POLICY BRIEF

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.

Introduction

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

Country Employment ('000) Unemployment
(% of labor force)
Subsistence workers
('000) % employed Year/Source
Cook Islands 6.2 8.2 0.1 1.8 2011 Census
Fiji 369.3 6.9 8.3 22.5 2010-2011 EUS
Kiribati 28.0 30.6 7.8 27.7 2010 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
Nauru 3.1 23.0 0.1 4.1 2011 Census
Palau 8.4 4.1 0.2 2.0 2012  Census
Papua New Guinea 2,713.1 6.4 1,112.4 41.0 2009 HIES
Samoa 40.7 5.7 14.5 35.6 2011 Census
Solomon Islands 220.0 3.2 170.7 77.6 2009 Census
Timor-Leste 284.2 3.6 198.5 69.8 2010 LFS
Tonga 30.2 1.1 8.6 28.6 2011 Census
Tuvalu 4.2 16.3 1.8 43.0 2004-2005 HIES
Vanuatu 108.9 4.6 65.0 59.6 2009 Census

EUS = Employment and Unemployment Survey, HIES = Household Income and Expenditure Survey, LFS = Labor Force Survey.
Note: This policy brief adopts the International Labour Organization definition of subsistence workers as "workers who hold a self-employment job and in this capacity produce goods or services which are predominantly consumed by their own household and constitute an important basis for its livelihood."
Source: ADB estimates based on latest population and housing censuses, household income and expenditure surveys, and labor force surveys.


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Meet the experts

  • Aekapol Chongvilaivan   
    Young Professional, Asian Development Bank

    Aekapol Chongvilaivan has worked with the economic team of the Pacific Department on various knowledge products, including the Pacific Economic Monitor. He is now assigned at the Southeast Asia Department where he serves as an economist in the regional cooperation and operations coordination division.

  • Ruth Francisco   
    Consultant, Asian Development Bank

  • Rommel Rabanal   
    Senior Economics Officer, Asian Development Bank

    Rommel Rabanal is a regular contributor to the Pacific Department’s quarterly macroeconomic monitoring and surveillance cycle. His other responsibilities include analytical contributions to knowledge products, and periodic capacity building missions to Pacific countries on fiscal and economic analysis.

   Industry and trade, Social development and protection
   Last updated: July 2014

 




Disclaimer

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.




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