Employment in Bangladesh: How to Tackle the Informal Sector Conundrum

LightCastle Analytics Wing
October 29, 2020
Employment in Bangladesh: How to Tackle the Informal Sector Conundrum

It is undeniable that Bangladesh holds tremendous potential in leveraging future economic development through its workforce.The country’s Labor Force is 71 Million Strong as of 2020. Of that number, 30.63% is women.[1] While this statistic may at first seem to paint a rosy picture, there are a number of issues with employment in Bangladesh that need to be addressed in order to sustain and build upon the high GDP growth rates that the country has achieved on a fairly consistent basis. 

Delving into the demographics and distribution of employment, we can find certain salient features. In 2017, the total labor force participation rate was 58.3%, of which 48% was female.[1] The Ready-Made Garments sector has contributed significantly in recent years to bringing gender parity in employment. However, this is no time to rest on laurels as women still face other social and cultural issues that limit their participation. These include attitudes of family, physical insecurity etc.

In terms of sectoral distribution, agriculture firmly remains the highest employing sector even though it has seen a decline in contribution to GDP over the last few years. In 2016, the Agriculture sector contributed 41.1% of the total employment, with Manufacturing and Service Sectors contributing 20.8% and 38% respectively.[2] 

Bangladesh faces a specific challenge in employment that is not easy to tackle on a nationwide basis. This problem, of course, is the ever-burgeoning informal employment in the country. Measures to transition large numbers of the workforce out of the informal economy, and into formal employment, are difficult to establish for a number of reasons.
With formal sector job-availability that has not kept pace with the growth of the labor force, the formalization of employment being procedurally difficult, and the allure of benefits such as being free of taxation, a staggering 85% of total employment is estimated to be informal.[3]

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Informal Employment: How it Prospers in Bangladesh 

Informal employment may be defined as any work that is not included within formally regulated structures. As such, those involved in informal employment do not have to pay taxes on their incomes. While this may seem a boon, and certainly a prime factor that drives people to this type of work, there are also disadvantages to partaking in this. This includes being excluded from any social safety net programmes and having less job security and assurance of regular income than say formal lines of work

Informal employment can take many forms, including contractual work for formally recognized businesses. Businesses sometimes prefer to outsource work to informal channels as it allows them to keep the average wages in the company for formal employees at a steady level. Besides serving to keep the bargaining power of formal employees in check, it also is a way for companies to bypass regulations in formal employment processes.  Informal workers receive no benefits from unions and as a result do not have much bargaining power.

A large amount of informal employment in Bangladesh is attributed to small shops, household work, private tuition etc. Rurally, it can range from subsistence farming work to sophisticated craftwork. It is also spread out over different demographics in the country and encompasses all genders. Females are more involved in informal activities (91.8 percent) relative to 82.1 percent for males. In both rural and urban areas, females and youths (aged 15-29) are more likely to be in informal employment.[3] 

Besides the benefits of not having to pay taxes, the barrier to entry for such employment is also low. There is generally a low skill and/or low educational qualification requirement for such work. There is as a result, negative correlation between the level of education attained and the proclivity to engage in informal employment. It was seen that nearly half of those who are engaged in informal employment have no schooling while only a small fraction (less than 0.5 percent) have received any vocational/technical/skills development training

Vulnerability to Exogenous Shocks: COVID 19

The COVID 19 situation has no doubt brought its own share of problems to the employment landscape globally. Almost all sectors across different countries have seen an upsurge in job losses and have experienced a pattern of decline in household income. This is no different in Bangladesh. It is difficult to assess how much informal employment has been affected by the crisis itself but given its nature and the skills and facilities of those engaged in it, very few could afford to work from home and lost their jobs.

A World Bank report based on surveys conducted in Dhaka and Chittagong stated that around 68% of the people who had to stop working in urban areas of Dhaka and Chattogram due to the pandemic have lost their jobs. These had resulted in a large exodus of labor from urban back to rural areas. The report also estimated a 50% fall in incomes of informal sector workers.[4]

A big problem in the Bangladesh Labor Market is the lack of growth of Real Wages i.e- Wages adjusted for inflation. This means that living standards do not tend to rise much despite increases in nominal wages. This is true in all forms of employment. COVID-19 has only made this problem worse as many households recorded a decline in nominal incomes while total consumption had kept inflation rates steady

FIGURE: Growth Rates of Wages and Inflation Rates / Source: BBS, The Daily Star 

The Effect of the Informal Sector on the Economy

The main issue caused by the strong proclivity towards informal employment is the lack of tax revenue that is generated. According to the National Board of Revenue(NBR), Bangladesh already holds a very low tax to GDP ratio of 9.3 percent. This is well below the 15 percent average for developing countries. Though other factors such as weak tax litigation and inefficient collection systems may also be contributing factors, the fact remains that the government is missing out on revenue from informal employment. 

Another main issue with informal employment is the lack of skill development in comparison with formal employment. Those engaged in informal employment for long periods of time may find it difficult to later learn new skills to transition to formal employment. Coupled with the relative lack of job security in informal employment, a shock to the industry, economy, or individual may lead to long term joblessness. 

However, informal employment allows many to keep up their standards of living and serves as an easy way to sustain livelihoods in the absence of in-demand skills or legal/advisory assistance.  

Tackling the Issue of Informal Employment

With such a large percentage of workers in informal employment, it becomes essential that the government find some way to mitigate their sufferings, as well bring them under the umbrella of some form of regulation and safety nets.

One policy approach may be to follow a method of hard negative reinforcement and penalizing those involved in informal work through new laws and forcing them to register their employment. There is no conclusive historical evidence to suggest this is effective in curbing informal work. Also, due to the low level of skill development and education attainment, this may lead to job losses altogether that may persist for a long time

Instead, the two main channels for government policy should be in 

  • Employment generation in formal sectors: This includes policies to facilitate private sector investment–which has been low in Bangladesh. Also, measures will need to be taken to make more of the labor force employable in formal sectors through vocational and/or technical training. Research carried out by the South Asian Network on Economic Modeling (SANEM) indicated that as high as 23% of non-poor engaged in elementary occupation, 22%  in skilled agriculture, and 13.4% of those in craft and related trades, may fall below poverty line due to a pattern of decline in returns to such occupations.[5] 
  • Formalization of employment: While this is difficult on a large-scale programme basis, the introduction of easier procedures to become formalized can be a boon to this end. Incentivizing informal labor through tax benefits, access to technical assistance, and easier access to loans may be helpful in driving this agenda forward. 

Whichever the approach may be, it is imperative that Social Safety Net Programmes are broadened to bring some relief to the large base of informal workers. This may be done through making these Programmes self-targeted by those in need rather than through disbursement to pre-targeted groups. The needs of the individual household can then be assessed on prior criteria before they receive relief. The growth of technology and the utilization of geo-tagged and spatial data is also viable in improving such programmes.

Addressing the case of the informal sector in Bangladesh cannot be ignored as it continues to grow in size and earns the livelihood for a great number of workers. The informal sector is estimated to contribute more than 40% to GDP.[6]

Sartaz Zahir, Content Writer and Sanjir Ali, Senior Business Consultant and Project Manager at LightCastle Partners, have prepared the write-up. For further clarifications, contact here: [email protected]


WRITTEN BY: LightCastle Analytics Wing

At LightCastle, we take a data-driven approach to create opportunities for growth and impact. We consult and collaborate with development partners, the public sector, and private organizations to promote inclusive economic growth that positively changes the lives of people at scale. Being a data-driven and transparent organization, we believe in democratizing knowledge and information among the stakeholders of the economy to drive inclusive growth.

For further clarifications, contact here: [email protected]

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