The role of the informal sector in inclusive growth: A state of knowledge study from policy perspectives

Abstract

This study takes a close look at the various dimensions of informality in Bangladesh from labour market and sectoral-enterprise perspectives. The specific issues examined include: the sectoral background of informal employment; reasons why informality is so persistent (push and pull factors); the formal and informal employment interface (including informal labour as a feature of the formal sector coexisting with formal employment); ownership patterns in the informal sector; earnings from formal and informal labour; the nature of the informal–formal continuum in value chains; sectoral distribution; gender divide and educational background; productivity, and issues of graduation from informal to formal employment. While some of these issues have been extensively studied in the context of south American developing countries (e.g. Perry et al., 2007), key issues demand more detailed examination and analysis in Bangladesh’s context. Addressing issues related to informality is important for inclusive economic growth, which Bangladesh aspires to pursue in light of its Seventh Five Year Plan for the 2016–20 period and other key policy documents. Like many developing countries, Bangladesh is currently experiencing the so-called Lewis turning point, where labour moves from the agricultural sector to the rural non-farm and urban sectors. Indeed, a large part is being absorbed by the urban informal service sector, mostly in low-paying jobs. It is pertinent to note here that studies show that a 1% rise in agricultural income has the capacity to reduce poverty by 0.39% compared to 0.11% for non-agricultural income (Hossain et al., 2017). If these two trends are considered in tandem, the need for an in-depth study of the dynamics of Bangladesh’s labour market, particularly focusing on informal employment and inclusiveness of the development process, is clear.