Vulnerability of the informal sector in an emerging economy: a multi-level analysis

Abstract

ABSTRACT This study investigates the determinants of vulnerability and the vulnerability gap between workers in an emerging economy’s formal and informal employment sectors. To this end, a multi-level model combined with a fixed-effect model was employed to capture idiosyncratic and covariate vulnerabilities. The results from the multi-level model show signs of a ‘cycle of vulnerability’ for informal workers, in that covariate shocks indirectly impact idiosyncratic shocks, which in turn leads them to suffer more from covariate vulnerability. Compared to those with formal employment, informal workers are 1.2% more likely to fall into poverty in the future. Among wage workers, informal wage workers had higher vulnerability indices than formal sector workers, with a vulnerability gap of 3.1%. These gaps are more significant when accounting for time-invariant unobserved heterogeneity. Based on these results, it is vital to consider idiosyncratic and covariate components to reduce vulnerability in the informal sector. Specifically, for informal workers who engage in business and industry sectors at high risk of income shocks, the government should monitor and provide them with legal frameworks that will prevent them from being exposed to a high risk of vulnerability. Additionally, a policy expanding voluntary social insurance should be promoted to support informal groups.