Issues in the Labour Market

The Informal Sector: Considering Productivity

Accounting for Low Productivity in the Informal Sector

At six o’clock in the morning Mariam, now 18 years old, wakes up and gets ready for the day. She works at a garments factory just outside Dhaka city. As she brushes her hair, she remembers her work as a maid. She was just a child. She cooked, cleaned and took care of the kids when their parents weren’t around. Maryam has bad memories of those times. She always felt the family were unhappy with her work. But she didn’t know why. Sometimes they were happy and would give her gifts of clothes and sometimes money.  When she they were unhappy…well, those really were painful memories.

That’s all behind her now. But work in the factory isn’t easy, either.

Mariam started working in the sewing section just a few months ago. She gets paid by the hour and is just one of hundreds in the same situation. But other workers seem to have different conditions. The factory pays them at the end of the month into their bank accounts. Maryam is not sure what a bank account is.

What does this all mean, thinks Maryam.

Mariam enters the factory gate alongside other workers. Her face shows no sign of interest or excitement about going to work. As she looks around while climbing the stairs, she sees women of different ages around her. Mariam sits at her bench; a sewing machine in front of her. She talks to no one and starts work.

Sometimes Maryam gets lost in the middle of her work. She’s lost in her memories. She never finishes her work on time. Her co-workers shout at her for holding up the line. She hurries, she stabs herself with a needle. Not again! Always accidents, Maryam thinks

While she works she listens to the other workers. They talk about their wages, their holidays, and their overtime. They complain that the better jobs are all for men. All their supervisors are men. And they don’t have to come to work as early as the women workers. This seems unfair. But it doesn’t seem to bother Mariam. She’s been getting up early since she was a child. Just then, she sees Fatema coming to her bench. Fatema comes and stands right in front of Mariam.

Fatema is a 29-year-old woman with an expression that is both stern and gentle at the same time. Fatema has worked in the factory for five years. She graduated high school before getting married. She has a special role in the factory. Fatema provides training to the younger and newer women workers at the factory after working hours. The training usually lasts for an hour. It’s a new idea for the factory. They want to promote women as supervisors or to give them other permanent positions in the factory. Fatema tells everybody to come to the training room after work.

Domestic Worker to Industrial Employee

In last month’s post, we wrote about Mariam. When Mariam was 11 years old she was a maid. Now, seven years, later we find her employed at an entry level position in a garments factory.

Mariam is a fictional character but her story is real. She represents both men and women casually employed in factories.

The Informal Sector

What is informal sector industrial employment?

Workers are considered to have informal jobs if, both in law and in practice, they are not covered by national labour legislation, income tax, social security or employment benefits such as paid annual leave or sick leave.

According to International Labour Organization, the informal economy comprises workers in the informal sector and informally employed workers in formally established enterprises. A person can be employed informally in a formally registered business or regulated economic sectors. A formally employed worker in the formal sector has written employment contracts and their employment is subject to labour legislation, social security provisions, and collective bargaining agreements. But for those employed informally in the formal sector, no legislation or regulations are applicable. Workers are considered to have informal jobs if, both in law and in practice, they are not covered by national labour legislation, income tax, social security or employment benefits such as paid annual leave or sick leave.


What do we understand by productivity?

Productivity means different things to different people. Different disciplines explain productivity from different perspectives. Economists, business owners, human resource professionals, and workers all have a view on productivity.

The Economist

Economists define labor productivity as output per hour worked. It measures how efficiently the economy makes use of the available labour resources. Increased productivity boosts output that in turn increases the national output or gross domestic product.

According to the ADB, the informal sector creates 89 percent of jobs in the Bangladesh economy but contributes only 43 percent to gross domestic product.  This suggests that much of the working population is concentrated in low productivity jobs.

The Business Owner

Productivity is defined as the total output per input unit. Increased productivity is important to an employer. An employer wants to maximize profit through increased productivity. Higher productivity will result in more real income for an organization. Businesses can then meet the requirements of customers, suppliers, workers, shareholders, and government regulations while remaining competitive.

The Human Resource Manager

A human resource department sees productivity in terms of the effective recruitment and placement of workers in positions where they work quickly, efficiently and accurately. Skills, motivation, time management, work environment, remuneration and support from other workers are all factors in productivity to the human resource manager.

The Worker

We can imagine that productivity, from a worker’s perspective, means conforming to the expectations of her employer. That might mean working quicker, longer, taking less breaks or making less mistakes. In some employment arrangements, a worker understands that productivity is related to reward. Working quicker, longer, or with fewer mistakes might lead to bonuses, opportunities for promotion or recognition.

Mariam’s View

Mariam sits at her bench and looks around the room. She sees hundreds of women working sometimes without a break. Some of her co-workers seem hungry and exhausted. The supervisor comes once in a while to check on everybody. He tells them to work faster. He tells them an order is due soon. Everybody needs to work hard to meet the deadline. They might have to work extra hours.

When the supervisor leaves, Mariam’s co-workers complain about the longer working hours. They didn’t know the order was due. Someone whispers to Mariam: she has left her new-born with her mother-in law and her baby must be hungry. She is sad but keeps working. Next to her someone grumbles: she wanted to go the hospital to see her sick aunt. Across the bench another worker looks feverish; she’s sick. She should just go home, thinks Mariam.

As she works Mariam looks around the room. Why are we all here, she asks herself?  Why do we have to work so hard? What stops us going home and taking care of our families? Why should we even listen to the supervisor? She tries to work harder but doesn’t know why.

Productivity in the Informal Sector

What accounts for low productivity of the informal sector?

Measures of Productivity

Typically, the demography of a developing country means a large number of young people enter the workforce every year. Poor educational opportunities result in many unskilled job-seekers.

Whether productivity is low or high in a sector can be determined by the efficiency of workers, the technology used, the time-frame of output delivery and the quality of the output. According to ADB’s the informal sector accounted for more than 40% of the total gross value added of Bangladesh in 2010. However, labour productivity in the formal sector is six times higher than in the informal sector.

There are many reasons why productivity can be significantly lower in the informal sector. These reasons are related to the structure of the economy, to the labour market and educational policies, to business conditions, to the management of people in informal enterprises, and to the psychological characteristics of informal employees.

The Structure of the Labour Market

Typically, the demography of a developing country means a large number of young people enter the workforce every year. Poor educational opportunities result in many unskilled job-seekers. In a developing economy, unskilled workers find themselves in informal work. The informal economy is geared to lower wages and social costs and the flexibility to recruit and release workers without recourse to employment regulation. Bangladesh remains a country with a significant rural and agrarian economy. Informal employment in the urban areas is around 76% but in the rural areas it is around 92% according to the ADB.

Educational Opportunities and Quality of Education

Workers with lower levels of education gravitate to the informal sector. The informal sector often involves physical and unskilled labour.  We know that routine physical work does not need educational qualifications. But even physical and so-called unskilled work is associated with a social understanding of employment. Timeliness, following instructions, and cooperating with other workers are all essential elements of work both physical and intellectual. These cognitive and social qualities are usually developed through education. Without these fundamental qualities, most individuals cannot be as effective in work as those that have benefitted from a complete education. We can assume that education and productivity are inextricably linked for all workers; not just the skilled and professional classes.

Her early experiences have harmed her self-esteem and self-confidence. She has missed out on even a rudimentary education and never developed the cognitive and social skills that are integral to all work.

The informal sector is not entirely made up of unskilled workers. The employment arena is diverse. Many farmers are highly skilled and knowledgeable. Traditional artisans with skills passed on through the generations work for themselves or in small informal enterprises. More commonly there are industrial workers employed in formal businesses on an informal basis. Most of them enter these businesses without prior skills training. In addition, a poor education probably results in a lower capacity to carry out simple tasks and impedes the learning of new skills. Consequently, poorly educated workers often take longer than expected to understand the work required particularly tasks involving the operation of machinery. Businesses are less likely to invest in training for informal or casual employees. All these factors potentially have a negative impact on productivity.

The Work Environment and Human Resource Management for Casual Employees

Long working hours, lack of social security, unsafe working conditions, unskilled workers, unpredictable terminations, lack of regulatory oversight and labour protection all contribute to lowvproductivity among informally or casually employed workers.

Many garments factories employ men in supervisory positions while women are hired at a basic production level. From a social or family point of view, women are considered to be secondary wage earners. Their earnings supplement the income of male family members. Social norms around child rearing suggest that women may exchange the security afforded by formal work for the flexibility of informal employment.  In social terms this is an inequitable choice leaving women with lower wages, less protection and – in fact – fewer choices. This gender disparity is possibly a cause of lower productivity amongst women workers.

In informal employment, low and irregular wages, and unspecified work hours combined with poor supervision and direction can have an impact on motivation. Demotivated employees are less productive. Long working hours can lead to fatigue and lower levels of concentration. When overtime is not adequately or clearly compensated workers will not be motivated and their effort on tasks will decline.

Early Experiences of Work and the Impact on Work Behaviour

As we trace our fictional heroine, Mariam, through her career we are trying to understand the psychology of work for women and men like Mariam.  By following Mariam’s trajectory, we can see that several factors might impact her capacity to work effectively or be productive. Her early experiences have harmed her self-esteem and self-confidence. She has missed out on even a rudimentary education and never developed the cognitive and social skills that are integral to all work. The informal sector has different rules; the wider social contract between employer and employee is not evident. The lack of professional management in informal work means that workers may not be sufficiently directed or motivated possibly resulting in lower productivity.

Low Self-Esteem

Children who become involved in work at an early age have no opportunity to develop their natural psycho-social health. One study says that about 40 percent of child workers are affected by abnormal psychological growth. Lower levels of adaptive skill, poor health, depression, loss of confidence, low self-esteem, unwanted social behavior, anxiety, and guilt, are some of the psychological impacts. Their low self-esteem can make them feel that they do not deserve the attention of supervisors or peers, and this generates anxiety that may impact an individual’s productivity at work. In addition, abuse and confinement not only are not just physical hazards for child workers but they can also have devastating and lifelong psychological effects.

Missed Education

A fundamental purpose of education is to prepare children for adult life. Employment is an integral part of life for most women and men. Basic mathematical and language skills are critical to work and life in general. But at school we learn to pay attention, develop concentration, follow instructions and understand how activities are sequenced to achieve larger tasks. We learn the concept of time and how it  is applied to our world. We learn to interact and cooperate with other people. These are all critical to being a functional and productive employee in most work situations. If we miss out on schooling, we are ill prepared for work.

Poorly Prepared for the World of Work

Workers with childhood work experience struggle to adapt to the work environment. They may pay less attention or show little enthusiasm for work. We all take for granted the unwritten rules of employment. Simply speaking work is a transaction between the employer and the employee. This exchange is guided by both social norms and formal agreements.

Workers have specific expectations, entitlements and benefits from their employment. These are formalized in legislation, collective bargaining agreements, pay schemes, equal opportunity regulations, and social security arrangements. Most organizations pay special attentions to how their workforce is organized and remunerated. In large organizations, these arrangements can be complex.

An employee emerging from childhood and informal work may never have understood the social norms of work let alone the complexities of formal employment. Without an understanding of the relationship between work and reward, or between obligations and entitlements, many workers will miss out on opportunities and also present supervisory challenges for managers.

Conclusion and Preview

What can be done about low productivity in the informal sector?

In the next post – the third and final on the informal sector – we discuss what could be done to improve the productivity of workers in the informal sector. We look at this from the point of view of individual workers; the perspective of the human resource professional. This analysis is part of the broader economic discussion and the domestic business environment. But these are the realms of policy makers We are more interested in the immediate practical actions individual businesses can take to better integrate lower skilled workers – with a history of informal employment –  into complex industries under formal employment arrangements.

Phillip Choudhury and Mandy Mukhuti

Dhaka, 2017