Informal Sector Employment and Economic Growth: Evidence from Developing Countries in SDG Perspective

Abstract

The understanding of the role of informal employment in economic growth is important to facilitate developing countries in safeguarding the decent work, productive employment, and inclusive growth agenda mentioned in Sustainable Development Goals (SDG) 8. The present study attempts to this end by investigating the role of informal employment on economic growth with an aim to assist in fulfilling target 8.3 of SDG. This study utilizes the data available for 20 developing countries for the period 2011–2019. Panel data analysis techniques have been applied, considering the percentage of total employment in the informal sector as the main explanatory variable of the models. The relevant macroeconomic indicators are included in the model as control variables. Empirical findings from Fully Modified Ordinary Least Squares (FMOLS), Dynamic Ordinary Least Squares (DOLS), and Dynamic Fixed Effect (DFE) models indicate a positive effect of informal employment on the economic growth of developing countries. The other macroeconomic indicators, per capita income, national expenditure, money supply, and economic freedom, are also found to contribute to the economic growth of the selected countries. This study reveals an important bidirectional causal association between informal employment and economic growth, a unidirectional causal link from per capita income to informal employment and from informal employment to national expenditure. Taking into account the contribution of the informal sector to the economy, this study fosters the need for achieving the targets mentioned in SDG 8 by adopting appropriate policies rather than punishing this sector immediately.