Informal Economy

Introduction

by Paul  J. Dejillas

The informal sector provides jobs and incomes to the poorest of the poor. In many cities of the world, those operating in the informal sector constitute a greater portion of the labor force and their number is increasing steadily over the years. This is especially true in the Philippines, where recent estimates place this sector to constitute 80 percent of the country’s entire labor force.

But since their activities are not officially registered with the government, they operate underground and become continually the objects of harassment, intimidation, with some even arrested and incarcerated for illegal occupancy and illegal operation. In the Philippines, small businesses in the informal sector are highly vulnerable to hazards and risks. They situate themselves mostly in prohibited areas and in busy commercial centers, where pedestrian and vehicular movements are heaviest, thus, they become easily victims to apprehension by law enforcement agencies. This is compounded by the fact that they possess no permit or license to operate and engage their trade and commerce.

There is a need to correct this situation. As provider of jobs and incomes, the informal sector in fact helps the government solve the country’s growing problems of high unemployment, low income, and widespread poverty.

Statement of the Problem

This study seeks to examine and assess the present conditions of the informal sector in the country. It responds to the following questions:

When did the informal sector emerge? Who compose the sector? How big is it? What are its activities? Where do they converge?

What explains the behavior of informal-sector participants? Why did the IS emerge? What factors explains its emergence and growth? What attracts individuals to enter, remain, or leave informal-sector activities?

What are the country’s policies, laws and legislations that seek to address the welfare of those in the IS? Are there mechanisms designed to allow IS participation on issues that directly affect them? What are the IS’s available sources of capital? What institutions are extending financial assistance to the IS? Are the IS participants availing of these credit facilities?

How can informal-sector operations in the country be transformed?

In trying to explore explanations to these questions, this study assumes that the decision of the individuals to enter, remain, or leave the informal sector is influenced by factors that are external to them, e.g. level of unemployment, job opportunities, wage rates, prices and inflation, availability of credit, government assistance, etc. 

But while these external factors affect the individuals’ decision, the nature and direction of their influence is also assumed to vary depending on factors that are internal to them, e.g. sex, age, age, education, income, household size, number of income earners in the family, hours of work, place of work (whether urban or rural), type of job category, etc. 

Thus, in effect, individual decision is assumed to be essentially a product of the combined and interacting effects of factors or variables that are both exogenous and endogenous to the individual. 

Research Objectives

This is an impact assessment study of the informal sector designed to institute changes or transformations on the conditions, structures, policies, programs that directly affect the welfare of informal participants as well as the growth and development of the sector. In order to achieve this overall objective, this study has these specific research objectives in mind:

To examine the conditions obtaining in the informal sector;

To examine the implications of these conditions with respect to … (pastoral ministry, social work, sociology, or applied cosmic anthropology); and

To introduce policy measures designed to transform the country’s informal-sector activities as well as to strengthen social organizations and processes (or pastoral ministry, social work) in this sector, all this from the perspective of applied cosmic anthropology. 

Significance of the Study

The informal economy is growing and is not a short term but a permanent phenomenon (Chen). It is here to stay and, for many years to come, it will continue to serve as the provider of jobs and incomes to those who cannot enter the formal sector for reasons of lack of education, skills, training, and capital, among many others.

It is not just a traditional or residual phenomenon but a feature of modern capitalist development, associated with both growth and global integration (Chen). It is a by-product of firms constantly seeking to restructure production and lower costs and is, therefore, endogenous to or an integral part of the labor market (Pippidi, Ionita, and Mandruta 2000). It ought not to be treated as an adjunct operating in the periphery of society’s national economy. Its activities are not comprised of marginal activities distinct from or not related to the formal sector (Boeke 1953, Hart 1973, ILO 1972, Sethuraman 1976, and Tokman 1978). The two sectors---formal and informal---coexist and are also inextricably connected and interdependent (Moser 1978, Portes and Castells 1989, Portes 1985).

In exercising their roles, informal-sector activities may indeed create effects that are disadvantageous to society, e.g., tax avoidance, obstruction to traffic and pedestrians, and illegal occupancy. But they also generate enormous advantages not only to the family but, more importantly, to society in general in terms of providing job and income opportunities. And we all know that government is hardly able to effectively address the growing problems of unemployment and widespread poverty prevailing in society today.

Informal-sector activities can trigger negative or positive effects on society depending on the type of policies and actions the government imposes on them. If only because of this, it is important that in the overall planning towards economic development, policy advocates and decision makers at least know how informal-sector activities can be promoted to operate for the benefit of society. It is particularly important for the national leadership to know how the informal sector would behave and react to a given economic or political condition as well as why they espouse such a response.

Research Methods, Data, and Phases

This research study proceeds along four different but inter-related phases. The first phase involves the formulation of the research design and the construction of the research instruments that include the questionnaire and another guide for the focus-group discussions. This first phase defines the direction, focus, methodology, and expected outputs of the study.

The second phase explores the macro-economic profile of the informal sector. This phase of the research looks into the patterns and changes in the informal sector insofar as employment, wages, incomes, and hours of work are concerned. The second phase also involves a review of literature and studies made on the informal-sector economy in general. This review is conducted to help contextualize and draw out added information relevant to the objectives of this study.

The third phase is the interview part of the study, designed to examine the conditions of both urban and rural areas of the informal economy. This involves prospection trips and eventually the gathering of data through direct interviews with the participants of the informal sector using the questionnaire and the focus group discussion guide. FGDs are also conducted after the preliminary results have been analyzed.

The fourth and final phase of the study involves data analysis and formulation. Data gathered from the field are checked and entered into the computer, processed and analyzed using the SPSS statistical package software. For the quantifiable data, the study employs multiple techniques that include descriptive and correlational measures. For qualitative information, the data are analyzed utilizing the content and phenomenological methods.

The study first identifies the area where the study will be conducted. To get a comparative picture, two areas are selected to represent the urban and rural sectors of the country. Some cities are initially identified as possible targets: Cebu, Baguio, Cavite, and Marikina for the urban area and Bukidnon, Tagum in Davao del Norte, and Cotabato for the rural area. But it is not the purpose of the study to come up with a comprehensive listing of informal household enterprises in both rural and urban areas. A prospection trip is first made during the preparatory stage of the research to explore basic information about the profile of the informal sector in these places. Based on the initial information gathered, the final target cities will be selected based on the following concerns:

·         Presence of as many job categories of informal-sector workers. Informal-sector workers are generally classified into paid employees, unpaid family members, homeworkers, self-employed or own-account workers or as employers.

·         Number of products produced or traded. The more varied the products the area manufacture or trade, the more likely it will be chosen as the target area.

·         Facility in locating the target respondents;

·         Time spent in traveling from one respondent to the other.

The number of respondents to be interviewed for each of this job category has been so designed as to reflect the estimated distribution of informal workers in the area by job category. It was on this basis that the City of Marikina and the Calinan District of Davao del Sur have been finally chosen to reflect the conditions of the Philippine informal sector in the urban and rural communities respectively.

In the District of Calinan in Davao del Sur, many households are engaged in the sub-contracting of farm produce that are marketed abroad. In this area, the household members work as homeworkers, self-employed, employers, paid employees, or unpaid family members. They are engaged mainly exports and their main export products are also quite diversified: banana, cacao, pineapple, corn, cutflowers, papaya and rattan-based products. Likewise, Marikina City also boasts of several families, which operate their own informal enterprises or are employed in many household enterprises in the area, whose products are primarily designed for exports. The products of these export-oriented home enterprises include shell-based products, handicrafts and furniture, stuffed toys, shoes, garments, Christmas décor, paper-based products and give-away items.

In both urban and rural areas, the primary sampling unit is the household---also home-based or family-operated---enterprise where various categories of employment or classes of job may exist. Prior to the actual interview, a listing of these household enterprises was prepared and classified according to the kind of products produced, job category, and gender. It is from this listing that the final respondents are identified.

The ultimate sampling unit is the individual, who may be working as paid employee, unpaid family member, homeworker, self-employed or own-account worker or as employer. 

The respondents of the survey have also been predetermined using purposive sampling. A total of 240 individuals, or approximately 120 individuals each for the rural and urban areas, have been preset. Then, utilizing an allocation scheme, these individuals are selected with consideration to gender, area, employment category and the kind of products produced. This method has been chosen as the most appropriate since, during the initial prospection trips, it was found out that there are practically no official records and information available about the informal sector in the places identified in this study.

The researchers, then, make their own ocular survey of the area in order to locate these family-operated enterprises in the informal sector. These field surveys are able to provide basic information and knowledge about the size and magnitude of the various categories of workers in the informal sector. Most of the workers in the informal sector are mostly homeworkers, paid employees, and unpaid employees in that order. But the number of self-employed or own-account workers and employers are relatively few. During the prospection trips, many self-employed and employers, especially those in the urban area, are reluctant to come out to the open and be interviewed for fear of possible government actions.

After careful investigation and discussions with the local government officials, a proportional allocation scheme has been designed to determine the actual number of respondents by job category to be interviewed. This is given in Table 1-1 below. To ensure gender balance, a 50:50 ratio (plus or minus 5 percentage points) have been adopted as the guiding formula. Initially, the intention is to interview the main owner or operator, the spouse and at least one child who work in the family enterprise in order to ensure gender balance. In the initial trips, however, this method is found to be largely inappropriate and unsuitable to the culture and conditions of the selected areas. In many household enterprises, especially those operated by women, the spouse usually works elsewhere and does not have any time at all to assist in the operation of the family business. The children too are in school and have only time to do their school assignment when they are at home. It would have taken us more time to locate those household enterprises that meet the initial criteria of the study.

Secondly, in instances where we have identified and located the ideal household enterprise, the main operators are not too willing to let their spouse and child be interviewed since, according to them, they are the ones who know best about the business operation. Spouses and children are also reluctant to be interviewed since they are not ready to defy the wishes of whoever is the one running the family business. Some employers of family-owned enterprises have refused the idea of interviewing their employees during work hours. In instances like this, paid employees are interviewed after work hours outside the premises of their workplace or in their respective residences.

Table 1-1. Sampling Allocation scheme for the determination of the target respondents in both urban and rural areas

Prior to the actual data gathering, prospection trips have been made in order to identify and ensure that the selected area and household enterprises are engaged in export activities and that they fall within the informal-sector category as defined in this study. Through these trips, the researchers are able to identify most, if not all, of those family-operated enterprises that are export-oriented and also to identify the field interviewers for the actual survey. Priority has been given to the selection of local interviewers who speak the dialect and are familiar with the culture and inhabitants of the place.

The questionnaire has been pre-tested during these trips to a select group of respondents to determine the duration of the interview as well as the clarity, relevance, and accuracy of the questions in drawing out the views and insights of the participants. Because of this, the presentation, format, and style of the questionnaire are revised to suit the language and culture of the respondents. The final form and content of the questionnaire is attached as Appendix 1 of this study. In the actual data gathering, selected local interviewers are trained and sent to the field to conduct the actual interviews under the guidance of a field supervisor. Rigorous field-quality controls have been installed to ensure a high quality of data gathered from the interviews.

·         At least 10 percent of the total output of each field interviewer is directly supervised by a Field Supervisor.

·         The field interviewer being observed is evaluated right after the conduct of the interview.

·         The Field Supervisor only allows the interviewer to do interviews alone when he/she observes that the rules and techniques of field interviewing which are taught during the training are followed strictly.

·         In addition to the Field Supervisors, Field Coordinators are assigned to collate and edit filled-up questionnaires of the interviewers.

·         Errors detected, like inconsistencies, incomplete answers, vague answers, etc. are immediately brought to the attention of the field interviewers concerned who are then instructed to go back to the field and correct such errors, or otherwise, a replacement will be made.

·         About 20 percent of the total unobserved interviews of each interviewer are spot-checked or back-checked.

Finally, all the information gathered from all these controls and measures are further analyzed by the researcher to ensure high quality of data gathered from the field.

To gain deeper insights on the conditions of workers in the informal sector, focus group discussions (FGDs) are conducted for the homeworkers, self-employed and the employers. A total of 20 of this group of respondents, or 10 each for the rural and urban areas, have been pre-selected---taking into consideration equitable gender representation---and gathered together for the FGD. Specific issues are tackled in these discussions especially the reasons and explanations behind the changes in the conditions of the respondents with respect to employment, wages and incomes, benefits, hours of work as well as job contracting, access to credit and financing and marketing.

As earlier indicated, the relevant variables of the study consist of both exogenous and endogenous variables. The exogenous variables that are finally included in the study are unemployment levels, job opportunities, wage rates, prices and inflation, availability of credit, and government assistance. On the other hand, the endogenous or internal variables identified in this study are sex, age, age, education, income, household size, number of income earners in the family, hours of work, place of work (whether urban or rural), and type of job category.

All the data gathered from the questionnaires are then subjected to a series of statistical measures that include frequency and percentage distribution and measures of central tendency. This measure is applied to determine the average pattern and behavior of the respondents on a particular behavior. On this basis, comparison by age, sex, education, income, job category, urban-rural disaggregation, etc. becomes possible. Correlation measures (chi-square and multiple linear regressions) are also applied to determine the relationship between the influencing variables (both endogenous and exogenous) and the independent variable.

Definitions of Terms

There are five known employment categories that exist in the informal sector. These are the homeworkers, self-employed or own-account workers, employers, employees and unpaid family workers. All these are target respondents of this study and it is important to know the exact meanings and nuances of each of these categories, as these are used here.

A "homeworker" is a person who works at, or near his/her home in the production of goods for a fixed agreement with an employer or contractor. Normally, it is outside employer or contractor who sets the specification of the product and who supplies the raw materials. In return, the homeworker receives his/her wage, which is usually set on a piece-rate basis. The homeworker cannot sell his/her finished products to anybody except to his/her employer or contractor. In fact, there is no selling involved at all in the transaction between his/her employer/contractor and the homeworker, since the latter merely turns over all the finished products to the contractor, the volume of which is also predetermined as part of the work contract.

A "self-employed" or "own-account" worker is different. He/she does not have any employer or contractor. He/she operates the business on his/her own. He/she secures his/her own capital, supplies his/her own raw materials, designs his/her products, sets their price, and can sell these products to anybody in the market. He/she does not hire any paid employees. If he/she needs workers, he/she merely requests his/her family members to assist in the business operation, and usually only on an occasional basis. The "self-employed" or "own-account” worker is not supervised by anybody in the performance of his/her business. He/she undertakes his/her business by taking all the risks involved, including losses, when there is no demand in the market. But like the homeworker, the "self-employed" or "own-account" worker may also work at, or near his/her home on the production of goods.

On the other hand, an "employer" operates much like that of a "self-employed" or "own-account" worker except that he/she employs one or more paid employees. Normally, the "employer" contracts paid workers on a continuous basis. By the very nature of his/her occupation, the "employer" is the one who "gives out home work in pursuance of his/her business activity."

Meanwhile, the term "employee," also referred to as paid employee, is understood here to mean a person working in an informal enterprise, who offers his/her labor and services for pay. He/she is usually employed on a continuous basis. By the very nature of his/her work, he/she has an employer who supervises him/her in the performance of his/her daily tasks.

Finally, an "unpaid family worker" refers to a person who works without pay on a farm or business, operated by a member of his/her family or another member living in the same household. Normally, he/she works merely on an occasional basis, e.g. in the case of the children, during school breaks, weekends, etc., or in the case of family members who are working outside, during weekends or after their work or office hours.

Organization of the Study

The presentation of this study is organized as follows:

Chapter 1 – Introduction and presents the rationale, statement of the problem, research objectives as well as the research methods used in the study.

Chapter 2 – Theoretical Considerations and discusses about the theories explaining its emergence and proliferation of the informal sector as well as the factors that attract or discourage individuals to engage in informal-sector activities.

Chapter 3 – Philippine Conditions and the Informal Sector and presents the country’s economic conditions as well as the emergence, composition, size and activities of informal sector.

Chapter 4 – The Philippine Policy on Informal Sector Operation and investigates the country’s policies, laws and legislations that seek to address the welfare of those in the IS, the mechanisms designed to allow IS participation on issues that directly affect them.

Chapter 5 – Philippine Credit Facilities and the Informal Sector and examines the various credit facilities and assistance available for the informal sector and the extent to which informal-sector participants are availing of these services.

Chapter 6 – Factors Influencing the Behavior of Informal-Sector Participants and presents the regression results of the factors influencing the respondents’ decision to enter, remain, or leave the informal sector. It examines, in particular, the relationship of the independent variables to the dependent variable.

Chapter 7 – Summary of Findings, Conclusions, and Recommendations, where, based on the findings of the study, conclusions are draws out with the view of proposing policy measures designed to transform the informal-sector economy.