Informal sector pays below minimum wage: State Bank

KARACHI: Pakistan’s informal sector that employs three-fourth of the country’s total labour force has been found the poorest paymaster in the central bank’s survey, lagging much behind the formal sector in terms of minimum wage set by the government. 

“(Total) 47.6 percent of firms in the informal sector pay workers below the minimum wage, while only 17.5 percent of the formal sector pays below the minimum wage,” said the working paper on ‘informal labour markets in Pakistan’, recently released by the State Bank of Pakistan (SBP).

“Wage differentials between formal and informal sectors are especially pronounced for white collar workers,” said the research paper.

According to the SBP, informal firms employ less than 10 people.

The Pakistan Bureau of Statistics estimated the total number of employees at 57.420 million in its labour survey 2014/15.

The SBP, having gleaned responses from 960 informal manufacturing firms in Punjab and Sindh three years ago, found that the respondents didn’t consider the minimum wage level set by the government to set the payroll.

“Minimum wage, set by the government, has less importance. In contrast to the formal sector, minimum wages are less important and non-binding in the informal sector,” it said. “The minimum wage was among the five least important factors for wage adjustments in the informal sector.”

Inflation consideration, however, is more marked in the informal sector. A majority of the firms in the sector said the wages are inflation-indexed. “Inflation is an important anchor in wage negotiation in the informal labour market, both in terms of frequency,” the survey report said. “Informal sector firms have higher frequency of wage changes in both directions relative to formal sector firms and the frequencies are lower than a year.”

The report said the government allows small firms to stay unregistered while operating within the law. “Informal sector firms list financial constraints as one of the most important reasons for staying in the sector. The nature of their businesses and the ease of running businesses in the informal sector come second and third as reasons for operating in the informal sector,” it said.

“This implies that their ability to absorb shocks is limited, as clearly seen in their lower life expectancy (median age of sampled formal sector firms is 19 years while that of the informal sector firms is median 12 years).”

The central bank’s study found a link of small companies with the rural areas. “Total 22.3 percent of proprietors migrated from rural to urban areas, although there might be many others who migrated with their parents,” it said.

The previous survey also noticed a similar trend for informal sector workers with 28 percent of them having rural links and only 10 percent having migrated to urban areas.

While skilled blue collar employees are more than the white collar workers in the informal sector, both the segments draw below the minimum wages from informal companies.

The SBP’s research department pencilled in the official minimum wage at Rs7,000.

According to the findings, wages in the informal economy are less rigid than in the formal sector because of limited workers’ protection and low entry-exit frictions. “Mean wage duration is 9.6 months in the informal sector compared to 12.7 months in the formal sector,” the report said.

“The reasons for wage flexibility include lower bureaucratic requirements and less regulation… [and] the absence of collective bargaining power.”