Informal Sector Growth and Employment in the Pacific
This policy brief underscores the need to facilitate the transition of businesses from the informal to the formal sector to generate more jobs in the Pacific.
One of the Paciﬁc economies' distinctive characteristics is the informal sector's signiﬁcant contribution to growth and employment. The informal sector is broadly characterized as "unregistered and/or small unincorporated private enterprises engaged in the production of goods and services" (ILO 1993). Typically, informal business operations are small scale, without contractual arrangements and division between capital and labor, and generate income and employment exclusively for the persons concerned. In this analysis, the informal sector includes subsistence agriculture.
Subsistence workers account for a signiﬁcant proportion of total employment in developing member countries (DMCs) of Asian Development Bank in the Paciﬁc (Table 1). They constitute more than half of total employment in the Federated States of Micronesia, Solomon Islands, Timor-Leste, and Vanuatu.
The sheer size of subsistence employment has at least two implications. First, the informal sector essentially serves as a natural economic shock absorber. It allows workers to exit the formal sector temporarily and, rather than being unemployed, earn subsistence income. Therefore, low unemployment rates in some Paciﬁc DMCs (e.g., Solomon Islands, Timor-Leste, Tonga, and Vanuatu) should be interpreted with caution because it may mask a high incidence of underemployment.
Secondly, the informal sector's disproportionately large role in the labor market poses a pressing challenge to sustainable growth and development in Paciﬁc DMCs. Subsistence workers have no access to employment protection and external credit, and are ﬁnancially vulnerable to shocks. Except in Papua New Guinea, there is no legislation recognizing the informal sector's contribution to subsistence employment in Paciﬁc DMCs.
The absence of legislative and policy frameworks to systematically address subsistence labor development hampers improvements in overall labor productivity and business operations.
Table 1: Contribution of informal sectors to employment
(% of labor force)
|Cook Islands||6.2||8.2||0.1||1.8||2011 Census|
|Marshall Islands||11.1||30.9||0.4||3.5||1999 and 2011 Census|
|Micronesia, Fed. States of||31.3||16.2||16.4||52.4||2010 Census|
|Papua New Guinea||2,713.1||6.4||1,112.4||41.0||2009 HIES|
|Solomon Islands||220.0||3.2||170.7||77.6||2009 Census|
Industry and trade, Social development and protection
Last updated: July 2014
The views expressed in these articles are those of the authors and do not necessarily reflect the views of the Asian Development Bank, its management, its Board of Directors, or its members.