A large share of the workforce in the developing world is outside the purview of legislation and excluded from social security benefits (Huitfeldt and Jütting 2009; Schneider 2012; La Porta and Shleifer 2014). Despite increasing attention in policy as well as academic discourse, measuring the incidence and causes of informality remains a challenge. This is primarily due to the prevalence of multiple definitions and ambiguity in the conceptualisation of informality (Kanbur 2009; Henley et. al. 2009). To address these measurement and conceptualisation issues, two definitions of informality were adopted by the International Labour Organization (ILO), viz. ‘informal sector’ and ‘informal employment’, which cover two different aspects of informality have gained prominence. While the former definition is based on firm or enterprise characteristics, the latter takes into account the employment conditions of the worker. Furthermore, such operational definitions are often tempered by data availability in operationalising informality (Lehmann 2015).
In this study on informality in the Indian labour market we use unit-level data from a nationally representative sample comprising of approximately half a million individuals for the year 2011–2012. The study intends to examine whether determinants of informality differ by the definition followed, and assess the implications of such differences. After controlling for selection bias, the probit estimates suggest that females, urban residents and more educated workers were less likely to be employed informally. Furthermore, workers with formal skills training were less likely to have informal work. The findings of study are robust to regional variations.
Evidence on the correlates of informality examined from an enterprise as well worker’s perspective is crucial for developing economies, such as India, on the following grounds: First, fast-growing emerging economies that are experiencing a demographic transition are characterized by a large informal sector. For instance, the informal sector in India accounted for 82% of the workforce in 2011–2012 (ILO, 2016). Second, the developmental consequences of informality are considerable, given the characteristics of those engaged in informal work. Workers with employment in the informal sector or informal employment are typically less educated, and most belong to socially and economically disadvantaged communities. More often than not, these jobs are characterised by exclusion from benefits of social security and fail to have decent work conditions. Without binding legal contracts, workers are vulnerable to spells of unemployment and poverty (Standing 1999; Huitfeldt and Jütting 2009; Breman 1996). Third, the phenomenon of ‘jobless growth’ (World Bank 2018; Thomas 2014; Mehrotra et al. 2015; Himanshu 2011; Kannan and Raveendran 2009) in the formal sector, particularly the formal manufacturing sector, makes understanding of informal employment critical. Furthermore, despite rapid economic growth, most of the jobs being created are informal in nature. This study contributes to an improved understanding of determinants of participation in informal work in developing and emerging economies such as India. Since the informal sector is defined on the basis of enterprise characteristics while informal employment takes into account workers’ characteristics, the trend of growing informality can be examined from two perspectives: either an increase in employment in informal enterprises or an increase in workers having informal employment. Indeed, workers in the informal sector are less likely to receive social security benefits, while those in the formal sector may also be bereft of social security benefits. In this context, this study brings out a lesser-known facet of labour market dynamics in the developing world, i.e., formal sector growth can coexist with growth of informal employment. Despite economic growth, growing informality is a major policy concern, and identifying strategies to target the informal sector or informal employment is crucial. Therefore, understanding the determinants of informality has potential policy implications, particularly in identifying vulnerable groups in the labour market and examining the effectiveness of skills and training initiatives.