The majority of employment in Bangladesh is in the informal sector, which includes employees without job contracts, the self-employed and family members who work in household enterprises. Researchers from RAND, BIGD, BIDS and BRAC University have recently completed two studies on informal labour markets in Bangladesh, one funded by the UK Department for International Development (DFID) through the Institute of Labour Economics, IZA, and the other funded by the World Bank.
GLM|LIC investigators Krishna Kumar (RAND), Shanthi Nataraj (RAND) of the project “The Formal-Informal Labour Nexus and Growth: The Case of Bangladesh“, Minhaj Mahmud (BIDS, BIGD), Italo Gutierrez (RAND), Farzana Munshi (BRAC University), Prodyumna Goutam (RAND) presented their findings in the workshop.
The research team analysed existing secondary data, and also conducted a survey of approximately 2,000 workers in Dhaka and Chittagong, as well as a matched employer-employee survey of 873 employers located in 55 small and medium enterprise (SME) clusters and 2,739 employees working for these employers. The data were used to analyse the links between informality and growth, examine worker transitions between different types of jobs, and estimate the valuations of specific job benefits by workers and employers.
Major Sets of Findings
1. Impact of Sectoral Growth on Formal and Informal Employment.Demand for Bangladesh’s exports – particularly from the ready-made garments sector – has risen rapidly over the past two decades. However, little is known about how rising export demand affects employment in the rest of the economy. Researchers exploit exogenous variation in demand for exports, coupled with supply chain links that propagate these export-driven demand shocks throughout the economy, to examine the effect of sectoral growth on employment in the formal, informal, unpaid, and self-employment categories. Their results suggest that export-led growth increases employment levels in all four employment categories. However, in terms of employment shares, researchers find that sectoral growth causes a reallocation away from informal wage employment towards self-employment and, for workers with relatively high levels of education, formal employment. These results stand in contrast to the conventional view that as economies grow, employment shifts primarily towards the formal sector, and suggest that the informal sector – and in particular self-employment – might be influenced by growth opportunities.
2. Formal-Informal Job Transitions and Workers’ preference for Specific Job Benefits: Evidence from a Survey of Workers in Bangladesh.
Despite substantial growth in recent years, the share of informal employment has remained stubbornly high in Bangladesh. The researchers examine whether individual workers are “locked” into informal employment or whether they move between different types of jobs, and if so, what characteristics or events trigger those transitions. The researchers construct transition matrices showing the extent to which workers move between formal and informal work and self-employment, as well as between jobs with and without specific worker benefits. Using a choice experiment researchers elicit workers’ preferences for specific benefits, including a written contract, termination notice and paid leave. Their results suggest substantial transitions between different types of employment, and that workers tend to place the highest values on benefits associated with job stability.
3. Preferences for Job Benefits: Evidence from a Matched Employer-Employee Survey of Informal Enterprises.
In the near term, a large share of jobs is likely to remain informal in many countries, including Bangladesh. A critical question for policymakers is therefore how to improve conditions for those who remain informally employed. One potential option is to extend formal labour regulations to a wider set of firms including informal employers. But enforcing these regulations could be prohibitively costly for small firms, and may push employers further into the shadows. The researchers aim to identify which specific features of formality are most valuable to workers, which features of formality employers might be most willing to provide, and how these differ. The researchers conducted a matched employer-employee survey in employers in 55 small and medium enterprise (SME) clusters in and around Dhaka and Chittagong. The survey allows them to systematically examine the “mismatch” between the benefits that employers report providing and that employees report receiving. Using two choice experiments, researchers estimate workers’ willingness to pay for specific job benefits as well as employers’ willingness to provide benefits to their employees, and whether they are more likely to be induced to do so based on a “stick” (a fine) or a “carrot” (offer of preferential loans and marketing assistance).
Many thanks to Principal Investigators (in alphabetical order by surname) Krishna B. Kumar (the first from the right) and Shanthi Nataraj (the second from the left), and all involved in the project and their contributions to further shape the research agenda of the GLM|LIC programme.