Skills, informality, and development

Issues concerning the residual absorption of labour in the low productivity informal sector have already received a great deal of attention in the past. In the present context of globalization, while most countries are aiming at maximizing growth, the issue of well-being has become increasingly important. One of the crucial dimensions of well-being is access to productive employment opportunities. Thus the concept of pro-poor growth and various other questions relating informalization have acquired prominence in the development literature.

This paper estimates the index of informal sector employment, which can be attributed to the supply-push phenomenon in India. Factors that explain the inter-state variations include the industrial-informal sector wage gap, revenue expenditure, and development expenditure incurred by the government.

Increased development expenditure brings in a decline in distress-led informalization. With improved education, health, and infrastructure facilities the employability of an individual goes up, which, in turn, reduces the compulsion to get absorbed residually. However, expansion in government activities measured through increased revenue expenditure raises in-migration, which in turn raises the supply-push phenomenon.

In conclusion the paper observes that with an increase in distress-led informalization inequality tends to rise. Thus, the adoption of labour intensive technology in the organized industrial sector is indeed crucial for pro-poor growth. The other policy implication recommended by this paper is in terms of enhanced investment in the areas of education, health and other infrastructural facilities.