The Informal Labour Market in India: Transitory or Permanent Employment for Migrants?

Abstract

In most developing countries, there is a large sector of the economy that is called the informal sector or the unorganized sector. Employment in the informal labour market plays an important role in most developing economies. Very broadly, the informal labour market consists of workers in the informal sector, plus casual workers in the formal sector. The informal labour market is a very large part of the agricultural sector, but is also a significant part of the urban sector. There is a difference between employment in the formal sector and the informal sector in terms of the conditions of work, whether workers are subject to government taxes, have access to social security or insurance, are casual or contract workers, and whether or not they receive the minimum wages¹.

This paper studies the characteristics of the workers in the informal economy and whether internal migrants treat this sector as a temporary location before moving on to the organised or formal sector to improve their lifetime income and living conditions. We limit our study to the Indian urban (non-agricultural) sector and study the characteristics of the household heads that belong to the informal sector (self-employed and informal wage workers) and the formal sector. We find that household heads that are less educated, come from poorer households, and/or are in lower social groups (castes and religions) are more likely to be in the informal sector. In addition, our results show strong evidence that the longer a rural migrant household head has been working in the urban areas, ceteris paribus, the more likely that individual has moved out of the informal wage sector. These results support the hypothesis that, for internal migrants, the informal wage labour market is a stepping stone to a secured life in the formal sector.