economy. In this model, transformation
of surplus labour from the traditional sector and and its absorption in the modern
industrial sector indicate the informal sector as a temporary stage or transitory phase.
Be that as it may, the legalist way to deal with informality is based on the legal
instruments which influence informality.The enterpreneures participate in the
informal sector due to government institutions and regulations. Accordingly, informal
sector is referred as a store of financial dynamism refused to achieve its maximum
capacity because of regulations imposed by the government (De Soto 1989). Informal
sector is found as a voluntary phenomenon of firms to avail legal exemption benefits
from a mandated minimum wage policy (Rauch, 1991). The excessive taxes and
regulations by governments having inability to implement compliance increased the
informality (Loayza, 1996).
The trade reforms increase the infomalization. The sectors with the largest
reductions in tariffs experience sharpest increase in the share of skilled workers.
Regarding industry wage, premium diminished more in sectors which face large tariff
reductions and the diminishing premium increase inequality. The increasing size of
23
informal sector is related to the increased foreign competition i.e. sectors which
experienced large tariff reductions and trade exposure face enhanced informality in
prior to the labour market reform (Atanasio et al., 2004).
Contrarily, the growth of employment (formal) has no need to suggest a
compression of casual business if the two are supplements not substitutes. The level
of lower wage informal employment is decreased in spite of having been positively
associated with the business cycle. The informal opportunities are increased due to
home ownership. The majority of the workers are hired by firms in the personal
services sector (Mercilli, 2004). Workers due to economic instability forcefully
participate in the informal sector. Lack of stability and social protection in the formal
sector increses opportunities to work in the informal sector (with low productivity and
poor wages) are become a part of informal sector (Tokman, 2007).
The segmentation of labour market is investigated through a semi-parametric
approach in developing countries. On average, the wages in the formal sector are
higher than wages in informal sector (Paratap and Quintin, 2006). Moreover,
participants‟ earnings in the informal sector are not the lowest in the informal service
employment. In addition the workers earnings are not equal to the wages of unskilled
workers in the formal sector in New Delhi (Dasgupta, 2003).
Education and health are considered as the objectives of development. Health
is important for well-being and education is vital to satisfy and to reward the life.
Both are important for the wider view of extended human capabilities that lie at the
heart of the meaning of development. The role of education is important in the talent
of a developing country to captivate modern technology and to develop the size for
self-sustaining growth and development simultaneously. Furthermore, health is
required to enhance the productivity and effective education also relies on passable
health. Hence, education is viewed as most important components of growth and
development (Todaro and Smith, 2012).
Balanced population growth is crucial for progression of economy in a better
way. The population in a country is crucial in the economic development along with
for the social well-being of the people. Though, social distress and low economic
performance of economy can lead to poor management of human resources.
24
Historically, high population growth rate has been considered as an essential factor in
overall economic development of economy of Pakistan.
The government made commitments for the allocation of funds and measures
on an innovative policy to raise the issue seriously in terms of managing growth in
population and the labour force. Improved health facilities and promoted population
welfare activities through the Ministry of Population Welfare declined the crude birth
and fertility rates significantly, that causes a curtailment in the average growth of the
population accompanied by an increased labour force participation rate. Therefore,
further efforts are needed for development of better human resources.
Govt is facing important challenges to identify the development strategies in
order to generate new employment and income opportunities, and reduce
underemployment and unemployment. The urgent need to create employment
opportunities is underscored due to higher labour force growth rate than population
growth. Moreover, the women‟s share in both (wage and salary employment) has
decreased but still their share is up to a quarter of these jobs. Though, a greater part of
female workers is involved in the urban informal sector to continue existence
(Pakistan Economic Survey, 2011-12).
The formal sector is limited in its capacity to generate employment
opportunities. A greater part of labour force is engaged in informal sector
employment where productivity of labour is at low level and workers are not given
protection against exploitation by the employers. Consequently, wages are very
meagre despite longer working hours in informal sector. Therefore, the informal
sector must be promoted in order to absorb surplus labour. It is an attempt to enhance
the labour productivity in the informal sector and to protect the workers from
exploitation in informal sector (Kemal and Mehmood, 1998).
In Pakistan, the informal sector covers a wide range of labour market activities
and plays an important and sometimes controversial role that makes accessible
number of activities in labour market. It makes possible provision for jobs and
diminishes unemployment but almost all jobs are low paid. Furthermore,
unemployment indicates a situation in which people agreed and eligible to work at the
prevailing wage rate are not sufficiently expert to find jobs. In Pakistan, labour force
25
comprises all persons whose age is ten years and above and who are without work for
the reference period, presently available and looking for work (Labour Force Survey,
2011-12).
There is a complex relationship between informal employment and poverty.
On the one hand, poor people, due to inadequate formal opportunities, work in
informal economic activities as an alternative livelihood strategy. Contrarily, such
informal employment can itself either lead to poverty or contribute to poverty
reduction. These diverse results habitually exist together as restrictive on casual work
sort and particular nation connection and time period (Jutting, Parlevliet and
Xenogioni, 2008).
The significance of fiscal policy can't be overruled as it backings monetary
movement through manageable development and destitution lightening. The powerful
practice of the fiscal activities to assemble assets through taxes and public savings,
can subsidize greatly required public goods and services. It demonstrates supportive
to right financial uneven characters and also to advance venture and development by
ideal designation of investment and growth through making the tax system better.
Rapid economic growth and development need a well structured policy in the
country.1
The inward looking policies with fiscal incentives, mostly to manufacturing,
prevailed at large scale direct resource allocation towards the capital intensive
activities and adopt capital intensive techniques which are responsible for low
employment opportunities. There is a need to redirect policy towards the labour
intensive informal sector which probably uses capital to generate supplementary
employment opportunities with no compromising on economic growth in a better way
(see Kemal and Mehmood, 1993).
The urban informal sector is quite large and expanding rapidly due to growing
urbanization, migration and inadequate formal employment. The informal sector
provides employment to the poor segment and plays an entrepreneurial role in the
development of the economy as well. The informal sector tries to reduce
unemployment by creating more opportunities. The problems and constraints of the
1 see Pakistan Economic survey, 2011-12
26
informal sector must be removed in order to develop it. However, there is a need to
create more formal employment opportunities for the development of the economy.
It is gigantic to study the informal sector comprehensively because the very
sector is hallmark of heterogeneous activities. Inspite of rapid growth of GDP,
employment opportunities have been insufficient to fascinate the labour force which
is growing rapidly in Pakistan, so a large proportion of labour force is persuaded
towards informal sector for employment (Kemal and Mehmood, 1993). Informal
sector growth is very useful in formulating policy concerning employment, human
resource development and growth.
Few studies regarding various aspects of informal sector consisting of earnings
determinants, wage rates, labour productivity, capital intensity, skill development and
constraints on the growth of small units are carried out in Pakistan. While these
studies are very valuable as in they draw out the fundamental attributes of informal
sector exercises and requirements on their development, yet in light of the fact that
they have been done in disengagement from one another and are in view of little
specimen overviews, they regularly think of clashing proof and conflicting
arrangement recommendation which diminish the utility of their discoveries. The
distinctions in the center, technique, review configuration, scope and nature of the
investigation introduced in different studies have given clashing proof (Kemal and
Mehmood, 1993).
This study carries out a survey of the urban informal sector of Southern
Punjab, Pakistan with a view to examine different features of the informal sector.
Taking into consideration the size of the urban informal sector, this research looks at
the pattern of the urban informal sector and employment in three divisions of
Southern Punjab, Pakistan. For sake of analysis, dependent variable is probability of
informal sector employment and logistic techniques are used to analyse the
determinants of urban informal sector employment.
In addition, earnings functions are also estimated including human capital
variables to see effect on earnings of people employed in the informal sector using
regression techniques. A part from this, Human Development Perspective has been
used in order to identify the living standards of participants of the urban informal
27
sector and examine the link between them and poverty. Human development
indicators (i.e. economic, human and social capital) are used to gauge the relation
between poverty and the urban informal sector employment. Indicator of economic
capital is income of participants and the households‟ income which is measured by
using the poverty line to gauge the capacity of the informal sector participants in
meeting basic needs and hence get close to the idea of poverty. Human capital
includes the attainment of education, access to health services and access to housing
facilities which are measured on the basis of high level of access and higher
utilization of these facilities. Social capital covers access to social institution as
indicated by the participation in socio-cultural activities gauged by proportion of
informal sector employed watching television, listening to the radio programmes,
reading the newspapers or participation in local organization activities.
1.2 Objectives of the Study
The study has been conducted in order to examine different aspects of the
informal sector to devise strategy for the growth potential and development of the
urban informal sector in Southern Punjab. Particularly, the study emphasizes on:
1) To assess the nature and size of the urban informal sector employment in
Southern Punjab, Pakistan.
2) To examine the characteristics of people working in the informal and formal
sector employment of Southern Punjab, Pakistan.
3) To analyze the socio-economic and demographic factors of the participants of
the urban informal sector who motivate or determine and enhance growth
potential of the urban informal sector.
4) To empirically estimate the determinants of the urban informal sector
employment by using the binary Logit model.
5) To estimate the earnings structure of the urban informal sector employment by
using the regression techniques.
6) To focus on gender employment in the urban informal sector and comparison
in three divisions of Southern Punjab, Pakistan.
7) To highlight the effects of the urban informal sector‟s employment on
participant‟s development or to what extent these urban informal sector
28
participants possess economic, human and social capital in three divisions (i.e.
Bahawalpur, Multan and Dera Ghazi Khan) of Southern Punjab, Pakistan.
8) To design policies and offer recommendations for the future course of action.
1.3 Material and Methods
The gigantic part of this research is based on the primary source of data. This
study is primarily based on the multi-dimensional field survey that has been
conducted by the author during 2012. Almost 1506 workers are interviewed and
information is recorded for further analysis. Three divisions out of nine divisions have
been selected for survey. From each division, one district and two tehsils have been
selected. Simple random sampling and stratified sampling are undertaken for
collection of the data.
Moreover, the compiled data from the sources like Pakistan Economic Survey
(Annual), Publications of Government of Pakistan, World Bank Publications, ILO
Publications, Pakistan Millennium Developmet Goals Report and Labour Force
Survey (various issues) are used in this research.
In the present study, main focus is the complete analysis of determinants of
participants of the informal sector in urban areas of Southern Punjab, Pakistan. The
present study has analysed the characteristics of participants of the formal as well as
informal sector employment. Furthermore, econometric technique has been adopted
in order to estimate the probability of determinants of the urban informal sector
employment of total sample along with the gender comparison. The study also looks
at the earnings structure of participants of the urban informal sector in Southern
Punjab, Pakistan. Moreover, the living standard of the participants of the urban
informal sector has been checked by Human Development perspective. However, the
data and methodology are interpreted in detail in chapter five.
1.4 Organization of the Study
The organization of the study will be as follows:
The present study consists of ten chapters. After the prelude, Chapter two
deals with an overview of the informal sector, growth and economic development.
29
Chapter three explains Neo-classical Labour Supply theory and Human
Capital theory. Furthermore, the Theoretical Approaches towards the urban informal
sector are highlighted.
Chapter four consists of review of literature about different aspects of the
informal, the urban informal sector and economic development both at national and
international level seperately.
In chapter five, the preliminary analysis of data has been made and
measurement issues concerning it are described. It also explains the detail of study
areas, data source, and explanation of the determinants of the urban informal sector
employment, model, methodological issues and selection of variables.
Chapter six elaborates descriptive analysis of workers in the informal and
formal employment in labour market of Southern Punjab, Pakistan regarding total,
male and female sample.
In chapter seven, we will analyze empirically the socio-economic determinants
of workers who motivate, determine and promote the growth potential of the urban
informal sector of three divisions of Southern Punjab.
Chapter eight describes the earnings determinants of workers engaged in the
urban informal sector and economic development in terms of total surveyed sample in
Southern Punjab and its three districts.
Chapter nine interprets the determinants of employment of both genders and
makes comparison in the urban informal sector of Southern Punjab, Pakistan.
Chapter ten provides conclusions and policy recommendations.
30
Chapter 2
URBAN INFORMAL SECTOR, GROWTH AND
DEVELOPMENT
2.1 Introduction
Inspite of growth of GDP in Pakistan, employment opportunities have been
relatively insufficient to absorb the labour force growing at rapid rate due to promoted
industrialization in Pakistan. Due to trade, investment and public sector policies, the
capital-intensive industries prevailed at large scale however they discouraged the
informal sector or the situation gave way to industrialization (Kemal and Mehmood,
1998).
The growth in the size of the labour force has been increasing at a large scale
than the growth rate of formal sector jobs. In fact, it has been expected that private as
well as informal sector must play the leading role to create employment which, in
turn, changes trends significantly in unemployment, the formal and informal sector
employment. The informal sector is viewed as a very important sector of the economy
because development stratigies are redirected to endorse jobs and equity due to its
presence.
The informal sector certainly generates employment at higher level as
compared to formal sector for any particular investment having relatively high
productivity of capital. The process of the formal sector employment creation depends
on informal sector to a great extent. However, the productivity of workforce in the
informal sector is, most probably, rather low and they are not provided protection
against exploitation by employers who earn skimpy wages at the cost of longer
working hours. Consequently, policy intervention regarding informal sector must
hinge on the truth that informal sector, which is labour-intensive, creates additional
employment. At the same time, public policies are required to induce enhanced
labour productivity in the informal sector with no compromise on growth objective
and on workers‟ protection against exploitation. The policy is also needed to promote
31
and encourage informal economic activities instead of their active discrimination
(Kemal and Mehmood, 1998).
The arrangement of the chapter is as follows.
In section 2.2, we review the urban informal sector and various definitions of
the informal and urban informal sector at national and international level. The section
2.3 describes an overview of Pakistan‟s growth and development in relation to socio-
economic indicators over the time period to understand informal sector employment
in Pakistan. The section 2.4 shows population, labour force and employment pattern
in Pakistan economy. Unemployment situation is explained in section 2.5. Trends in
urbanization and migration in Pakistan economy are described in section 2.6. In
section 2.7, poverty and measures are explained. Section 2.8 highlights the women
and urban informal sector. Section 2.9 explains the concept of development. Human
indicators and development are stated in section 2.10. Section 2.11 shows social
indicators and development. Concluding remarks are presented in section 2.12.
2.2 Urban Informal Sector: An Overview
The informal economy has been oserved as having more of a fixed character
in countries where income and assets are not equally distributed. It was estimated that
informal work accounted for almost 80 % of non-agriculture employment during the
past decade, its share was over 60 % of urban employment and over 90 percent of
new job (see Charmes, 2002).
For women in sub-Saharan Africa, the informal economy denoted 92. 5 % of
the total job opportunities outside of agriculture as compared to men share of 71%.
However, in Asia, informal workers‟ shares ranged from 45 to 85 % of non-
agricultural employment and from 40 percent to 60 % of urban employment (ILO,
2002).2
In the developing countries, the share of self-employment is greater in the
informal employment as compared to wage employment. Specifically, share of self-
employment is 70% of informal employment in Sub-Saharan Africa (if South Africa
2 see Becker (2004).
32
is excluded, the share is 81%) 62% in North Africa, 60% in Latin America and 59%
in Asia (see Becker, 2004).
The bulk of people depend on the informal sector to earn a livlihood due to
lack of employment opportunities in the public as well as in the private formal sector.
Though their earnings remain very meager, that classifies them as poor, yet without
informal sector, it would be even negligible and their poverty would turn even worse.
Resultantly, the productivity and incomes of informal sector workers should be
enhanced outstandingly.3
The developing and developed countries consider informal sector as an issue
of great importance. The informal markets determine the co-operative
entrepreneurship to make economically and politically stronger the poorest people all
over the world. This silent revolution brought changes in societies around the World.
This overwhelmed the societies by extraordinary challenges; increasing opportunities
by setting up institutions and policies to allow their citizens to participate easily in all
sphere of economic, social, and political life (Chickering and Salahuddine,1991).
Urban informl sector contributes to curtail down the costs of urbanization. The
countries having cheaper labour in form of urban informal activities relatively pay
lesser urbanization costs.4
The informal sector has the potential to face sufficiently escalating
unemployment problem in Pakistan. Easy access, low skills and necessary investment
in informal economic activities increase the stock and annual addition to the work
force and the existing financial resources. The very sector has the potential to absorb
large portion of rural and urban workforce and to contribute significantly skill
development of work force (Sabur and Chayur, 1994).
The several definitions have been intricated because of mixed nature of the
informal economy and it can not enfold the presented definitions regarding the
informal sector. Yet, a lot of focal definitions are considered to show the different
view points of the informal economy.
3 see ESCAP, 2006. 4 see Richardson (1987).
33
The concept „Informal‟ is theoretically based on the dichotomy of the urban
economy in underdeveloped countries. Hart used the term “informl sector” in his
famous paper when he attended a conference which was held in Africa on the topic of
“urban unemployment”. It was arranged by the institute of Development Studies at
the University of Sussex. He focused on low income neighbourhood of Nima in Accra
and explained employment in the informal sector depends on new-comers who did not
find employment in the formal sector. He objected traditional outlook to deal with the
informal sector as being remarkably unproductive. In this way, various sorts of
activities, apt to fall in this sector, were neglected by research and policies equally to
a large extent (see Chowdhury, 2006).
International Labour Organization (ILO) introduced the concept of informal
sector in Employment Mission Report on Kenya in 1972 in that migration from the
countryside to the city caused urban unemployment. Along with the incapability of
the formal sector to make available adequate employment to rural migrants as well as
urban dwellers then, they are persuaded for small-scale and micro-level production
and distribution of goods and services. Accordingly, these mostly unrecognized,
unrecorded and unregulated small-scale activities are the informal sector. The
International Labour Organization (ILO) reports presented set of specific
characteristics of the informal sector. These enterprise production unit establishments
are as follows.
easy entry;
dependence on domestic resources;
family possession of enterprises;
labour-intensive, make use of adapted technology;
skills required beyond the scenario of formal school system;
unorganised and contestive markets;
lack of support and acknowledgement from the government;
It was concluded in ILO Kenya report that the informal sector efficiently
creates more jobs alongwith a quick increases the employment than formal sector.
34
Hart (1975) distinguished between income opportunities in wage and self-
employment in his dual model. He regards employment in the formal sector as the
wage employment and in the informal sector as self-employment.
In his conception of the informal and formal sector distinction, Weeks (1975)
emphasized the economic insecurity of operation in the informal sector. All private
sector enterprises which were officially documented, nurtured and regulated by the
state were viewed as in the formal sector. Contrarily, the informal sector comprised
the enterprises and individuals who were devoid of advantages and were not bound by
the government regulations. Moreover, these enterprises did not avail formal credit
and means causing transfer of foreign technology.5 People, without contributing to
social security institutes, were incorporated in informal group, apart from the group 2-
4 persons and domestic workers (Merrick, 1976).
Sethuraman (1976) suggested a list of criteria in order to identify the informal
sector enterprises. A manufacturing enterprise can be enlisted into the informal sector
by satisfying one or more conditions suggested below.
It engages ten persons or less incorporating part time and casual workers;
It functions on an illegal basis, incompatible to govt regulation;
It incorporates household family members of head of the enterprises;
It observes unfixed hours/working days;
Its operations are done in semi-permanent/temporary premises, or it shifts
location;
It does not use any electricity during manufacturing process;
It does not fulfill its credit needs from formal financial institutions;
It usually distributed output provided directly to final consumer;
Almost all workers have less than six years of formal schooling;
Breman (1976) demonstrated the crucial role of personal contacts to determine
the absorption into the informal work process with place and work type. Mazumdar
(1976) defined the informal sector as an “unprotected labour force” not covered by
5 Where numerous measures are seen in the informal sector economic operations such as tariff and
quota protection, import tax rebates, low interest rates selective monetary controls and licensing of
operations.
35
labour legislations. He viewed that the basic difference between informal and formal
sectors showed that formal sector employment was, somehow, protected so that the
wage levels and working conditions in the sector were generally not available to those
who seek job in the market until they enable themselves to cross the barriers of entry.
Peattie (1980) made query on the characteristics defined by ILO (1972). The
author was indifferent to accept the easy entrance in the informal sector. In her words,
these occupations were characterized as in informal sector due to a variety and
complexity of structure rather lack of formal structure. Cavalcanti (1981) explained
that informal sector consisted of small scale units producing and distributing goods
and services most preferably aiming at remarkable employment and income
generation, irrespective of the constraints on capital (i.e. physical and human) and the
technical know-how.
Smith and Koo (1983) identified two measures to distinguish the formal and
informal sector. These were employment type (i.e. all self-employed and unpaid
family workers engaged in the informal sector), and hired workers for domestic
services (such as maids, chauffeurs) or in small family enterprises were included in
the informal sector.
Banergee (1983) included the wage employment in the informal sector. Petty
trade would, approximately fall in informal sector (Okojie, 1980). House (1984)
distinguished the informal sector into two sub-sectors. First was the intermediate
sector which appeared as a reservoir of self-motivated entrepreneurs. The second was
the community of poor comprising large body of left behind and underemployed
labour.
Most important features of the urban informal sector by Fields (1975 and
1988) are given below:
Free entry, in the sense that (all entrants of the sector can get variety of work
which in turn provides with cash earnings);
Income distribution owes to institutional circumstances of production and
sales patterns of that sector;
36
Positive on-the-job search opportunities,because the participants of the
informal sector have a non-zero chance to seek out a job in the formal sector;
An intermediate probability (to search, as the participants have a better chance
to find a formal sector job than agricultural workers but they have a chance
than openly unemployed and unemployed workers);
A lower wage rate in the urban informal sector than in agriculture, which
arises endogenously due to higher search opportunity on-the-job;
Free entry is an important characteristic of the informal sector and other
features characterize the informal sector of typical developing economy;6
Tokman (1986) stated that migrants and newcomers with lack of human and
physical capital entered in the labour market and this induced them to decide to
perform activities avoiding their main requirement of being easy entrant into the
sector. However, the organization of the production seemed the major factor, while
the features of entry were just required to make difference between the units of
production using labour (paid or unpaid), and individual level units.
Others have also emphasized on diverse characteristics of the informal sector
which is of unorganised and non-institutional nature. The unauthorized operations that
did not avail incentive or social security system were incorporated in the informal
sector units.7 The informal sector proved temporary stage in urban areas for rural-
urban migrants expecting for receiving urban income higher than their agricultural
income.8
Generally, formal and informal sectors are distinguished by following:
Formal sector includes difficult entry, large scale, secure employment,
regulated enterprises, corporate ownership, links with international trade, capital
intensive, modern technology, fixed locations, reported/legal activity. Whereas,
informal sector is characterized by ease of entry, small-scale, insecure/seasonal
6 see Fields (1988), where free entry, income sharing, positive on the job training, an intermediate
search probability and lower wage in the urban informal sector than in agriculture. 7 Amin (1987) surveyed of wage workers and self-employed from 230 different informal sector
activities in Bangladesh. 8 The growth of urban sector has seen the establishment and growth of the informal sector, see
Chaudhary (1989).
37
employment, unregulated enterprises, family ownership and self-employment, local
market, labour intensive, traditional technology, transient patterns and
unreported/illicit activity.9
Boyd (1990) characterized the informal sector in terms of employment size,
informal networks, personal and social contacts of self-employed. The author
included self-employed unincorporated business owners in the informal sector. Kozel
and Alderman (1990) declared that labour force activities in household enterprises
engaged and production of goods consumed at home were productive as they
comprised the major part of the day.
Burki and Abbas (1991) measured the informal sector as firm size in Pakistan.
They added those establishments that were unregistered firms and hired 10 or fewer
than 10 workers. The apprentices and entrepreneurs both were used to define urban
informal sector. The informal sector was attributed as ease of entry, flexibility,
employment level (such as petty producers, petty traders, and casual disguised wage
labourers) and the lack of social benefits in Aman Jordan.10
Doan (1992) emphasized
on the stratification contained by the supposed informal sector i.e. part of the
economy that was unregulated by the state.11
The informal sector considered those
establishments which were unregistered with 10 workers or fewer. The concept of
legality was used to define informal sector.
Similarly, Swaminathan (1991) incorporated unregistered and unlicensed
establishments in the informal sector and these enterprises were considered as part of
the informal sector due to their unregulated status. The informal sector was defined as
an enterprise or production units. The authors emphasized that the employment in the
informal sector was not conditioned by regulations (i.e. any contract) and workers did
not access formal employment benefits i.e. fixed wages and employment security.12
9 see World Bank Country Study Report (1989).
10 see Doan (1992) for survey. 11
Doan (1992) showed distribution of workers i.e. petty traders, subcontractors salaried
workers, disguised wage labourers and casual wage labourers. 12 see Kemal and Mehmood (1993).
38
In January 1993 15th
International Conference of Labour Statistics gave the
international statistical definition of the informal sector and defined enterprises in
informal sector depending on following criteria:
There are private unincorporated enterprises, i.e. individuals or households
own these enterprises and are not composed as separate legal entites, as these
are accessible absolute accounts that allows for a financial separation of the
productive activities of the enterprise from the other activities of its owner(s).
All or at least a quantity of goods or services is being produced for sale or
barter, with inclusion of households to produce domestic or personal services
by hiring paid domestic employees.
The employment size of enterprises below a certain threshold must be
determined in keeping with national circumstances and they are unregistered
under particular structure of national legislation.
They are performing activities that come into the category of non-agricultural
along with secondary non-agricultural activities of enterprises in the
agricultural sector.
Paradhan (1995) considered two definitions: The first definition viewed the
size of the enterprise to indicate formality “if it was lower than 6, the work was
grouped as informal, if it was no less than 6, the job was formal”. The 2nd
definition
emphasized on worker‟s status (i.e. self-employed workers) to define informal sector.
Funkhouser (1996) defined informal sector as employment size i.e. self-
employed, domestic workers, family workers, and wage and salary workers in firms
of four or lesser persons excluding professional and technical occupations. Several
authors (Loyaza (1996); Jones and Fortin et al., (1997) measured the informality in
terms of legality. In their words, informal sector employment emerged due to
excessive taxes, regulations and minimum wages. The informal sector was
characterized by ease of entry, small scale, labour intensive and self-employment
(Samith and Metzger, 1998). In Fakuchi‟s (1998) study, the term informal sector was
regarded as those firms which were not formal and covered all small, cottages, and
39
family firms. The informal sector was characterized as sector of migrants, petty
traders and wage earners.13
Those small scale units which are engaged in producing goods and services,
primarily aiming at income and employment generation and not having intention for
tax payment evasion are regarded as informal sector. It has defined the informal sector
employment as labour force in un-incorporated enterprises, owned by own account
workers without considering the enterprise size or by employers who employ fewer
than 10 workers. Thus, informal sector enumerates all household enterprises managed
by own account workers and employers with fewer than ten persons involved in
production of activities, exclusive of agriculture or non-market production.14
Ranis and Stewart (1999) examined the informal sector with regard to the rest
of the economy and divided the very sector into two parts. One part was a
modernizing dynamic and the 2nd
one was a traditional stagnant one. The authors
highlighted that the informal sector was a disadvantaged part of a dualistic labour
market. Moreover, it appeared dualism relating to wages that were exceeded the
market clearing level.
The informal sector included both the family enterprises and industrial
establishments that hired less than ten employers. It also included the non-industrial
enterprises that hired fewer than twenty or at least twenty workers.15
Rosser et al.,
(2000) used the legalist approach to classify the informal sector. Accordingly, the
reasons to work in the informal sector were low tax rates and safety nets.
ILO (2001) describes these appropriate activities as it groups the informal
sector into these major parts:
(a) Owners or employers of microenterprises provide work for small number of
workers.
(b) Own-account workers are those who work without help or with unpaid
employes.
13 Study by Little and Levin et al. (1999). 14 Federal Bureau of Statistics (1998) 15 Malik and Nazli (1999) explained family enterprise, industrial establishments and non-industrial
establishments.
40
(c) Workers who are dependent found in micro-enterprises or serving employers
with no contract and casual workers.
Todaro (2000) argued that the informal sector largely depended on paid work by
women as primary source of employment in most developing countries (see Chen,
2001). It highlighted that the enterprises based on self-employment that availed
assistance of unpaid family members, domestic servants, low educated employees,
hired not more than ten workers. The informal workers did not avail social benefits
and protection and their relationship was not constrained by labour legislation and tax
rules were also included in informal sector.16
Gallaway and Bernasek (2002) found the informal sector as paid workers in a
family business as self-employed. Gray and Tudbal (2002) emphasized family
friendly work participation while defining informal work. The informal sector was
concerned with living condition, security and low benefits. Entrepreneurship was the
fundamental feature of informal sector (Reddy et al., 2003). The non-self-employment
was refered as in informal sector employment.17
The low status and unprofitable work were included in informal sector. 18
Das
(2003) looked upon informal self-employed workers who operated at their own farm
or non-farm enterprises or as own account workers with or without taking help from
partners and helpers, largely by hiring labour and unpaid helpers. This classification
excluded those entrepreneurs employing less than 3.5 workers. The micro-enterprises
were refered to those enterprises that incoporated family labour and hired at least 5
employees. The small scale enterprises provided work for above five and less than
twenty hired workers and medium scale enterprises with 20 employees or above
(Mukras, 2003).
Marshal and Oliver (2005) incorporated the entrepreneurship in informal
sector employment. The informal sector was regarded by two sub-sectors. One was
upper tier informal sector that did not facilitate the employees with benefits from
health, retirement or other benefits, but it was possible for the employees to resort to
16 see ILO report (2002). 17 see survey by Suharto (2002), Florez (2003), Zulu et al., (2002﴿ and Reddy (2003). 18
see studies by Dasgupta (2003), Ozcan et al., (2003), and Guang and Zheng (2005).
41
the law when they need ed it. Second was lower tier informal sector that included the
salaried employers who were, somehow, unprotected concerning the law, without
availing health retirement and other benefits (Bocquier, 2005).
Sandufur (2006) found that the establishments providing employment more
than five employees were included in the informal sector. Henley (2006) defined the
informality in terms of employment contract status, social security protection
according to the nature of the employment and the characteristics of the employer.
Ademu (2006) examined the income generating activities of urban dewellers
as in the informal sector. These worked without the restrictions and legal regulations
imposed by the government. The general characteristics of operators of an informal
sector are defined in the following form:
The factors of production are easily accessed by organizing the family and
friends socially.
Entrepreneurs involve in almost all branches of the economy i.e. productive
activities, general and specialized services.
The constraints on social relations determine more technology.
Operators‟ aspiration towards in the formal sector production as more profit-
oriented.
The operational definition was adopted by Kristic and Sanfy (2006) to define
informal employment. This definition was based on following:
1) Informal employees: wage employees without having payment of social
security contribution (health and pension insurance).
2) Informal self-employed: own-account workers and employers working in non-
agriculture family business without payment of social security contributions;
3) Farmers working on own farm.
4) Family workers who were not paid.
Florez (2003) defined informality in dualistic approach i.e. self-employed
excluding professionals and technicians, unremunerated family workers, domestic
servants, owners and salaried workers in small firms (utilizing 10 or lesser
42
employees). While, the owners and workers having no health insurance were
unprotected (i.e. all unpaid family workers and domestic servants) and added in
structural articulation approach. The term “informal sector” was invoked to refer as
construction work by Li and Peng (2006).
Gunatilaka (2008) defined the informal employment which contained units
involving in economic activities working outside the scope of official statistics. These
activities were done by family workers, employers, employee and temporary and
casual workers in the informal enterprises.
In 2003, 17th
International Conference of Labour Statistics defined the
informal sector employment or households in the following types of jobs:
Own-account workers working at owned informal sector enterprises;
Employers involved in the informal sector enterprises that they owned;
Participating family workers, (whatever be their work domain);
Members of informal producers‟ cooperatives in the informal sector;
Informally employed in the informal or formal sector;
Own-account workers producing goods for personal household use;
The informal sector contains small units responsible for production or services
keeping in view providing employment and incomes to the families engaged in these
activities. Such informal activities have often been characterised by low levels of
capital, skills, access to organized markets and technology; low and unstable incomes
and poor and unpredictable working conditions. In general, these activities are
working outside the scope of official statistics. They also do not avail social
protection.They are highly labour intensive but are based on casual employment
because of kinship. Activities in this sector rely on local and regional demand.19
According to Wamuthenya (2010), all small-scale activities that were
normally semi organized and unregulated and used low and simple technology were
considered informal sector. The sector covered self-employed persons or employers
of a few workers and unpaid family workers. The informal sector was defined by
Jonason (2009) as an unregistered employee, self-employed person, unpaid family
19 Source: Labour Force Survey, 2010-11.
43
worker, or an employer who hired lesser than five employees and did not contribute to
any social security transition.
A lot of research work on the urban informal sector created an ambiguity and
contradiction of definition because of smaller clear empirical basis for the notion. The
informal sector is gigantic in its size under any definition used. In this research, we
have followed the Funkhouser (1996) to define the informal sector i.e. the self-
employed, own-account workers, unpaid family workers, domestic workers, wage and
salaried workers in firms of less than five employees other than professional and
technicians. The employment size increases in urban areas of Southern Punjab,
Pakistan.
2.3 An Overview of Pakistan’s Growth and Development
The growth in per capita income was observed at about 2.2 % in Pakistan
economy during 1950-2000. Accordingly, per capita income has increased three
times. However, a decline was observed in growth rate decade by decade and
performance on social indicators was observed poor owing to this declining trend.
The economy observed a rapid increase in its growth during 2003-2007.
The resilience of Pakistan economy has been observed many times due to
crisis one after the other. The numerous shocks (domestic and external) targeted the
economy from 2007 onwards. The international oil and food inflation, security risks at
domestic level due to operation against extremism and repetitive natural catastrophes
(floods) have buffeted the macro level strategy with shock after shock (Government
of Pakistan Economic Survey, 2011-12).
The campaign against extremism along with associated destruction of physical
infrastructure, the migration of thousands of people from the affected areas with an
increased expenditures to support them have all taken their toll. As a result export
markets slowed down as compared to the last year. Gross Domestic Product (GDP)
growth of 6.5 percent per anum has been trapped at half level of Pakistan‟s long-term
growth potential. This is lesser than growth required for sustainable increase in
employment, income and GDP a reduction in poverty (Government of Pakistan
Economic Survey, 2011-12).
44
The focus has been on maintaining macro level stability, growth, mobilization
of resources at domestic level and greater than ever exports, balanced regional
development and provision of protection for the helpless segments in Pakistan
economy. Despite numerous challenges, the performance of economy is better in
2011-12 as compared to developing and developed countries. There has been a rapid
increase in fuel and commodity prices, recessionary trend globally and weak inflows.
Additionally, the cost of severe rains (in Sindh and part of Balochistan) is estimated at
$ 3.7 billion which struck the economy. The comparative increase in Gross Domestic
Product growth is observed 3.7 percent this year than 3.0 percent last year despite
several challenges (Government of Pakistan Economic Survey, 2011-12).
The GDP growth has been estimated at 3.7 percent with 3.1 percent growth in
agriculture sector and 1.1 percent growth in scale manufacturing (LSM) sector during
2011-12 in the economy. Generally, there is an improved performance of commodity
producing sectors and especially the agriculture sector. There has also been the
services sector‟s growth at 4.0 percent in 2011-12. An increase in per capita income is
estimated at 2.3 percent in 2011-12 as compared to 1.3 percent growth last year. The
important objectives of sustainable high growth, external payment viability and low
inflation can be obtained by eliminating specific structural obstacles in Pakistan
(Government of Pakistan Economic Survey, 2011-12).
Table 2.1: Growth Performance of Key Components of GDP (% growth at
Real GDP (FC) 2.45 3.61 4.7 7.5 9.0 6.6 7.0 3.68 1.72 3.07 3.04 3.67
Source: Govt. of Pakistan, Economic Survey (Various Issues)
Table 2.2 reveals the slow growth performance of economy during the last
five years. The economic growth fluctuations in the fiscal year 2011-2012 expanded
generally due to improved services sector. The commodity producing sector and
services sector contributed in overall growth at 3.67 percent. The estimates indicate
rapid growth of services sector. The Pakistan‟s services sector has been praised as it
has liberalized rights separated regulators from operators for its development. The
Pakistan economy has seen key changes in its economic structure (Govt of Pakistan,
Economic Survey, 2011-2012).
The investment plays role to enhance the productive capacity, to influence the
employment level and promotes technological progress by employing new techniques
in Pakistan. Generally, investment is unpredictable as it depends on various factors
and is responsible largely in GDP fluctuation. In previous some years, the investment
was hit by domestational factors which led to decline in total investment from 22.1
percent of GDP to 12.5 percent from 2007-08 to 2011-12. Fixed investment has
declined to 10.6 percent of GDP from 2007-08 to 2011-12. Private investment has
decreased from 15.0 percent of GDP in 2007-2008 to 7.9 percent in 2011-12. Public
investment as a percent of GDP has also decreased from 5.4 percent in 2007-08 to 3.0
percent in 2011-12. Changes also observed in the composition of investment (private
46
and publc sector) for the duration of the reviewed period (Government of Pakistan
Economic Survey, 2011-12).
The national savings contribute to domestic investment to indicate indirectly
foreign saving which is essential to fulfil investment demand. The foreign saving is
required to finance the saving investment gap which indicates the current account
deficit in the balance of payments. National savings are estimated about 10.7 percent
of GDP for the year 2011-12. Estimates reveal decline in domestic savings from 11.5
percent of GDP to 8.9 percent of GDP from 2007-08 to 2011-12 and net foreign
resources inflows are used to finance the saving investment gap. Notionally, the
improvement in saving investment gap can be made by increasing savings and
decreasing investment. The Pakistan economy requires gearing up saving and
investment in order to enhance the employment generating ability with expanded
provision of resources (Government of Pakistan Economic Survey, 2011-12).
Investment in public sector catalyzes economic development in economy and
induces spillover effects for private sector investment because development in private
sector can possibly be made by making expenditure predominantly on infrastructure.
Conversely, private sector development is limited by reducing development
expenditures. There is a fall in public sector investment from 5.4 percent to 3.0
percent of GDP from 2007-08 to 2011-12. Table 2.3 explains saving and investment
as percentage of GDP (Government of Pakistan Economic Survey, 2011-12).
Table 2.3: Structure of Savings and Investment (As Percentage of GDP)
Description 2003-
04
2004-
05
2005-
06
2006-
07
2007-
08
2008-
09
2009-
10
2010-
11
2011-
12P
Total
Investment
16.6 19.1 22.1 22.5 22.1 18.2 15.4 13.1 12.5
Gross Fixed
Investment
15.0 17.5 20.5 20.9 20.5 16.6 13.8 11.5 10.9
Public
Investment
4.0 4.3 4.8 5.6 5.4 4.3 3.6 2.9 3.0
Private
Investment
10.9 13.1 15.7 15.4 15.0 12.3 10.2 8.6 7.9
National
Savings
17.9 17.5 18.2 17.4 13.6 12.5 13.2 13.2 10.7
Domestic
Savings
15.7 15.4 16.3 15.6 11.5 9.8 9.3 13.3 8.9
47
The Pakistan economy witnessed growth of per capita real income at 2.3
percent in 2011-12. The growth is observed 1.3 percent for the year 2010. The
increase in per capita income in terms of dollars is observed $114 during 2010-2012.
It is estimated that workers‟ remittances enhanced by 25.8 percent in 2001 which are
higher than the previous year. The diversion of remittances from informal to the
formal channel at government level mostly resulted in resilence of remittances.
A noteworthy financial crisis has been observed in 2007-08 in global
economy. The crises originated in subprime mortgage loan portfolio. This was taken
aback that self-reliance of the international institutions and markets worsened the
economic development and balance of payments all over the world. The sever terms
of trade and slower economic growth which were faced by developing countries,
severly, and resulted in or lead to crises. Furthermore, the consumer, markets and
normally the investment process to produce goods and services were affected by the
financial melt down. This crisis (coincided with the rise in the process of commodities
and oil) decreased in aggregate demand and raised inflation all over the world
(Government of Pakistan Economic Survey, 2011-12).
The economy experienced a decline in inflation for the third consecutive year.
Consumer Price index estimated at a turn down of 14.2 percent during 2008- 2012
and it was observed in a single digit in 2012. The food and non-food inflation, on
average, is recorded at 11.1 percent and at 10.7 percent respectively. Both types of
inflation are higher as compared to previous year inflation.
The world‟s output and trade volume has experienced a turn down due to
inauspicious global environment during year 2011. The world‟s output estimated at
5.3 percent in 2010 and it decelerated to 3.9 percent in 2011. This falling global
economic activity sharply declined the growth of world trade from 13.0 percent in
2010 to 5.8 percent in 2010. An expansion of world output by 3.5 percent and trade
volume by 4.0 percent is anticipated during the period. The commodity prices in
international markets are decreased by global economic slow down which, turned-
down the world trade growth. There was also observed a decline in the prices of non-
fuel commodities from 26.3 percent to 17.8 percent during 2010 to 2011. The increase
in the prices is about at 10.3 percent in 2012 (Government of Pakistan Economic
Survey, 2011-12).
48
During July to April 2012, Pakistan has gone through a growth in export. It
remained buoyant and estimated at close to $ 13 billion, an increase of 16 percent
inspite of the worldwide slowdown. The capital flows to Pakistan were impacted by
worldwide recessionary trend. The sharp rise in oil prices and import of 1.2 million
metric tons of fertilizer also influenced the current account balance. Currently, there
has been observed signs of self-effacing improvement have been observed in the
economy. The current account deficit due to extended trade and services account
deficit was estimated at $ 3,394 during 2011-12.
Yet, continued support of the tranfers of workers‟s remittances expanded the
current account deficit. Trade volume expanded for the most part in result of 14.5
percent growth of imports and the 0.1 percent increased exports; thus increased trade
deficit by 49.2 percent. The trade deficit largely increased due to sharp increase in
import bill for the duration of july-April 2011-12 which boosted up due to higher
prices of crude oil at international level (Government of Pakistan Economic Survey,
2011-12).
It is observed that exports achieved $ 25 billion which is highest and shows 30
percent growth as limits both price and quality effect. Pakistan has also experienced
some diversification geographically regarding exports. 47.2 percent of the exports are
concentrated in five markets (USA, UK, Germany, Hong Kong, and U.A.E) of the
world and all other countires shared in exports at 52.8 percent. The share of exports of
these markets is about 35.7 percent while the share of exports of all other countries is
increased up to 64.3 percent in 2011-12. The increase in imports is noticed at 14.5
percent and continued at $ 33.1 billion for the period 2012. The current account
deficit stood at $ 3.4 billion principally due to high oil prices and import of fertilizers
for the period of 2012. The current account balance contained due to current transfers
in the form of workers‟ remittances (Government of Pakistan Economic Survey,
2011-12).
The public debt of Pakistan stood at Rs. 12024 billion as of March 31, 2012.
Public debt as a percentage of GDP stood at 58.2 percent by end-March 2012. It also
added to the EDL stock for the duration of July-March 2012. Furthermore, public debt
49
servicing stood at Rs. 720.3 billion against the budget amount of Rs.1034.2 billion of
the end of March 2012.20
High and speedy economic growth for large time period is prerequisite for
employment creation to accompany the rapid population growth and high living
statndard. The growth performance of the economy over the last five years can be
appreciated in many ways. Macro economic policies with structural reforms led to the
resurgence and statbility of the economy. However, there has been a slow growth
performance of Pakistan along with a decline in private, public sector investment and
a turn down in domestic savings throughout the last five years (GOP, Economic
Survey 2011-12).
The per capita real income has grown at an average rate of 2.3 percent during
the last year. Unemployment has increased from last three years. The poverty level
has been decreased and the development expenditures as a ratio of the economy
helpfully curtail down levels of unemployment in Pakistan (GOP, Economic Survey
2011-12).
2.4 Population, Labour Force and Employment Pattern in
Pakistan Economy
The population of a country plays an imperative part in economic
development and social well-being of the people. However, a turn down in economic
performance and social distress can be the result of poor human resource
management. The Pakistan economy faced socio-economic crises of food security,
and unemployment due to rapid population growth and lack of well-developed human
resources. However, the situation is being improved by the efforts of government.
Better health amenities and promotion of population welfare activities thorough the
ministry of population helpfully curtails down the crude birth and fertility rates
noticeably which lead to a decline in average growth rate of the population followed
by an increased labour participation rate. Thus, there has not been noticeable
reduction in growth of population and at the same time dependency ratio has
increased. Therefore, further essential efforts are required to make in order to improve
the human resources (Government of Pakistan Economic Survey, 2011-12).
20 GOP, Economic Survey, 2011-12.
50
A high rate of population growth has been exihibted in Pakistan since its
creation. Regarding size of population, Pakistan became sixth largest country of the
world from thirteenth country from 1951 to 2011. The rapidly growing population
demands security and fundamental services provsions. The labour force as being the
economically active part of population supply labour to produce goods and services in
the country. The labour force is very large in result of its large population size in
Pakistan. The government of Pakistan announced six labour policies in 1955, 1959,
1969, 1972, 2002 and 2010. These policies set down parameter for trade unionism
growth, protection of worker‟s rights, the settlement of industrial disputes and the
redress of workers grievances. The policy which reformed the labour law in 1972 was
most progressive one (Government of Pakistan Economic Survey, 2010-11).
The current government prerecognizes the significance of workers‟ and
employers‟ affable association to make them avail benefits without inflicting any set
back on the economy simultaneously. The mutual awareness and understanding of
both the workers‟ and employers‟ rights and obligations made it possible. The
observed labour force of 5.24 million people is 0.91 million more than the previous
year in Pakistan. In the economy, the employed people of 53.84 during 2010-11 were
0.63 million more as compared to the preceding year (Government of Pakistan
Economic Survey, 2010-11).
Table 2.4: Civilian Labour Force, Employed and Unemployed for Pakistan
(Million)
Year Labour Force Employed Unemployed
2003-04 45.5 42 3.5
2005-06 50.05 46.95 3.1
2006-07 50.33 47.65 2.68
2007-08 51.78 49.09 2.69
2008-09 53.72 50.79 2.93
2009-10 56.33 53.21 3.12
2010-11 57.24 53.84 3.40
Source: Varoius issues of labour force survey (2010-11)
51
2.4.1 Labour Force Participation Rates in Pakistan
The Crude Activity Rate (CAR) and Refined Activity Rate (RAR) are used to
estimate the labour force population rate. The CAR is a measurement of percentage of
the labour force in the total population while RAR as a better measurement and
comprised active labour force that can be achieved by the percentage of the labour
force of persons who are ten years old and obove. The mixed pattern of change in
CAR in rural areas was observed for the periods 2008-09 and 2010-11. Zero net effect
on participation was observed in rural areas, while, the female CAR comparatively
tended to increase more than the males‟ CAR and caused an expansion enhanced the
overall participation rate in urban areas.
During 2009-2011, it is experienced a marginal decline in CAR in rural areas.
There is a marginal increase in the female RAR and a decrease in male RAR.
However, an aggregate (male and female) increase in RAR abolished diminishing
effect in the RAR and this resulted in no change in overall RAR at the country level.
An observale fact behind this change is that females participated more which is a
good sign of female empowerment in urban areas (Government of Pakistan Economic
Survey, 2011-12).
Table 2.5: Population, Labour Force and Labour Force Participation
(LFP) Rates
Years
Population Labour Force LFP
Rates% Total
(Mn)
Growth
Rate
Working
Age
Total
(Mn)
Increase
(Mn)
1996-97 126.72 2.61 84.65 36.30 1.57 28.6
1997-98 129.97 2.41 88.52 38.20 1.90 29.3
1999-00 136.01 2.23 92.05 39.4 1.20 29.4
2001-02 145.80 2.06 99.60 42.39 2.99 29.6
2003-04 148.72 1.90 103.40 45.23 2.84 30.4
2005-06 155.37 1.90 108.78 50.05 4.82 32.2
Source: Labour Force Survey (various issues).
The table 2.5 explains population and labour force participation trends during
the years of 1996-97 to 2005-2006. The population of Pakistan was apparently
estimated at 32.5 million at the time of independence, which increased 3.06 percent
52
per annum from 1947 to 1981 and decreased by 2.41 percent during 1998 and
expansion has been observed about four and half-fold during sixty years of its
independence. The annual growth rate of population was observed at 1.8 percent in
1947 in Pakistan while it has tended to increase up to 3.06 percent per annum in 1981
and experienced a decline to 2.41 percent in the year 1998. The population growth
rate declined slightly during 2006.
2.4.2 The Formal Sector, Informal Sector and Employment Trends
or Patterns
The excess informalization has been observed in the agriculture sector during
the past years and a self-cultivation trend and decline in share tenancy was also
observed. Both the agriculture and non-agriculture sectors experienced an increased
informalization. The share of the formal sector employment experienced a decline of
7 percent for males and of 6 percent in favour of females during 2000-2008. Trade
and services sector improved informalization in the urban labour market.21
The urban informal sector has been identified as firm size in Pakistan
(Guisinger and Irfan (1980), World Bank (1989a) and Burki (1990). The informal
sector contributed about 69% of employment in Pakistan in 1972-73 and 72.7% in
1985-86. It was observed as 2.878 million persons in 1972-73 and 4.970 million in
1985-86 with an increase of 4.3% annually. The above mentioned estimates indicate
that it is hard to define the informal sector as marginal to the urban economy, provider
of “employment of the last resort” or as a temporary sponge to take in new rural-
urban migrants who migrate with the expectation of getting opportunity in formal
sector in urban labour market. The informal sector largely prevailed in construction
and trade sector and it is autonomous to the formal (Nadvi, 1990).
The women occupied in the urban informal sector of Pakistan represent a
noteworthy part of labour force of economy i-e about 2 million. The women occupied
the urban informal sector of Pakistan represent a noteworthy part of labour force of
economy i.e. about 2 million. As the surplus and unskilled labour is unable to find
formal sector jobs. The informal sector permits entry and access to enterprises that
would otherwise deny them, and it makes offer for conditions well-matched with their
21
Source: GOP, Economic Survey, 2009-2010.
53
cultural constraints.It is estimated that the informal economy accounts for 40 % of
Gross National Product (GNP) of low-income countries.22
The formal sector employment was mainly outstanding in manufacturing
sector in 1972-73 and 35% work force was engaged in manufacturing in informal
sector.23
During 1984-1985, an increase was observed in the remarkable share of the
informal sector to 70.9 % of urban employment in the manufacturing sector in Sindh
and Punjab (World Bank 1989a) and 71% for all Pakistan in 1985-86 (Burki, 1990).
The formal economy comparatively made inroads in the finance, insurance, business,
services, community and social services sector over this period. The informal sector
stood dominant regarding employment in the construction, wholesale and retail
trading, hotels, transport, communications and storage industries within urban
Pakistan (Nadvi, 1990).
Informal sector is defined in terms of non-agriculture sector due to its
difficulty of defining it in the agriculture sector. The share of the informal sector is
64.6 percent of the employment in the main jobs outside agriculture sector and the
informal sector activities accounted for a significant proportion of total employment
and income generation. There are 68.3 percent of employed occupied in the informal
sector in rural areas is comparatively higher than the participants (61.1%) in the urban
areas. There are more formal sector activities in urban areas (38.9%) rather than rural
areas (31.7%). The male participants are relatively higher in the informal sector as
compared to female workers in the rural and urban areas.24
The majority of workforce is engaged in dominant agricultural activities in
rural areas. The increased participation of female workers is noted by 1.4 percent
during 2008-11. However, the male workers‟ involvement is reduced as compared to
female participants.25
The declining trend has been noticed in labour incorporation
sectors, due to growing dependence on capital intensive techniques. The educated and
skilled manpower increasingly are absorbed by the formal sector. Contrarily, a large
22 see World Bank Study (1989). 23 Guisinger and Irfan‟s estimates (1980) 24 Labour Force Survey (2011-2012) 25 Source: Pakistan Economic Survey (2011-12)
54
proportion of the population of uneducated and unskilled labour force invoke towards
informal sector (Labour Force Survey, 2011-12).
Table 2.6: Employment Percentage in the Informal Sector by Regional Gender
Year Pakistan Urban Rural
Total Mae Female Total Male Female Total Male Female
Table 2.11 indicates that unemployment rate increases gradually in urban as well as in
rural areas in the economy. The unemployment rate among males has increased too
59
over the last three years. However, it indicates significant drop for female rates in year
2010-11. The change for males is comparatively higher than the females.
2.6 Urbanization, Migration and Pakistan Economy
Urbanization is peculiar feature of mega cities and their crucial functionality
can be considered also. Most of the cities are observed as post-industrial production
sites for the leading-industries of present time, finance and specialized services. They
have become national or transnational market places where firms and governments
can purchase financial instruments and specialized services. In this way, they perform
pivotal role for the coordination, control and service of global capital.
Pakistan‟s urban population experienced an expansion over seven-fold which
led to enhanced total population over four-fold. The remarkable changes in social
sector consequently increased the rate of urbanization and the emergence of mega-
cities. Pakistan is seen as mainly urbanized nation in South Asia as city dwellers
account for 36 % of its population (2008). There is a small urbanization rate of 3 %
during 2005-10. The highest urbanization rate is noticed during industrialization
process and in formative years of Pakistan as urban population availed enough
opportunities till even eighties.
The urbanization rate is expected to boost up further because of natural
impetus of past high growth rates. It is also observed that more than half of total urban
population lives in eight urban areas such as Karachi, Lahore, Faisalabad, Rawalpindi,
Multan, Hyderabad, Gujranwala and Peshawar in 2005 in Pakistan. These cities grew
around 3 percent per year during 2000 to 2005. It is further expected that the growth
rates of these cities will exceed in the next decade.
There is a positive association between proportion of migrants and degree of
populous-ness and hence, provinces make a downward sequence of Punjab with
65.8%, Sindh with 24.8%; KPK with 9.0% and Balochistan with 0.4%. Migration
recedes in all provinces but Sindh is an exception in this regard. Moreover, male
migrants are observed in great proportion in all provinces except in Punjab in
coallation with proportion of females (Labour Force Survey, 2011-12).
60
A positive link between Interprovincial migration and level of urbanization is
observed but in decreasing order of Sindh 44.9 %, Punjab 35.0 %, KPK 19.5 % and
Balochistan 0.6 %. Interprovincial migration also decreased except in Sindh. Similar
gender disaggregated proportions are found. The female migrants are proportionally
higher in all provinces except in KP as compared to proportion of male workers. The
positive correlation is seen in the proportion of intra provincial migrants and the
degree of populous-ness. Provinces form expected series in order of Punjab with
74.2%, Sindh with 19.4%, KPK with 6.1% and Balochistan with 0.3% are similar for
both genders. Interprovincial migration recedes in all provinces except in Sindh.
Male migrants are higher in percentage as compared to female migrants in all
provinces except in Punjab (Labour Force Survey, 2011-12).
2.7 Poverty and Measures
Mitigating poverty has been at the top of the agenda of policy makers in most
of the developing economies. The poverty alleviation as one of the major aims of the
millennium development goals was planned by International organizations like the
United Nations Development Programme (UNDP).27
The way wherein people participate in the labour market is key to urban
poverty dynamics. The non-poor get job in the formal employment, whereas chronic
poverty is related with casual labour or with the business activities of the female
workers. Informal work is a mixed blessing dependent on content which offers an
escape inevitably clear that more chances translate into improved working conditions
or remuneration for the poor (Grant, 2008).
Urban poverty is witnessed in Pakistan and as somewhere else in the Third
World, it is probable to increase. The challenge for poverty predictors and policy
makers, thus, is to recognize and make perceptible urban poverty which is frequently
disguised and problematic to identify. To identify urban poverty magnificently, it is
required to recognize poverty in diverse ways, within the services and interstices of
Pakistan‟s fast growing towns, its metropolitan cities and within low income
settlements themselves (see Beall, 1997).
27 see World Bank, 2008
61
The relationship between poverty and growth is not unambiguous in the
context of Pakistan. A high growth did not result in substantial decrease in poverty in
the 1960s. However, incidence of consumption based poverty diminished despite low
growth in the 1970s. A high growth was observed in 1980s and early 2000s which
reduced poverty, which suppoted the poverty-growth nexus.
The official poverty line is calorie based in Pakistan. It is defined as per capita
food and non-food expenditure per month in order to support food consumption which
yields 2,350 calories per adult equivalent per day. The official poverty line was set at
673.54 in Pakistani rupees in 1998/99. Based on this definition of poverty line, the
head count (proportion of people below the poverty line) was 26.1 percent in 1990-91,
the benchmark year for the MDGs. Meanwhie the universal target of halving the
poverty rate by 2015, Pakistan made the goal for 13 percent reduction in absolute
poverty. The evidence indicated that absolute poverty tended to increase to 34.5
percent in the 1990s, and diminished thereafter to 12.4 percent by 2010/11.28
2.8 Women and Urban Informal Sector
Women are dominant among rural-urban migrants and may well consist of the
bulk of the urban population in some regions of the world. A rising number of
women in Latin America, Asia and Africa migrate in search of opportunities. Some of
the migrant women get formal sector jobs while others are forced to work in the
informal sector where they work temporarily with out getting social security benefits.
The single female migrants have also contributed to the increased proportion of urban
household headed by women who become poorer, face constricted resource
constraints, and have relatively high fertility rates. The changing composition of flows
of migration has imperative economic and demographic implications for a lot of urban
areas of the developing world.
Because of the female-headed households are usually bound to work in low-
productivity informal-sector employment and have to face higher dependency
burdens, this makes them more poor and malnourished and they access low formal
28 see Pakistan Millennium Development Goals Report (2013).
62
education, health care or clean water and sanitation, frequently remaining effectively
excluded from government services.
Many women involve themselves in small business ventures or
microenterprises that have need of slight or no initial capital and frequently involve
the marketing of homemade foodstuffs and handicrafts. Nevertheless, women‟s
limited access to capital results in high rates of return on their very small investments,
the extremely low capital labor ratios restrict women to low-productivity activities
(Todaro and Smith, 2012).
2.9 Concept of Development
In pure economic terms, development generally means capacity of a national
economy, whose initial economic condition has been more or less unchanged for a
long time, to generate and maintain an annual increase in its gross national income
(GNI) at rates of 5% to 7% or more. A common alternative economic index of
development has been the use of rates of growth of income per capita by considering
national ability to expand its output at a faster rate than population growth. Levels and
rates of growth of “real” per capita GNI (monetary growth of GNI per capita minus
the rate of inflation) can be used to measure the overall economic well-being of a
population.
In the past, economic development has also been seen in the ways of alteration
of the structure of production and employment. So the development strategies have
been focused on rapid industrialization, at the expense of agriculture and rural
development. With few exceptions, development was nearly always seen as an
economic phenomenon in which rapid gains in overall and per capital GNI growth
would either“trickle down” to the public in the form of jobs and other economic
opportunities or create the necessary conditions to distribute the economic and social
benefits of growth at a wider scale. Problems of poverty, discrimination, and
unemployment and income distribution were less important than “getting the growth
job done” (Todaro and Smith, 2012).
As in 1950s and 1960s, many developing nations did reach their economic
growth targets but the levels of living of the majority were unchanged. This indicates
63
that something was very wrong while defining the development in this traditional
way. In 1970s economic development was redefined in terms of reduction of poverty,
inequality, and unemployment within the context of a growing economy.
Additionally, “Redistribution from growth” became a common signal.29
Development must be conceived as a multidimensional process, which
involves major changes in social structures and national institutions, as well as the
acceleration of economic growth, reduction of inequality, and poverty. In short,
development must show the whole gamut of change by which an entire within that
social system, moves beyond a condition of life which is widely perceived as
unsatisfactory toward a situation which can be better regarded materially and
spiritually (see Todaro and Smith, 2012).
2.9.1 Three Core Values of Development
The main values such as sustenance, self-esteem, and freedom represent
common goals sought by all individuals and societies. They associate with basic
human needs that are found in almost all societies and cultures at all times. These core
values are examined below.30
Sustenance: The Ability to Meet Basic Needs
Evey one has basic needs for life and existence. These lives sustaining basic human
needs include food, shelter, health, and protection. When any of these is absent or in
short supply, a condition of “absolute underdevelopment” exits. A basic function of
all economic activity, therefore of “absolute underdevelopment” exists. A basic
function of all economic activity is to provide people with the means of
overwhelming the helplessness and misery arising from a lack of food, shelter, health
and protection. In this way, economic development is viewed as a necessary condition
for the improvement in the quality of life that is development. The realization of
human potential would not be possible at both (individual and societal level) with-out
the sustained and continuous economic growth.
29 see Todaro and Smith (2012). 30 see in Goulet, Cruel Choice, 1971.
64
Self-Esteem: To Be a Person
A second universal component of the good life is self-esteem which means a sense of
worth and self-respect. In which a person can not be used by others for their own
interests. All people and societies are in search of some basic form of self-esteem. It
can be given the names of authenticity, identity, dignity, respect, honor, or
recognition. The nature and form of this self-esteem may differ from one society to
anothers and from one culture to another.
Freedom from Servitude: To Be Able to Choose
A third and final value is to constitute the meaning of development is the concept of
human freedom. Freedom comprises an expanded variety of choices for societies and
their members together with a minimization of external constraints in the pursuit of
some social goal we call development.
2.9.2 The Objectives of Development
Development is not just a physical reality but also a state of mind in which society has
got the means to obtain better life, through social, economic, and institutional
processes. Whatever are special components of this better life, development in all
societies must possess these objectives:
1. To enhance the accessibility and widen the distribution of basic life sustaining
goods such as food, shelter, health, and protection.
2. To improve living standards with higher incomes, more access to jobs, better
education, and larger concentration on cultural and human values, all these
will provide enhanced material well-being along with greater self-esteem at
individual and national level.
3. To increase economic and social range available to the people and nations.
They should be at liberty from miseries; illiteracy, servitude, dependence and
narrow-mindedness etc not only in relation to other people but also to other
nations (see Todaro and Smith, 2012).
65
2.10 Basic Indicators of Development
The fundamental indictors of three facets of development are real income per
capita used for purchasing power; health which is gauged by life expectancy,
undernourishment, and child mortality, and educational attainment as evaluated by
literacy and schooling (see Todaro and Smith, 2012).
2.10.1 Human Indicators and Development
Human Capital and Development
Human capital has been defined in indifferent ways. As a broad concept, it is
recognized in form of obtainable human characteristics which enhance income. It
generally takes in people‟s knowledge and skills, obtained to some extent through
education along with their strength and vitality, based on their health and nutrition.
Human capital theory views health and education as available inputs for economic
production (Appleton and Teal, 1998).
The concept of human capital comprises knowledge, skills, attitudes, physical
and managerial effort which are needed to maneover capital, technology, and land
among other things, to produce goods and services for human consumption (UNECA,
1990). Human resource development is concerned with double objective of skills
building and provision of productive employment for non-utilized or underutilized
manpower. Equally the above mentioned objectives stem from investment in man in
the form of education and training that plays the role of institutional mechanisms in
order to improve people‟s knowledge, skills and capabilities (see Meire, 1970).
Health care, of course, is greatly related to such other types of basic needs
satisfaction i.e. adequate shelter, water supply and sanitation: however it has its own
contribution to make because, over all, it deals with person at the individual level (see
Ebrahim, 1984). A good health enhances the economic and social development of a
country. Thus, it is requisite to highlight the issue of health status of the people by a
various policies which must consist on short and long term actions to secure better
health outcomes (Pakistan Economic survey, 2011-12).
66
Both the health and education are closely associated in economic
development. From one point of view, greater health capital may increase the return
to investment in education, partly because health is a vital factor in school attendance
and in the formal learning process of a child. A longer life enhances the return to
investments in education; better health during working life may lower the rate of
depreciation of educational capital. From another point of view, high human capital
may increase the return to investments in health since many health programs
regarding health depend on elementary abilities frequently educated at school,
personal health and sanitation are included, not to mention basic literacy and
numeracy; education is also required for the formation and training of health
personnel. An improved productivity of efficiency due to spending on education
increased the return on a life saving investment in health (see Todaro and Smith,
2012).
Education is generally regarded as a key investment in human resources.
Education can be helpful to improve the learners‟ quality of life. The education can
improve too the individuals‟ skills and efficiency to produce useful things (see
Machlup, 1982).
The primary objective of government policy has been to improve the level and
quality of education by increasing enrolements at faster rate than population growth in
the last few years in Pakistan but it has been observed that literacy and primary
schools enrolment rates in Pakistan have shown improvement. Scarcity of resources,
deficient provision of facilities and training are the primary obstacles in imparting and
expanding education (see Mehmood, 1999).
There has been gradually growing educational facilities in Pakistan economy
overtime. A continuing inafficiency and low investment on education lead to low rate
of improvement in educational indicators. The estimated 39 % of population is (50
percent for males and 27 percent for females was the literacy rate, in 1996-97), still
behind most of the regional countries, especially when females‟ education is separated
(see Mehmood, 1999).
It becomes indispensable to evaluate a nation‟s average health and educational
attainments, which imitate core capabilities. Good health positively contributes in
67
economic and social development at country level. The people of Pakistan have
experienced an improved health over the past three decades. The vision of health
sector is based on healthy population having good health, enjoying better life quality
with healthy living standard. The improved measures are adopted to prevent deseases,
promote health, greater coverage of immunization, family planning, and female health
worker service availability to achieve this objective (Government of Pakistan
Economic Survey, 2011-12).
“Housing” is as multifaceted issue as the societies it works. Per capita income,
its distribution and housing prices set up the amount of housing that family can afford.
The urban growth rate makes the housing problems stronger due to city size. In
developing countries, a large number of cities have been grown faster and such
growth rate is expected to increase further at faster rate (Yeh, 1984).
A high natural population growth rate and growing urbanization coupled with
constrained availability of resources caused a sharp deterioration in the quality of life
gauged by indicator in the urban areas where resources were allocated for the
development of physical and social infrastructure.31
The potable water in its regular supply (basic need of mankind) is essential for
survival. Several health benefits can be achieved and living standards can be
improved by availiabiliy of quantities of water greater than the minimum amount to
maintain life. The secure and convenient sources of clean water will reduce mortality
and morbidity. The poor people of urban areas of developing countries experience
scarce supply of water due to lack of sources to provide the facility and information to
diminish the effects of unhygienic conditions (Kirke and Arthur, 1984).
In developing countries, there is poor potable water supply that is associated
with health hazard and nearly all the fatal diseases among the children.32
Mainly
observed deseaes are water borne in Pakistan. The estimates show that 60 percent of
the infants died caused by infectious and parasitic diseases, nearly all are water-borne.
This shows that drinkable water supply and sewerage facilities would affect
31 see Banuri, Kemal, and Mumtaz, (1997). 32 Study by Ahmad and Abdul Sattar (2007).
68
favourably the death services in Pakistan.33
Health improvement is an essential
ingredient of socio-economic development. The healthy people prove relatively more
productive as compared to unhealthy people (see Blomquist, 1986).
2.10.2 Education and Employment Situation
Education and training are important in employment creation and income generation
in economy of Pakistan. In this way, the technical and vocational competence of
workforce along with its productivity is required to enhance to meet up the emerging
world‟s challenges. As almost workforce without training and semi-skilled felt
reluctance to take value added production assignments due to the negligence on
supply side issues (Labour Force Survey, 2011-12).
Table 2.12: Education and Literacy by Gender of Working Age Population (%)
Education and Literacy 2009-10 2010-11
Total Male Female Total Male Female
No formal Education 0.5 0.6 0.5 0.4 0.4 0.4
Below Metric 37.5 44.9 29.5 38.0 45.4 30.0
Matric But Less than
Intermediate
10.7 13.1 8.0 10.8 13.2 8.4
Intermediate But Less
than Degree
4.7 5.6 3.8 4.8 5.7 3.9
Degree and Above 4.3 5.3 3.4 4.5 5.5 3.4
Literate 57.7 69.5 45.2 58.5 70.2 46.3
Illiterate 42.3 30.5 54.8 41.5 29.8 53.9
Total 100.0 100.0 100.0 100.0 100.0 100.0
Source: Labour Force Survey, 2010-11
The table 2.12 highlights the level of education and rate of literacy
percentages by gender of working population for the duration of 2010-11. It is
noticed that the current labour force largely has skills indicated by higher educational
terms. The level of literacy is observed as low as 57.7 percent. The estimates indicate
that under matric are 38 percent, 11 percent have passed matriculation and 5 percent
33 see Human Development Report, 1996.
69
have completed higher secondry education. The small proportion of degree holders is
observed at 4.3 percent. Educational attainment of females is lower as compared to
males in all categories.
2.10. 3 Literacy Rates
Human progress and wellbeing depends on the literacy status or rate of the people.
Literacy can be considered as a fundamental human need and human right. So, there
is a need to enhance the literacy status of the population to progress.
Table 2.13: Literacy Rates (10 years or above) in Pakistan and Provinces
Provinces Total Male Female
Pakistan
Rural
Urban
58.5
50.2
73.7
70.2
64.5
80.5
46.3
35.6
66.4
KP
Rural
Urban
53.2
50.4
66.2
72.0
70.2
79.8
35.1
31.6
52.1
Punjab
Rural
Urban
59.8
53.3
72.8
69.0
64.3
77.9
50.7
42.3
67.5
Sindh
Rural
Urban
60.1
42.3
77.1
72.3
60.3
84.1
46.0
21.1
69.3
Balochistan
Rural
Urban
49.8
44.6
65.7
69.0
64.3
83.5
26.2
20.0
44.4
Source: Labour Force Survey, 2012-13
The above table shows the literacy rates in the provinces. The literacy rate
marks at 58.5% in Pakistan. The literacy rate for males is observed at 70.2 percent
which is greater than the literacy rate of females. Moreover highest literacy rate is
observed in Sindh that is 60.9 percent.
2.11 Social Indicators and Development
The social capital in a society, comprised institutions, the relationships, the
attitudes and values that preside over interactions amongst people and contribute to
economic and social development. The notion that social relations, networks, norms,
70
and values have an important issue in performance as development of society has long
been there in economics, sociology, anthropology, and political science literature.
However, the idea of social capital been put forth as a unifying concept having these
multidisciplinary views only in past 10 years (see Grootaert and Bastelaer, 2001)
Coleman (1990) explained the social capital as a variety of different entities all
of which comprised on some aspect of social structure, and which facilitated specific
actions of actors; whether they are personal or corporate actors. This definition
implicitly viewed the relations amongst the groups, rather than individuals. This
definition enlarged the concept of social capital by including both the associations
(i.e. vertical as well as horizontal) and behavior within and among other entities, such
as firms.
Social capital comprises the stock of active connections amongst people, the
trust, mutual understanding, and shared values and behaviors that connect members of
human networks and communities and make cooperative action possible. Social
capital makes any organization or any cooperative group, more than a collection of
individual‟s intent on achieving their own private purposes (see Cohen and Prusak,
2001).
2.12 Concluding Remarks
In this chapter, we have made an overview of the urban informal sector, keeping in
view the importance of informal sector in Pakistan economy. The urban informal
sector plays an important role in employment creation and in income generation. It is
noticed that the share of urban labour force engaged in the informal activities has also
increased gradually. The performance of Pakistan‟s economy is viewed in different
sectors regarding informal sector since 50s till present. The study further discussed all
the economic, human and social indictors and their performance in the economic
growth and development over the period of time. Evidence indicates that gradually
and constantly, Pakistan has shown an improved performane since the sixties in terms
of macroeconomic indicators. The GDP growth rate, which indicates an overall
economic activity, has increased significantly. The CPI has decreased, and investment
has increased during the years.
71
Moreover, the share of informal sector accounts for above seventy percent of
non-agricultural employment and its share is comparatively higher in rural areas than
urban areas in Pakistan. The impact of urban informal sector on the economic, human
and social development has been explained.
72
Chapter 3
THEORETICAL FRAMEWORK
3.1 Introduction
The decision to do work is ultimately a decision to utilize time in different
ways. One way in which people utlize their available time is pleasureable leisure
activities. On the other hand, people allocate their time more efficiently to work
related activities, most importantly household production. Alternatively, people have
the possibility to work for pay and can utilize their income for purchaseable
necessities (Ehrenberg and Smith, 1994). For maximum fulfillment of wants, the
efficient resource allocation is reqired. Hence, the efficient allocation of labour is
essential for economic development.
The supply of labour is typically defined as an amount of effort offered by a
given size population. In return, this amount is conveniently decomposed into four
factors: (1) the perecentage of population engaged in or seeking gainful employment,
usually called the labour force participation rate; (2) number of hours people are
agreeable to work per day, per week or per year while they are in the labour force; (3)
the effort that people make per hour a day while doing work; and (4) training and skill
levels that workers take to their jobs.34
The arrangement of the chapter is followed as: Section 3.2 discusses and
explains the conceptual framework related to employment and labour supply.
Theoretical framework of Neo-classical labour supply decision is evaluated in section
3.3. Section 3.4 describes the basic human capital theory. Section 3.5 elaborates the
theoretical approaches towards the urban informal sector. The last section 3.6 shows
the concluding remarks.
3.2 Conceptual Framework
A theoretical framework can be developed after problem definition,
completing a literature review and conducting field survey. Developing a good
34 see Berndt (1991)
73
theoretical framework is central to examine the problem under investigation and to
hypothesize and test certain relationships.
The study makes a detailed view of the concepts and issues which are
correlated to supply of labour and informal sector employment such as self-employed
(a person who during the reference period, engages in work activities for profit and
family gain, in cash and kind where the remuneration is directly dependent upon the
profit, the potential profits derived from the goods and services produced) without
getting assistance even from unpaid family members ; own account workers (a person
who is operating his or her own economic enterprise or involving independently in a
profession or trade, and without hiring employees). However, he or she may get
support by unpaid family workers; employers (a person who does work during the
reference period, on own-account or with the help of one or a few partners at a „self-
employment job‟ hiring one or above employees on a continuous basis); owner of
firms and unpaid family helper (a person performing without getting pay by an
economic enterprise being operated by his or her household or other related persons is
regarded as unpaid family member) and employee (a person who performs work to
get pay in kind from a public or private enterprise e.g casual wage worker and
domestic servants) (Labour Force Survey, 2005-06).
3.2.1 Labour Supply and Employment
The employment is defined as all persons who are 10 years old and over who
work minimum for one hour during the reference period and are either paid as
employees or self-employed. Permanent or regular employees who remain away from
work during the reference period, due to some reason but still receive their salary or
wages are also regognized as employed.35
The employed are defined as those individuals who worked for one hour or
more in order to earn wages or salary during the reference week or made use of their
energy for 15 hours or more of unpaid work in a family business or farm. Those
individuals, who did not work due to illness, inclement weather, or strikes and
lockouts are included too as employed but are incorporated in the separate sub-
category with a job but not work during work hours (see Brendt, 1991).
35 Labour Force Survey, 2011-2012.
74
3.3. The Neo-Classical Theory of Labour Supply Decision36
The study explains some theoretical model of labour supply management and
labour force participation developed by different economists. In this research, the
focus remained on growth of the informal sector and policy in urban areas of Southern
Punjab, Pakistan. We examine the individual‟s participation decision and the hours
supplied by the individual, given that participation. In this framework, the further
extensions are made to encompass the household rather than the individual as a
decision unit. Basic human capital theory and approaches to urban informal sector are
also explained.
3.3.1 Neo-Classical Individual Labour Supply37
Neo-Classical theory is an application of theory of consumer behavior. The
assumption is that individuals allocate time to market work and non-marketable
activities (leisure). Maximum utility is achieved by choosing a combination of goods
and leisure hours subject to time, price and income constraints.38
One dimension of labour supply is labour force participation (to be employed
or unemployed) where individuals have options whether to work for leisure or not?
An individual‟s priorities regarding making such decisions are determined by a two
pronged differentiable utility function U = F (Y, L), that depict the utility (U) which is
obtained from consuming alternative quantities of goods (Y) and leisure (L). It is
considered positive both the marginal utilities of Y and of L (MUY ≡ ∂U/∂Y and MUL
≡ ∂dU/dL), and the utility function is concave in Y and L, which implies that ∂2 U /
∂Y2, ∂
2 U / ∂ L
2 < 0, and ∂
2 U / ∂ Y ∂ L > 0.
Same satisfaction level is generated along with an indifference curve by
alternative combination of both L and Y. In Fig. 1.1, four indifference curves showing
greater levels of utility are drawn, I0, I1, I2, and I3. The slope as an important property
of indifference curve is derived in the following. The total differential of the utility
function U (Y, L) is
36 see Berndt (1991) 37 see Berndt (1991) 38 see H.Gregg Lewis (1975) in which labour supply model is presented.
75
dULUdYYU /(/ (3.1)
Along a given indifference curve, dU = 0. Substituting dU = 0 into Eq. (3.1)
and reorganizing yields the slope of indifference curve (dY/dL) in Fig.1. It is known as
the negative of the marginal rate of substitution of leisure for consumer goods. Below
it is denoted as –MRSLY
MRSMU
MU
Y
U
L
U
dL
dY
Y
L
LY (3.2)
Since by assumption, MUL and MUY both are positive, indifference curves
slope downward. The concavity entails the convexity of indifference curves to the
origin. Though it is possible to substitute L for Y and keep utility fixed, the greater the
ratio of L to Y, the greater the marginal amount of L required compensating for giving
up a marginal amount of Y.
Figure: 1.1 Indifference Curves and the Budget Constraint
Since indifference curves that are away from the origin signify successively
higher levels of utility, individuals who want maximum uility will choose the
indifference curve which is highest, considering his or her budget constraint.
76
Prices, non-labour income, and time are the primary three factors that
influence the budget constarint. First, if the unit price of goods be PY, and the
exogenous and constant wage rate be PL, then the individual‟s real wage is PL/ PY.
Second, the individual‟s nonlabour or property income is shown as Q; in case of
consumption goods the real amount of nonlabour income is Q/PY. Third, leisure
(nonmarket) hours L plus hours which is dedicated to market work H must exhaust T,
that is, L+H = T. Further, labour income equals the product PLH, and the real labour
income forgone by choosing one more unit of leisure as an alternate for working
equals PL/PY.
If individual is assumed to spend all of his or her available income, the above
three factors imply the budget constraint
YPQLTPQHPI YLL )( (3.3)
In the equation above, sum of labour and non-labour income is represented by
I, the total money income. There are two ways to write Equation (3.3). As the notion
is that an individual spends his or her full income „C‟ on goods and leisure, Gary
Becker [1965] has included PLL in the both side of Eq. (3.3), obtaining
QTPLPYPYPLPIC LLYYL (3.4)
This formulation indicates that full income budget constraint is comprised of
total amount of available time, T, which is evaluated at the constant wage rate PL plus
non-labour income Q. This full income C is then totally consumed on leisure (PLL)
and on goods (PY Y).
On the other hand, to facilitate graphical analysis, Eq. (3.3) is rewritten in
terms of real income,
LPY
P
Py
QT
P
Py L
y
L ..
(3.5)
When Eq. (3.5) is graphed as in Fig. 1.1, the budget line (MM) which
represents the income constraint, with intercept equal to [(PL/PY). T + Q/PY] and slope
equal to - (PL/PY). Note that even if L = T (while all time is devoted towards leisure),
77
the budget line M'M does not cross the horizontal axis unless nonlabour income Q is
zero.
Utility maximization subject to the budget constraint Eq. (3.5) involves
choosing the set of Y and L that is feasible (on budget line) and is on the highest
indifference curve that touches the budget line M'M. This point is at S, where the
slope of the indifference curve I2 (-MRSLY) equals the slope of the budget line – PL/PY
in Figure.1.1. It is possible for the individual to purchase goods OY', to choose leisure
OH', and the supplies hours of labour H'T to the market at this point.
More formally, the individual obtains solution of his or her maximization
problem by maximizing U = F (Y, L) subject to the budget constraint PYY = PL (T-L)
+ Q. However, the Lagrangian function is applied here
])([),( QLTPYPLYU LY (3.6)
We take first partial derivatives of Ψ with respect to Y and L, set them equal to
zero, and then solve. This yield,
Y
L
LY
Y
L
P
PMRS
MU
MU
YU
LU
/
/ (3.7)
It is shown in Eq. (3.7) that utility is maximized at the point where, MRSLY
(the negative of which, by Eq. (3.2), is equal to the slope of the indifference curve)
and the real wage rate PL/PY (the negative of which, by Eq. (3.5), equals the slope of
the budget line M'M).Collectively they are equal.
Fig. 1.1 indicates that the individual is allowed to maximize his or her utility
at an interior solution S where L < T and H > 0, that, where the individual participates
in the labour force with non-zero H. The case that is mentioned above is critical to
understand the decision of labour force participation. Assume that individual would
earn the lower wage rate by working in market with some non-labur income Q and
preferences as before, he now faces budget constraint PY Y = PL' (T-L) + Q, which is
drawn in Fig.1.1 as the flatter budget line M''M . The individual could attain highest
indifference curve, I1, by showing his or her preferences and the budget constraint
M''M. At point M, the indifference curve I1 touches the budget line MM, where L = T
78
and H = 0, such point shows less partaking of individuals in the labour force by
spending all of his or her time in leisure (nonmarket activities). The individuals are
unable to attain merely any higher indifference curve with such preferences and
budget constraints.
Point M shows a corner solution to the individual‟s utility maximization
problem rather than an interior solution. Note, particularly the slope of the
indifference curve is steeper than that of the budget line, indicating that MRSLY >
PL/PY at the corner solution M, rather than Eq. (3.7) holding, where MRSLY = PL/PY.
This suggest that decision of labour force participation can be seen simply as
complying to whether the individual‟s has any utility maximization problem, given
budget constraints, yields a corner solution or an interior solution. In particular, if at
the solution point, MRSLY = PL/PY, then H > 0 and L < T- an interior solution occurs
and if instead at the solution point, MRSLY > PL/PY, then H= 0 and L= T- a corner
solution is being obtained.
Neo-Classical framework of labour supply puts forward that individual‟s act
rationally for maximization of their utility by willingly opting for jobs administered
by the basic condition that market wage rate exceeds reservation wage. The
reservation wage is actually the amount of extra earnings the individual would be
provided to give up one unit of leisure, the maximum wage where he or she is
willingly to involve in employment, is denoted as w* and indicated by the slope of
indifference curve at point M. 39
Fig. 1.1 shows that the reservation wage w* is greater
than the market wage PL at budget line M''M that is, the extra satisfaction from an
hour of leisure is greater than the wage rate. However, if the wage rate rises then
budget line rotates upward from M''M to M'M, and then at certain point the wage rate
would surpass the reservation wage, which results in a positive labour force supply.
Hence, PL > w* indicates positive labour force participation condition.
A few important imlications of this economic theory of labour force
participaion are noteworthy. Firstly, for individuals having identical reservation
wages those who have higher (potential) wage rates are being participated more in the
39 This reservation wage notion is apparently due to Jacob Mincer (1963). Important extensions and
applications include those of Reuben Granau (1973b) and James Heckman (1974b); also see Gronau
(1986).
79
labour force. Secondly, for individuals having with identical potential wage rates
those with lower reservation wages are being participated more in the labour force. As
“workaholics” have lower reservation wages as compared to, say, avoid hobbyists,
given identical potential wage rates, workaholics are working more. Likewise, women
who have to tackle expensive daycare of their children are likely to have higher
reservation wages as compared to single, career-oriented women having no children;
other things being equal, we would expect the higher labour for participation rates in
the later case. It is noteworthy, that such difference in preferrences among individuals
is indicated by the shape and slope of their indifference curves. Additionally, the
shape of indifference curve may change for a given individual at different points
during his or her life cycle.
The above presented theoretical framework generalizes the cases in which
only several points for hours at work are obtainable to employees. Such situations
state the optimal corner solution i.e. the largest amount of working hours where
market wage exceeds or equals reservation wage.
The changes in non-labour income and in the wage rate affect labour supply.
Suppose that the individual faces an increase in non-labour income from TM to TC in
Fig. 1.1 with constant wage rate at PL and obtains new budget line which is N'N
parallel to the old budget line M'M. If we firstly discuss initial equilibrium at S, the
increased non-labour income makes possible the movement of utility maximizing
individual to a higher indifference curve, I3, tangent to the new budget line N'N at
point S'. This point shows the increases in hours of leisure consumed to OH'', the
decreases to H''T in amount of labour supplied, and increases the amount of goods
consumed upto OY''. The pure income effect is the result of outward movement from
S to S' and increases the L and Y due to increased non-labour income. However, pure
income effect on hours of labour supplied is negative which reflects the implicit
assumption i.e. leisure as a normal good.
When the individuals experience a change in wage rate, the response reflects
both income and substitution effects. Fig. 1.2 illustrates the initial equilibrium point S,
at which the I0 indifference curve is tangent to the original budget line M'M, which
shows OY units of goods and OH hours of leisure consumed and HT hours of labour
supplied. Now, there is an increase in wage rate while goods prices, preferences, and
80
nonlabour income remain unchanged. The increased wage rate results in an upward
rotated new budget line M''M, tangent to the higher, indifference curve I1 at point S'.
The utility maximizing individual faces more goods consumed from OY to OY',
decreases the leisure amount chosen from OH to OH', and increases labour supplied
hours to the market from HT to H'T at this new equilibrium.
The movement from S to S/ can be usefully decomposed into pure income and
compensated substitution effects. The compensated substitution effect (which is the
definite response of the individual in result of change in the wage rate while holding
utility fixed) involves a movement along the individual indifference curve I0.
Graphically, it is shown by notionally reduction in individual‟s non-labour income by
imposing tax on it that the new notional budget line R'R has the same slope as the new
budget line M''M (reflecting the higher wage rate) but is just tangent to the original
indifference curve I0 at point S''. This budget line R'R, concerning utility, just offsets
or compensates for improvement in earning power that is the result of increased wage
rate.
Figure: 3:2 Income and Substitutin Effects in Response to a Change in the Wage Rate
Fig.3.2 demonstrates the movement from S to S'' is the compensated
substitution effect; it directs or leads to reduced leisure OH'' and enhanced labour
supply H''T, reflects the fact that leisure becomes rather expensive due to increased
O
81
wage rate. By isolating this compensated substitution effect, the pure income effect
(without changing the prices) is the residual movement from S'' to S', with addition
leisure from OH'' to OH' and supplied labour to the market falling from H''T to H'T.
Incidentally, the (nomenclature) can be confusing, it is noteworthy that the total
movement from S to S' due to a rise in wage rate is called the uncompensated or gross
substitution effect in copious literature. Hence, the summation of compensated
substitution effect and pure income effect is uncompensated or gross substitution
effect.
The above graphical analysis shows that an increase in the wage rate leads the
utility-maximizing individual to respond in two different ways. Firstly, the
uncompensated substitution effect results in more labour supply and less leisure.
Secondly, pure income effect indicates a reduction of labour supply and more leisure.
Figure 1.2 shows that a positive compensated substitution effect on labour supply lags
behind the negative pure income effect.
Two notable remarks are as follows. First, it is assumed in the above analysis
of income and substitution effects, interior solutions occur before and after increase in
wage rate, that is, it is conditional for positive labour force participation. Although it
is not indicated here, it can be demonstrated if the original solution becomes corner
one with no participation, then a sufficiently large wage increases, ceteris paribus,
could result in positive labour force participation, and reduction in nonlabour income,
ceteris paribus. Thus, participation decisions can also be evaluated for income and
substitution effects.
The way we write the gross, compensated substitution and pure income effects
of change in wage rate are in terms of calculus and in elasticity form 40
and this results
in the well-known Slutsky equation predominantly,
I
HH
P
H
P
H
UUL
gross
L
. (3.8)
40 Follow the theory of consumer demand as, for example, in R.G.D Allen (1938) and Angus Deaton
and John M. Muellbauer (1980).
82
Where, I am money income. The first term on the right-hand side of Eq. (3.8)
is the compensated substitution effect by holding the utility constant, and the second
term indicates the pure income effect. If one multiplies the complete expression in Eq.
(3.1) by PL/H and then multiplies and divides the income effect by I, so Slutsky
relation is obtained in elasticity form,
H
I
I
H
I
HP
H
P
P
H
H
PL
P
H L
UU
L
L
gross
L
....
(3.9)
It can be rewritten as
IHL
c
L
g SLHPHP .. (3.10)
Where SL is the share of labour in total money income and where the g and c
subscripts on substitution elasticities to gross and compensated changes,
correspondingly.41
The Neo-Classical analysis predicts that labour force status of an individual is
therefore determined in a two stage process. Firstly, an individual decides whether or
not to supply labour to the market or not. Secondly, whether he is employed or not, it
is assured by a combination of factors including labour demand (employers
preferences, skills, experience, education, marital status and sex), incentives to look
for employment rapidly and to accecpt any job opportunities. The theory has also its
drawbacks; it does not take into account the family members‟ interdependence and
their decision-making that it doesn‟t succeed or fail to promote constructivity (Van de
Brink, 1994).
3.3.2 Household Labour Supply42
In fact, generally, decision of labour supply is taken in the context of the
decision made by other household or family members. Killings-worth (1983) made a
distinction among three approaches that connect family membership to supply of
labour.
41 The expressions in Eqs (3.8)-(3.10) implicitly assume that interior solutions occur both before and
after the small change in PL. 42 see Berndt (1991).
83
It is assumed in male chauvinist model that wife takes into account her
husband‟s earnings in form of property or nonlabour income while taking labour
supply decisions, however the husband decides to supply his labour exclusively just
taking into account his own wage and actual non-labour income of family.43
The
property income is assumed to incorporate both incomes (labour and non-labour
income) of the husband. In second approach it is assumed that the existence of a
family or household aggregates utility function U = U (Y, L1, L2, -----, Ln), where Li is
the leisure which the ith individual of family consumes. This is the family utility
function and is maximized subject to a family budget constraint.44
In labour supply analysis, family utility approach has become familiar due to
fact that various renowned comparative statics are the consequences of framework of
individual utility maximization goes with little adaptation. The family utility function
approach shows four substitution effects (the response of labour supply of the ith
family member to a change in his or her own wage rate), but two cross-substitution
effects also occur, that involve the ith family member‟s labour supply response due to
a change in the jth family member‟s wage rate and vice versa.
Within the existence of aggregate family utility function, the compensated
cross-substitution effect of a change in the ith individual‟s wage rate on the member‟s
labour supply must be same as the effect of the jth member‟s wage rate on the ith
member‟s labour supply. Moreover, though these effects must be equal in magnitude,
and yet their signs can be either positive (indicative of substitutability) or negative
(complimentarily). However, because the pure income effects on the two family
members need not be the same, the gross (uncompensated) cross-substitution effects
necessarily are not equal. Hence the gross effect of a change in the wife‟s wage rate
on the husband‟s labour supply is not equal to the gross effect of a change in the
husband‟s wage rate on the wife‟s labour supply.
43 This choice of nomenclature is somewhat unfortunate, since while chauvinism is clearly undesirable,
this particular model might or might not be a reasonable description of household decision making. 44 For example the use of the male chauvinist model, see, among others, Bowen and Fineagan (1965,
1969) and Hausman (1981a).
84
The detailed view of a special case of the family utility function framework
was made by authors.45
It occurs when the compensated cross-substitution effects
equal zero for all members in the family. Such an illustration notifies change in the ith
member‟s wage rate which entails a pure income effect on the labour supply of the jth
individual. This signifies that the labour supply function of the jth family member
depends on his or her wage rate and on the sum of labour and non-labour income of
all other family members.46
The family utility function approach is commonly used in studies empirically
done on labour supply because of its analytical easiness. It is note worthy, yet, there
are numeral drawbacks in this framework. Since the aggregate utility function entails
that the family derives utility from consumption collectively, the distribution of goods
consumption does not matter, while this might make sense for family “public goods”.
Furthermore, the approach to family utility function is silent as to the process that
really makes an aggregate utility function in which all members of family are agreed
equally.
Marital status is considered important one in household labour supply models.
In this context, Gary Becker (1974, 1981, and 1988) makes an effort to endognize the
marital status, consumption, and the labour supply decisions of individuals jointly in
his latest work, but, at this level, the author has not developed a model which was
fully empirically implementable.
3.4 The Basic Theory of Human Capital
The human capital theory is a dominant economic theory of wage
determination. The theory was developed by Jocob Mincer (1957, 1958, and 1962),
Theodore Schultz (1960, 1961), Gary Becker (1962, 1964) and Blauge (1969). The
human capital theory in framework of neo-classicals concentrates that individuals
make investment by spending on education and training in order to enhance their
market skills, productivity and earnings. In the theory, the emphasis has been made on
45 see in Malcolm S. Cohen, Samuel A. Rea, and Robert I. Lerman (1970) and Orley Ashenfelter and
James J. Heckman (1974), 46 Applications of this model include Marvin Kosters (1966); Malcolm Cohen, SamRea, and Robert
Lerman (1970); Robert Hall (1973); Orley Ashenfelter and James Heckman (1974); and Jerry Hausman
and Paul Ruud (1984).
85
individual differences in years of education, lenth of the on the job training and those
important factors that induce individual to make comparatively more investment on
human capital than others.
Mincer (1958) presented a theoretical model in which implications for income
distributions of individual differences in investment in human capital have been
derived. He assumed the process of investment was subject to free choice i.e. training.
As the time spent in training found a delay of earnings to a later age, the rational
choice assumption indicated an equalization of present values of life-earnings at the
time the choice was made. Intra-occupational differences increased when human
capital investment included experience on the job. Age measured the obtainable
experience process along with biological growth and decline. The growth of
experience and hence of productivity showed increasing earnings which increased
with age, up to a point when biological decline started to influence productivity badly.
The differences in training caused the differences in earnings levels among
''occupations" in addition to the differences in slopes of life-paths of earnings among
occupations and these differences seemed systematic.
Mincer (1970) presented a theory of lifetime behavior of individuals. It was
stated that the distinction between longitudinal (cohort) analysis and coexistent (cross-
section) analysis would not matter in some special cases of a stationary economy, or
of an economy where the changes were "neutral" regarding categories adding the
human capital model. He argued that modifications which were introduced by secular
change must be considered when the models were used in cross-section.
Becker (1962) analyzed the investment in human capital and found that the
differences in earnings among persons, areas, or time periods were generally due to
differences in physical capital, technological knowledge, ability, or institutions. The
analyses showed that investment in human capital also had a vital influence on
observed earnings because earnings seemed net of investment costs and gross of
investment returns. Certainly, an appreciation of importance of human capital seemed
to resolve many else findings regarding earnings. However, observed earnings were
gross of the return on human capital were influenced by changes in the amount and
86
rate of return. A lot of human capital investment enhanced observed earnings both at
older ages, and at earlier ages.
The attention was paid on the job training (i.e. a specific kind of human
capital) because it usually emphasized on common effects to a general theory.
However, the theory had very vital implications such as earnings were gross of the
return on human capital; some persons may earn more as compared to others because
they spend more on their education. And, since talented persons tended to invest more
than others, the earnings distribution could be very unequal and even skewed, even if
"ability" was symmetrically and not too unequally distributed. The learning, both on
and off the job, and other activities had similar effects on observed earnings as do
education, training, and other traditional human capital investments. Furthermore,
human capital investment did not affect earnings because costs were paid and returns
were gathered by the firms, industries, or countries that used capital. Schultz (1960)
stated that education levels were aggregated, the proportion of total costs attributable
to earnings foregone tended to rise gradually because of more importance of
education at secondary and higher level in current years, a change that offsets the
decrease in the foregone-earnings proportion of high school education alone. He
further stated that spending on education as "investments" based on the behavior of
people looking for investment opportunities would not inconsistent with the
hypothesis i.e. rates of return to education were adequate larger as compared to the
rate of return to investments in physical capital to have "induced" the implicit larger
growth rate of such kind of human capital.
Blaug (1976a) argued that individuals make investment on themselves just for
the future gains, pecuniary and non-pecuniary. He further argued that well educated
population is a productive, ingenious, and inventive resource for both the growth and
wide-ranging growth. This indicated that human capital formation included the formal
and informal education, on-the-job training and „learning by doing‟ because all of
these made a contribution to enhance the people‟s economic capabilities (see
Chattopadhay, 2012).
Becker (1964) emphasized on human capital investments influencing an
individual's potential earnings and cognitive income. The investments in human
87
capital consisted of level of educational, on-the-job skills training, health care,
migration, and regional prices and income issues. The earnings tended to increase
with education and skill level of the individuals. He also discussed the costs and
returns of investments and social and private gains of individuals and compared them
based upon education as well as level of skill.
Schultz (1961) stated that investment in human capital benefits both the
individuals and society. The improvement can be brought out in the quality of human
efforts and its productivity can be increased. Investment in human capital increased
real earnings per worker. The human capital can be estimated by its yield relatively
than by its cost while any capability produced by human investment becomes a part of
the human agents and that‟s it can not be sold; it is however”in touch with the market
place and influences the wages and salaries which the human agents can earn. The
induced increased earnings were the yield on investment. In order to improve human
capabilities, the improvements in activities were necessary. These investments may
lead to improve the human capabilities: (1) health facilities and services incorporating
energies, and the strength and vitality; (2) On-the-job training, incorporating
apprenticeship of old style; (3) formally organized education at the elementary,
secondary and higher level; (4) adults study programmes i.e. protracted programs
particularly in agriculture; (5) individuals and families‟ migration to make adjustment
according to the changes in job chances.
His theorem indicated that on the job training decreased the worker‟s net
earnings at the beginning and enhanced their earnings afterward. In addition,
individuals spend time in searching for job opportunities and gathering information.
3.5 Theoretical ApproachesTowards the Urban Informal Sector
The theoretical literature in terms of the urban informal sector enlightens three
approaches. The precise explanation of these approaches is given below.
3.5.1 Dualistic Labour Market Approach
The dualistic view is that underdeveloping countries are catagorised into two different
sectors: One is modern and dynamic sector which is characterized by capitalist
method of production; and second is a marginal or „subsistence‟ sector overpowerd by
agriculture, characterized by pre-capitalist mothedos of production. The major
88
hypothesis was that the wage determination process in both the sectors was different.
Firstly, a theoretical model of development was presented by Lewis (1954) in a
dualistic economy. However, he based his model on Classical School foundations
having two sectors (i.e. agriculture and non-agriculture) with planned symmetrical
behavior for each one. He discussed the transformation of surplus labour from the
traditional sector and and its absorption in the modern industrial sector in order to
start the development process in an effective way. Fei and Ranis (1964) emphasized
upon the simultaneous growth of agriculture and industrial sectors and product
dualism on their organizational dualism.
Todaro (1969) model stated that people are migrated from rural to urban areas
inspite of unemployment in cities. Moreove, labour force participants, compared their
expected incomes for a given time limit in the urban sector with the prevalent average
rural incomes, and they are migrated if the former surpasses the later. The Harris-
Todaro (1970) model of migration process proposed that all migrants intended to get
employment eventually in urban modern sector employment but did not clarify the
movement of the participants of urban subsistence sector. The authors notioned that
intersectoral wage gap was influenced by reallocation of labour between the sectors
along with the probability of obtaining job in the formal sector. Fields (1975) traced
out that the migrants have three choices: a job in the formal sector, open urban
unemployment and a possibility of getting job in the urban informal sector. But
Banerjee (1983) showed that entrants in informal sector were immersed to Delhi due
to additional chances to find the informal sector work. The new migrants searching
for job in the formal sector took the informal sector as a temporary staging post.
3.5.2 Neo-liberal Approach
The Neo-liberal approach focused on the legal instruments influencing the
providence and existence of informal sector. The enterpreneures were attracted
towards informal sector due to prolonged registration procedures, difficult
administrative steps and the costs incured to make an enterprise legal. The role of
informal sector was looked upon as most advantageous and harmonized response of
economic units towards government-induced distortions i.e minimum wages and
excessive taxation policies (De Soto, 1989).
89
Rauch (1991) found the informal sector as a voluntary phenomenon of firms to
avail legal exemption benefit from a mandated minimum wage policy because it
distorted resources away from first best allocations. Loayza (1996) used an
endogenous growth model and found that informal economy tended to increase in
results of excessive taxes and regulations that were imposed by governments having
inability to implement compliance. Fortin et al. (1997) studied the effects of taxation
and wage controls in an informal sector in developing economy. He found that
significance of the informal sector, unemployment rate and efficiency costs were
increased due to increased tax rate on profits, in the payroll tax, and in the
government set wage rate. Sarte (2000) drew a connection between bureaucratic rent-
seeking, the informal economy, and economic growth. The increased costs of
operating out official laws caused informal sector disappear endogenously
(internally). An increase in minimum wages affected the urban formal sector
The focus of this approach is on the neo-liberal school. The urban informal
sector was distinguished into two parts i.e. modernizing dynamic and a traditional
stagnant one. The informal sector was a disadvantaged part of a dualistic labour
market and a dynamic sector tied by subcontract to the urban formal sector and
dualism looked in relation to wages that were exceeded the market clearing level
(Ranis and Stewart, 1999). Florez (2002) defined informality in dualistic approach in
which activities were made for subsistence purpose and for the purpose of drecreasing
costs of labour and attainment of capital accumulation.
Attanasio et al. (2003) worked on trade reforms and wage inequality and
found the influence of drastic tariff reduction on the wage distribution. The skill
premium increased due to skilled biased technological change. However, the sectors
with the largest reductions in tariffs were those with the sharpest increase in the share
of skilled workers. Regarding industry wage, premium diminished more in sectors
which faced large tariff reductions and the diminishing premium increased inequality.
The increasing size of informal sector was related to the increased foreign competition
i.e. sectors which experienced large tariff reductions and trade exposure enhanced
their informality in prior to the labour market reform. Overall, effect of the trade
90
reforms on wage distribution was trivial. The poor people employed in the informal
sector did not earn low incomes in the economy (Dasgupta, 2003). The informal
employment acted in response to the strength of enforcement and, perhaps corporate
tax rates (Ihring and Moe, 2004).
The informal employment was also considered a voluntary phenomenon. The
informal sector was distinguished into two sub-sectors i.e. the intermediate sector
which appeared as a reservoir of self-motivated entrepreneurs and the community of
poor comprised on large body of left behind and underemployed labour (House,1984).
The migrants and newcomers with less human and physical capital participated in the
labour market and started work to avoid their main requirement of being easy entrant
into the sector (Tokman, 1986). Fields (1990) devided the informal sector into two
segments i.e. upper-tier informal sector and „easy entry‟ ones. The mobility from
formal to informal sector and earnings differentials revealed the participants‟
willingness to work in the informal sector (Maloney, 1999).
3.6 Conclusion
We have pointed out different theoretical concepts concerning labour supply
decisions and labour choice in sector of employment. In this chapter, we have
discussed the Neo-classical theory of labour supply decision. The individual‟s labour
force participation decision and the hours supplied by the individual given that
participation are explained. Furthermore, we have described the household
participation decision and hours of labour supplied. We have also explained the basic
human capital theory. The theoretical approaches towards the urban informal sector
are also discussed. In conclusion, it is found that the theoretical approaches towards
urban informal sector and neoclassical theory of labour supply47
are the relevant and
suitable measures to determine the urban informal sector employment in Southern
Punjab, Pakistan. The Human capital theory by Becker also relates regarding earnings
determinants of the participants of urban informal sector. These theories have been
elaborated by various economists in their studies.
47see Gary Becker (1965), Jacob Mincer (1962), Shelly Lundberg (1985).
91
Chapter 4
LITERATURE REVIEW
4.1 Introduction
The informal sector absorbs bulk of such labour and hence reduces the
problem of unemployment or underemployment to a large extent in underdeveloped
countries as indicated or evidenced by theoretical and empirical literature. The effort
to highlight this problem has been made at national and international level and some
strategies are suggested to overcome this emerging issue. Moreover, this issue of
informal sector calls for further research for policy suggestions.
We point out the review of the informal sector and employment at national
and international level considering its importance. The present chapter is planned as
follows: Section 4.2 introduces the classic theories of growth and development and
informal employment. In section 4.3, we review the aspects of the urban informal
sector; its determinants, earnings determinants and impact on poverty or development
at international level. In section 4.4 we present the review of the literature concerning
different aspects at national level. Section 4.5 presents some concluding remarks.
4.2 Informal Employment and Classic Theories of Growth and
Development
In the 2nd
half of the 20th
century, the countries under colonial rule started the
development process. However, it started with the beginning of industrial revolution
in Western countries. Industrial revolution came in Britain between 1760 and 1820.
Capitalistic industrial economy took place of feudal agrarian economy among Britain
and Western coutries by characterizing a laissez-fair economy at intial stage of
industrial capitalism. Other European countries like France, Germany, and the new
World of the United States of America have experienced a similar industrial
revolution as that in Britain.
Adam Smith (1776) presented the theoretical base for such a philosophy of
laissez-fair economy. He argued that invisible hand of providence in the market
transformed the fruits of private entrepreneurs in search of self-interest into
production and supply of goods and services which society requires. The philosophy
92
of laissez-fair took a turn in favour of state intervention based in multi-justification.
Thus the monopoly legislation and its implementation provided the reason for the
emergency of monopolies and oligopolies.The solution of inequalities in form of
progressive taxation and other measures made case for redistribution of income and
wealth and eventually for guiding the welfare state. J. M. Keynes (1936) gave
suggestions for compensatory fiscal measures as a way to enhance income and output
and diminish high unemployment (business cycle which was the result of business
cycle and particularly Great Depression of 1930).
John Kenneth and Galbraith (1979) followed the Pigou‟s approach and
contrasted between private opulence and social squalor. Thus, the policy or
philosophy of state intervention aimed at the optimum use of resources and
maximization of consumer satisfaction. However, Malthus (1978) highlighted the
fundamental problem of imbalance between population growth and production. He
further argued that population control measures could be the way to overcome this
high population growth problem. Schumpeter (1995) focused on inventions and
innovations that were responsible for trade cycle and lead to or directed development
of capitalistic economies.
All these theories were explained by Classical and Neo-classical or even
Modern Economists. However, they did not illustrate theory of development
comprehensively.
The classic post-World II literature, on economic development has been
dominated by four energetic and provocative aspects of thought discusses the linear-
stages-of-growth model, theories and patterns of structural change, the international-
dependence revolution and neoclassical free-market counter-revolution. In current
years, an approach has emerged that is miscellaneous and draws on all of these classic
theories. The wide range of contending theories and approaches are presented in order
to study the economic development.
Walt W. Rostow was an American economist who presented „Stages of
growth‟ model of development.48
The author argued that process of
48 A theory of Economic Development, associated with the American Economic Historian Walt
W.Rostow, according to which a country passes through sequential stages in achieving development.
93
underdevelopment to development, whereby all the developed industrial nations of
the world transformed themselves from backwardness to prosperity, can be explained
in terms of stages of growth.49
In the linear stages model, emphasis is placed on
imperative role of saving and investment to enhance sustainable long-run growth. But
Rostow‟s historical theory did not explain development sufficiently.
Simon Kuznets (1959) explained the contribution of technology in
development so as to make capital productive. Almost underdeveloped countries are
fortunate enough to absorb such kind of productive technology. However, these
underdeveloped countries are endowed with abundant human capital especially
surplus labour and have to adopt labour-intensive technology. He argued that poor
countries should not needlessly take the responsibility in absorbing outdated
technology of the western countries and East European countries. Simultaneously,
underdeveloped countries should not absorb a capital intensive technology which is
viewed modern technology.The idea of labour-intensive technology for productive
use of surplus labour is important one for its significance or concentration among
economists in developed countries. R. Nurkse (1953) argued that labour force, that is
unemployed and underemployed, can be utilized for capital formation process start.
He further emphasized that skilled and unskilled manpower can be productively used
in order to produce capital assets in rural areas. The above illustration of
underdeveloped economies indicates the transformation of surplus labour into capital
assets.
While, capital formation with the use of appropriate technology and skilled,
provoked, dynamic population can lead to development (Guner Myrdal, 1968 and
John Galbraith, 1979). The vicious circle of poverty is considered the major cause of
underdevelopment and the underdeveloped counries are trapped in this demand side
and supply side vicious circle of poverty. The development and growth can be
achieved by eradicating this vicious circle of poverty. Rosenstein-Rodan (1964)
presented the Big Push Theory. The author viewed that big and comprehensive
investment in form of intensive agriculture and promotion proves helpful to bring
economic development. Development can beignified by a joint investment with a
49 see Todaro and Smith (2012).
94
number of backward and farward linkages and benefits of external economies, anemic
efforts towards development will prove worthless or ineffective.
The idea of joint investment in balanced and unbalanced growth theories was
given by Hirshman (1958). According to him, a comprehensive investment caused
unbalanced growth to start with, would eventually cause to investment opprtunties in
the complementary fields of activities and would ultimately excite wide ranging
economic growth and development.
Structural change theory50
emphasizes on the mechanism by which
underdeveloped economies transform their domestic economic structures from a
heavy to a more modern service economy. The Neo-Classical price and resource
allocation theory and modern econometrics is used to show how this transformation
process takes place. The “two-sector surplus labour” theoretical model of W. Arthur
Lewis and the “patterns of development” empirical analysis of Hollis B. Chenery and
his co-authors recognized the illustrations of structural change approach. The Lewis
two-sector model 51
of structural change depicts transfers of resources from low
productivity to high-productivity activities in the process of economic development
by analysing many linkages between traditional agriculture and modern industry and
illuminating recent growth experiences such as that of China ( see Todaro and Smith,
2012).
The Structural-Change model emphasises development as an exclusive
growth process and change with same main features in all countries. Yet, the model
does recognize that differences can be raised amongst countries development pattern,
depending on their particular set of circumstances (see Todaro and Smith, 2012).
In the period of the 1970s, International-Dependence models were supported
in result of growing dissatisfaction with both the stages and Structural-Change models
among intellectuals in developing countries. While this theory to a large degree went
out of favor during the 1980s and 1990s, as only some of its views have been adopted.
50 The hypothesis that underdevelopment is the result of underutilization of resources arising from
structural or institutional factors that has their origins in both domestic and international dualism.
Development therefore requires more than just accelerated capital formation. 51 The process of transforming is in such a way that the contribution to national income by the
manufacturing sector eventually surpasses the contribution by the agricultural sector.
95
The international-dependence theorists recognized the importance of the structure,
mechanism, work of world economy, and decisions made in developed world can
influence the lives of millions of people in third world. The similar applies to
arguments concerning the dualistic structures and the role that ruling elites in the
domestic economies of the developing world. Within this general approach there are
three major streams of thought: the neocolonial dependence model, the false paradigm
model, and the dualistic development thesis (see Todaro and Smith, 2012).
The first major stream entitled as Neo-colonial Dependence Model52
, is an
indirect outgrowth of Marxist. This model argued that the existence and continuance
of underdevelopment was most important to the historical evolution of a highly
unequal international capitalist system of relationship between rich country and poor
country (see Todaro and Smith, 2012).
During 1980s, when the conservative governments were in power in the
United States, Canada, Britain, and the West Germany, the Neo-classical counter-
revolution theory and policy were revitalized. The neoclassical counterrevolution
argued that poor resource allocation due to incorrect policies regarding prices and too
much state intervention by excessively active developing-nation governments caused
underdevelopment. This Neo-classical counter-revolution favoured supply-side macro
economics and privatization of state-owned corporations in developing countires, and
it stressed upon de-thronement of public-ownership, statist planning and govt-
regulations in underdeveploed countries (see Todaro and Smith, 2012).
Thus, the cornerstone of Neo-Classical free market theory is attached with the
liberalization (opening up) of domestic markets which will attract domestic and
foreign investment. Thus, the capital accumulation will enhance. In relation to GNP
growth, this is equalent to elevating domestic saving rates which will enhance capital
labour ratios and per capita incomes in capital poor developing countries. The Solow
Neo-Classical Growth Model53
in particular represented the seminal contribution to
the Neo-classical theory of growth and later received Robert Solow the Nobel Prize in
economics. It distinguishes itself from Harrod-Domar formulation by addition of
52 The main proposition of model is that underdevelopment exists in developing countries due to
continuing exploitative economic, political, and cultural policies of former colonial rulars towards less
developed countries. 53 see Todaro and Smith (2012).
96
labour, and introducing technology to the growth equation. In order to promote
growth along with equity in developing world, the Traditional Neo-Classical Growth
Theory discussed the unquestioning adulation of free markets and open economies
along with the universal disparagement (see Todaro and Smith, 2012).
4.3 Review of Empirical Evidence and Urban Informal Sector
This section reviews the empirical evidence on aspects of the informal sector
and the urban informal sector employment determinants. The literature on the
informal sector is characterized by terminological confusion. Theoretical literature on
the informal sector is commonly taken to show dualistic as well as Neo-liberal and
legalist approach in this research. We also review the literature regarding earnings
determinants in the urban informal sector. The present study also reviews empirical
evidence on the subject of the informal sector development and socio-economic
factors in support of the informal sector development at the national as well as at
international level. In the next paragraph, we will review some studies associated with
our topic. There is a diversity of literature on topic of the urban informal sector
development though we are reviewing a few imperative studies in order to support
this research.
Mazumdar (1976) examined the urban informal sector. The results showed
that there were disproportionally young and old participants in the informal sector.
Majority of the participants were female workers. Moreover, the participants of the
informal sector were possessed with formal education. The informal sector did not
prove the entry point to the rural migrants. The workers earned at very low level in
the informal sector. The participants were not the primary earners. The employment,
productivity and earnings trends indicated that migration function implicit in
probabilistic job search models exaggerated the rate of migration to the urban market,
and underplayed the role of actual economic performance in controling migration
over time.
Koo and Smith (1983) discussed the urban informal sector and migration to
city based on data from National Demographic Survey conducted in 1968. The
various factors were explored like migrants‟ participation, personal income, sex and
level of education which influenced the informal sector. The authors used sectoral
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distribution and regression techniques. The results indicated that age, years of
education, and hours of work were positively associated with the personal earnings of
the participants. The sex and earnings of the informal sector workers were positively
associated. Findings also showed that rural migrants‟ earnings were lower in the
informal sector and this sector was tertiary. It was the informal sector which enabled
the rural migrants to participate in the informal occupations. The informal economies
provided continuous income opportunities predominantly to migrant women. Finally,
results concluded a great deal of overlap between participants‟ income in both the
(formal and informal) sector.
By using primary data, Tielhet-Waldorf and Waldorf (1983) explored the
earnings of the self-employed in an informal sector in Bangkok. The authors
examined the impact of years of experience in periods, previous experience, migrants‟
status, sex and region on the earnings of self-employed. OLS regression techniques
were used in the study. The results showed that self-employed workers noticeably
earned relatively higher average earnings than unskilled workers in the formal sector.
The result of the study also showed that level of education of participats was low
(primary). Analysis indicated that there were higher earnings of the self-employed
with primary level education. In conclusion, the recent migrants, almost all self-
employed were inclined to earn a smaller amount as compared to city born for that
time period.
Hill (1983) studied female labour force participation in developing and
developed countries based on Japanese data. The author used the multinomial logit
model. It was found that women did not regard the decision to work as identical to an
employee‟s decision to work. The increase in husband‟s wage certainly raised the
wife‟s inclination to work in the informal sector as family worker. It was concluded
that the option to work in family business along with the choice not to take part can
not be combined.
Okojie (984) studied female migrants in the urban labour market by collecting
data in 1980 in the survey of female Benin City of Nigeria. The explanatory variables
such as sex, marital status, religion, and education levels were included in the study.
The author used the regression estimates in the study. The results pointed out that
migrants took the urban informal sector as refuge. The evidence indicated that both
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the migrant and non-migrant women, with their low education, were occupied in low
income jobs in the informal and formal sector. The results of study suggested that
employment opportunities should be increased in the urban areas and rural-urban
migration must be decreased on behalf of both female and male workers possessing
higher education.
House (1984) conducted a survey of the informal sector enterprises in mid
1977 in Nairobi. The author of study used the percentage distribution and ordinary
least square method. The results indicated that participants having low skill level
entered in the urban informal sector easily and the required amount of money to start
business was insignificant. Moreover, there was an influx of migrants in informal
sector in urban areas. The study concluded that the informal sector offered a
permanent way to urban existence, even at a bare survival. The study has given policy
suggestions about the maximization of development potential of the intermediate
sector and about lessening the size of the community of the poor at similar time.
Terrell (1989) analyzed the determinants of wages by using data from the
Labour Force Survey in Guatemala. The regression results indicate that there were
low and positive returns to education and experience. Positive relationship was also
found between education and earnings with large differentials. The result also found
the interindustry wage differential were limited to large groups (i.e. modern and
traditional). The returns to hours worked were found to be negative. Results found the
sex discrimination in the formal sector occupation among the wages of street vendors
and shop assistance. The variable years of schooling affected more wages of shop
assistants as compared to the earnings of street vendors. It was also found that
earnings of the street vendors were increased with the experience. Moreover, job
tenure did not determine the wages in either of these occupations. Finally, a negative
association was found between working hours and earnings of the street vendors.
Boyd (1990) examined the Black and Asian self-employment in large
metropolitan areas in United States by using micro data sample, U.S census Volumes,
and published sources. The explanatory variables were individual and personal
characteristics. The study used a logistic regression model. A positive relationship
was found between age, education and self-employment of Asians. The findings
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indicated that Asians also used informal networks for guidance in business. However,
Blacks did not get benefit in business ownership due to lack of informal network
support.
Banergee (1993) examined the role of informal sector in migration process.
The data was collected by survey method from October 1975 to April 1976. The
author used earnings functions logit model and logit estimations of mobility between
sectors. It was found that mobility was very low from informal to formal sector. It
was also found that return to education and experience was equally rewarded in both
the sectors. The return to education and experience were high in the informal sector.
The main conclusion was that education of the workers determined mobility between
the sectors.
Aly and Quisi (1996) estimated socio-economic determinants influencing
women‟s decisions in labor market. The non-linear maximum likelihood function was
used in the study. The results found that women‟s monthly wage rate and their
education affected their working decisions in the labour force. However, variables
such as marital status, number of children under five years of age and their age
influenced their decisions negatively.
Funkhouser (1996) examined the employment patterns and earnings structures
by conducting household surveys in five Spanish-speaking countries of Central
America. Factors regarding age, years of education, marital status, sex, children less
than 10 and adults were used by author. The author of the study adopted the probit
model to estimate the informal sector employment. The results highlighted that there
were higher returns to a year of education in the informal sector in each country as
compared to most developed countries and gender differential was to a great extent in
informal sector. The results also showed that participants enjoyed the higher returns
due to labour market experience. Furthermore, it was found that heads were being
employed more in informal sector employment. As far as number of children is
concerned, workers were being employed more or less in informal sector employment
across countries in Central America. The workers having male children less than 10
years of age decreased their involvement in informal employment in some of the
countries. Married workers participated less in the informal sector employment.
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The findings also indicated that informal sector employment increased due to
having female children less than 10 years and it decreased in Nicaroga in 1993 and in
Costa Rica in 1980, 1985 and 1991. The study concluded that the important
determinant of informal sector employment was level of development.
Borjas (1996) worked on self-employment experience of immigrants by using
data from U.S censuses of 1970 and 1980. The author used maximum likelihood logit
regressions in this study. The result showed that self-employment proved a vital
aspect of experience of the immigrants of the labour market. It was also found that
self-employment rates of immigrants were higher as compared to self-employment
rates of native-born male workers. The assimilation influenced positively the self-
employment rates. More immigrants adopt self-employment more often.
Loayza (1996) examined the determinants and effects of the informal sector
by using data from Latin American countries in the early 1990s. The author used an
endogenous growth model. Results showed that the informal economy tended to
increase in results of excessive taxes and regulations that were imposed by
governments having inability to implement compliance.
Fortin et al. (1997) studied the effects of taxation and wage controls in an
informal sector in developing economy. The authors applied a simple general
equilibrium model consistent with different parts in labour market. Results indicated
that the significance of the informal sector, unemployment rate and efficiency costs
were increased because of an expansion in the tax rate on profits, in the payroll tax,
and in the government set wage rate.
Samith and Metzger (1998) discussed the return to education among street
vendors. The authors used data drawn in 1994, survey of street vendors in Mexico.
The explanatory variables consisted of capital, capital association, hours worked per
year, hours worked per day, secondary education, beyond primary education,
experience, experience-squared, family worker, gender, merchandise and prepared
food. The study was based on the specification of earning function. Findings
indicated that there were significant positive returns to formal education among street
vendors. A positive relationship was found between capital investment and
educational attainment. The results also indicated an inverse association between
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earnings and working hours per year. It was also found that earnings of the vendors
seemed to increase gradually.
Maloney (1999) worked on informality segmentation in urban labour market
in Mexico based on data from National urban employment survey. The author
estimated the earnings differentials and multinomial logit model was used in the
study. The author found a relationship between the formal and the informal sector.
The result showed that informal sector workers forcefully worked in the sector due to
inefficiencies and low productivity levels of the labour in developing countries. The
major conclusion was that mobility from formal to informal and earnings differentials
showed the participants‟ willingness to detain or engage them selves in the informal
sector.
Hout and Rosen (2000) studied the influence of family background and race
on self-employment in United States. Data were drawn from the General Social
Survey (GSC) made from1500 English speaking adults. By using a logistic regression
analysis, it was found that the self-employment rate among African, Americans and
Latinos whose fathers were self-employed was lower as compared to a European
ancestory average man whose father was not self-employed. Self-employment rates
were influenced by ancestry and immigration. The findings concluded that
individual‟s self employment was primarily influenced by the self-employment status
of his or her father or family background.
Sarte (2000) introduced a simple economic model and drew a connection
between bureaucratic rent-seeking, the informal economy, and economic growth. The
results showed that increased costs in respect of operating out official laws caused