Trade and Employment From Myths to Facts - International Labour ...

Chapter 4: Trade and the informal economy
workers in the EPZ. The formal sector outside the EPZ remained largely unaffected.
The wages in the EPZ, though lower than in the formal sector, were higher than in
the informal sector. Again using a field study in 2005, Marjit and Maiti (2005) investigated
in the state of West Bengal, India, how the Government’s trade-opening
policies affected the informal economy. The survey found that, with the growth of
dedicated export sectors, the production units in the informal economy became tied
to formal units through various types of agent. The informal economy existed and
even expanded; but it expanded as a web of relationships with the formal units,
rather than as independent units, and consequently exhibited trends such as adoption
of technology and even growth.
In a case study conducted by Singh and Sapra (2007) in the industrial clusters
of Tiruppur (southern India) and Delhi, garment factories that were linked to the
global value chain were found to operate in clusters, and were considered informal
since they hired casual, temporary and daily-wage labour. The lower castes formed
the bulk of such informal labour in Tiruppur, but migrant workers formed most
of the labour force in Delhi. Labour had no bargaining power and, over the years,
the entire hiring and firing process seemed to have been taken over by the labour
contractor. What was important was that even within the informal economy there
seemed to be a division between “factory” and “home-based” work, in which the
latter was a further subcontracted form of the former. There was also a hierarchical
division of work, with the better-paid and skilled jobs going to males and the lowerpaid
jobs going to women, reflecting that informal work was at the lower end of
the production value chain and women within the informal economy were at the
bottom of this chain.
4.4.2 Empirical quantitative studies
Similar to some qualitative case studies, several empirical studies on the informal
sector shed light on the structure of the informal economy and its link to the
formal economy. Agenor and Aizenman (1994) employ an econometric model
using data from both the formal and the informal economies to show that the
efforts of workers to find formal employment depend on the wage differentials between
the formal and the informal sectors. Bauch (1991) uses econometric models
using firm-level data across the economy to examine the relationship between firm
size, employment and minimum wages, and observes that the insistence on minimum
wages creates the formal-informal duality. Fortin et al. (1997) use an
econometric model including firm-level data to observe formal and informal firms
in the same productive sector of the economy, and find that market segmentation
takes place due to scale of the operation, the evasion of taxes and the wages paid
to workers. Following liberalization, trading countries want to become more competitive,
reducing the wages of workers and cutting down on overheads associated
with the regulations of the formal sector. This desire to minimize the costs of
labour, and other costs of compliance such as fees and taxes, informalizes both
firms and employment.
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