Profile

Profile of the Informal Sector

Paul J. Dejillas

2006

The informal sector is the most visible sector in many countries of so-called developing nations. Here in Asia, this sector is very active and vibrant in Thailand, Hongkong, Malaysia, India, Vietnam, and here in the Philippines. Yet, compared with the formal sector, its nature, composition, and behavior is relatively the least known, since its activities are not officially recorded, much less reported in government statistical reports. This could explain why this sector is sometimes called the underground, hidden, shadow, or submerged economy.

Definitions and Features

Meanings

                There is as yet no uniform and common definition of the term “informal sector.” In fact, the term goes by so many names, e.g., underground, shadow, parallel, black market, hidden, submerged, etc. (J. Jerkins, 1988). The reference to the informal sector as comprising of economic activities that are not officially registered or untaxed is still the popular view today. For example, Hernando de Soto (1989), known as the father of informal economics, highlights the dimension of illegitimacy, when he defines "informality as referring to individuals or enterprises operating totally or partially outside the legal system."

                The ILO also speaks of this illegitimacy when it defines informal sector as "a group of production units, which … form part of the household sector as household enterprises or, equivalently, unincorporated enterprises owned by households …"

                Who are those in the informal sector? Studies show that they are the small-time income earners, operating varying types of work. In the Philippine context, they can be seen in agriculture, e.g., the small farmers, municipal and coastal fishermen, forest dwellers, and livestock raisers (Endaya et al. 1994,: 16-17). They are also in the industry sector and work as small entrepreneurs, small miners, and construction workers. In the services sector, they are the drivers, ambulant vendors, variety-store owners, barter traders, domestic helpers, squatters, wholesalers and retailers, and the informal credit store operators. But they are also found in the open market as dollar blackmarket dealers, foreign currency salters, technical smugglers, illegal recruiters, and the Overseas Contract Workers who remit their earnings outside the banking system (ibid.)

                Workers in the informal sector are generally categorized into homeworkers, employers, self-employed or own-account workers, paid employees, and unpaid family workers. 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 the outside employer or contractor who sets the specification of the product and who supplies the raw materials. The homeworker receives his/her wage, which is usually set on a piece-rate basis. He/she cannot sell his/her finished products to anybody except to his/her employer or contractor. 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.

                Meanwhile, the self-employed, also called own-account worker, does not have any employer or contractor; is not supervised by anybody in the performance of his/her business. He/she operates the business on his/her own. In addition, 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. He/she undertakes his/her business by taking all the risks involved, including losses, when there is no demand in the market. He/she may also work at, or near his/her home in the production of goods.

                On the other hand, an employer employs one or more paid employees. Normally, the "employer" contracts paid workers on a continuous basis. He/she gives out home work in pursuance of his/her business activity.

                The 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 is usually employed on a continuous basis and has an employer who supervises him/her in the performance of his/her daily tasks.

                Finally, the 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. He normally works 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.

                Why do individuals go to the informal sector? Existing studies offer several reasons explaining why families and individuals flock to informal activities. The main reason is its relative ease of entry. It is practically open to anybody, requiring very little or no skill at all and very little or no capital at all (Richardson, 1984). Other reasons include the existing structure of taxation, economic controls, sharp increases in government-sector spending, general deterioration in moral standards, inflation and weak deterrence against tax evasion (NIPFP, 1982; Yoingco and Guevara, 1991).

Profile of the Philippine Informal Sector

Until today, one still finds great difficulty in obtaining accurate information about the informal sector. The statistics given by the Department of Labor and Employment (DOLE) are not disaggregated according to formality and informality of the labor market. In fact, there is no clear operational definition yet of what the informal sector is and who compose it. But the DOLE data speak of specific classes or categories of workers that in the context of this study partly compose the workers in the informal sector.

These workers include the self-employed, employers, paid employees and unpaid employees. In its 1997 Yearbook of Labor Statistics (1998), the statistics for the self-employed and employers are lumped up under the “own-account workers” category. Again, the definitions of these terms do not distinguish at all whether these classes of workers work in the formal or informal sector, or whether the enterprises owned by these workers are officially registered or not. Meanwhile, paid employees are subsumed under the “wage and salary workers” category. The labor department defines wage and salary workers in very general terms to include those paid employees working for private household, private establishments, and family-operated activities as well as those working for government and government corporations.

The above information do not speak yet of homeworkers, as we understand the term in this study. But the National Statistics Office (NSO) has information about homeworkers in the Philippines. It distinguishes two types, namely, subcontractees or “those who accept orders from an agent, investor or small or big businessman” and the self-employed or own-account workers “who work on their own initiatives and own capital.”  But its data do not also say explicitly whether the household enterprises operated by the homeworkers are officially registered or not. In 1993, it estimates a total of 6.3 million homeworkers in the country, 60.3 percent of which are in the rural areas. At this level, homeworkers alone comprise already approximately 25.0 percent of the total working force during this period. But homeworkers, though they include the self-employed or own-account workers, comprise only part of the employment in the informal sector, thus, the figures cannot be relied upon to approximate the size of the informal sector.

The statistics of the DOLE, although also restrictive, can be used as a proxy for approximating the size of the Philippine informal sector, since it includes other employment categories that are not covered in the NSO definition of homeworkers. But we have to contend with other limitations of the DOLE figures. The disaggregation of the data on the various employment categories is not consistently presented according to sex, area and job category over the years. Hence, there is practically no sex-disaggregated time-series data yet that continuously present information about the informal sector’s conditions like employment, wages and incomes, hours of work and benefits received over the past 20 years. It is possible though to gather these data for one specific period, like 1997, which is the latest.

The picture becomes starker when one considers only those informal workers in the export-oriented industry. There are no officially-organized data at all about workers in the informal sector who are engaged in export-oriented activities. In spite of all these limitations, however, the statistics culled by the DOLE can still provide us a fairly good picture of the magnitude and conditions of the informal sector economy. Based on government figures, for the last 20 years, the informal sector constitutes more than 50 percent of the total employed persons in the country (Table 3-1). The number of workers in the informal sector continues to decrease from 1980 to 1997, but shows signs of picking up from 1998 to 1999. It is still very early to tell, however, whether or not this perceptible increase in 1999 is due to the effects of the financial crisis in 1997.

Table 3-1. Employed persons by class of worker  (in thousands except percent)

This estimate could be understated since it does not include the “paid-employees” and “homeworkers” categories. The estimates given by Dr. Gatchalian (1993) of the University of the Philippines places the population of the informal sector at 80.0 percent of the total working force, which if translated to today’s figures of the employed labor force could run to more than 20 million workers. In spite of the understatement, the figures have their utility. The increasing trend from 1998 to 1999 makes great sense. It is said that the financial crisis in 1997 has forced many formal enterprises to either close down or retrench many of their working force in 1998.

Over the past ten years, employment in the informal sector is prevalent in agriculture, constituting close to 80.0 percent of the total employed persons and appears to be increasing slightly over the years (Table 3-2). In the non-agricultural sector, workers in the informal sector constitute around one-third, or 33.0 percent, of the total but its number is registering a perceptible decrease over time, or from 34.3 percent in 1989 to 32.7 percent in 1997. Latest available figures (1997) indicate that workers in the informal sector dominate in the rural areas, comprising 64.2 percent of the total employed force, as compared with only 36.1 percent in the urban sector.

Table 3-2.  Employed persons in the informal sector by sector (in thousands except percent)

The DOLE presents a distribution of household population 15 years old and over by class of worker. While the data are not classified according to formality and informality, these provide us added picture about the distribution of workers by job category in the informal sector. Workers in the informal sector---those not working in private enterprises or households and government---comprise approximately one-half, or 49.73 percent, of the total working household population 15 years and above (Table 3-3). Most of these workers are self-employed, constituting around one-third, or 29.86 percent, of the total household population 15 years and above. Again, the data do not distinguish whether these self-employed workers officially register their businesses or not with the government.

Table 3-3.   Distribution of household population 15 years and over who worked at anytime in the past year by class of workers, Philippines: 1995

It is possible to look into the pattern of distribution of the employed labor force in the informal sector by class of worker (Table 3-4). Again, using available data as proxy, in 1997 the informal sector comprises 51.8 percent, or 14,252,000 of the total employed persons. Most of these employed persons in the informal sector (9,708 or 64.2 percent) are in the rural area. The majority of those in the informal sector work as self-employed (65.6 percent). Although the information do not give any specific data for the paid employees, it gives a good indication of the size of the workers in the informal sector by employment category.

Table 3-4.  Employed persons by class of worker and area: 1997 (in thousands)

The picture could not be complete by simply ignoring the gender distribution of the informal sector workers. Since, as stated earlier, there are no available records categorizing the informal sector according to gender, the national figures are again used as a proxy to reflect the gender pattern in the informal sector. For the last 20 years, women comprise more than one-third of the total employed persons. Their proportion in the workforce appears to be slightly increasing over the years, from 34.5 percent in 1980 to 37.4 percent in 1999 (Table 3-5). Also, over the years, the proportion of unemployed women is consistently higher.

Table 3-5.  Employed and unemployed persons by sex and year: 1980 - July 1999

                   (in thousands except percent)

Area-wise, the majority of the men are employed in the rural area (Table 3-6). In 1997, the majority of the women (50.4 percent) work in the rural area, but since then its proportion continues to decrease slightly so that by 1999, the majority of the women workers (50.8 percent) are already in the urban area. Men, on the other hand, continue to dominate in the rural area from 1997 to 1999.

Table 3-6.  Employed and unemployed persons by sex area and year: 1980 - July 1999

                   (in thousands except percent)

On the average, women workers spend relatively longer time looking for work than men (Table 3-7). Women spend an average of eight weeks before they could finally land a job. This is higher than the national average of seven weeks and likewise higher than the average number of weeks men spend looking for work, which is also seven weeks. The working exposure of both men and women also show some variations.  The proportion of women working part time is higher than that of men. But the proportion of men working part time appears to be increasing from 1997 to 1999, while that of the women remains practically the same (Table 3-8). Of those working full time, the proportion of men is much higher than that of women. The proportion of men who are full timers show some signs of decreasing over the three-year period, the biggest decrease of which is from 68.2 percent in 1997 to 65.2 percent in 1998, the period when the Asian financial crisis was felt in the country. The proportion of women who are full timers, however, remain the same over the three-year period.

Table 3-7.  Employed persons looking for work by number of weeks looking for work and by sex: 1997  (in thousands except percent)

Table 3-8. Employed labor force by sex, Philippines: 1997-October 1999 (n thousands except rates)

In terms of education, the majority of the employed labor force (40.6 percent in 1997) have reached elementary level. But the proportion is decreasing slightly over time (Table 3-9). The same trend can be observed for those who have not entered formal schooling at all. The proportion decreased from 3.2 percent in 1997 to 2.9 percent in 1999. On the other hand, the proportion of those who have reached high school and college levels are slightly increasing over the three-year period.

Table 3-9.  Employed persons by highest grade completed: 1997 - July 1999 (in thousands except percent)

In terms of age, majority of the employed labor force, or 74.2 percent of the total number of employment, are below 35 years old (Table 3-10). Gender-wise, the proportion of women workers who are below 35 years old is 76.6 percent, higher than the national average of 74.2 percent, and also that of men which is 72.6 percent.

Table 3-10.  Employed persons by age and sex: 1997  (in thousands except percent)

Income-wise, workers in the urban area receive family and per capita income levels that are much higher than those in the rural area (Table 3-11). In terms of region, poverty incidence in 1999 is highest in Southern Mindanao (37.9) and lowest in the National Capital Region (7.1), as can be seen in Table 3-12. Poverty incidence is defined by the labor department as the proportion of families whose income falls below the poverty threshold, or the amount required to satisfy the basic food and non-food requirements.

Table 3-11.  Average family and per capita income by area and year (in pesos)

Table 3-11.  Average family and per capita income by area and year (in pesos)

Finally, the number of hours worked by employment category is shown in Table 3-13. Except for the unpaid family workers, women in the informal sector work longer than men.

Table 3-12.  Poverty incidence by region and year (in percent)

Table 3-13.  Average weekly hours worked of employed persons at work by class of worker and sex, Philippines: 1997