A Study on

Labor Markets in Bangladesh: The Role of the Informal Sector

Course Name: Microeconomics

Course Code: ALD 2102

Submitted By:
Name : Ubada Ahnaf
Roll No. : 2225171053
Batch : 07
Section : A

Submitted To:
Dr. Mohammad Jahangir Alam
Professor, Department of Economics
Jahangirnagar University

Department of Business Administration in Marketing

Faculty of Business Studies
Bangladesh University of Professionals

Date of Submission: 25/10/2023

 TABLE OF CONTENTS

TABLE OF CONTENTS 2
ABSTRACT 3
Chapter One
INTRODUCTION 4
1.1 Relevance 4
1.2 Scope 4
1.3 Objectives 5
1.4 Overview of Subsequent Sections 5
Chapter Two
OVERVIEW OF LABOR MARKETS 6
2.1 Population & Labor Force Composition 6
2.2 Changes in The Youth Labor Force Compared To 1999-2000 7
2.3 Present Status of The Youth Labor Force 8
2.4 Labor Force Participation Rate: 8
2.5 Employment-Population By Sector And Gender 9
Chapter Three
CHARACTERISTICS OF INFORMAL SECTOR ENTERPRISES 10
Chapter Four 12
EMPLOYMENT IN FORMAL AND INFORMAL ECONOMY 12
4.1 Formal and Informal Employment Condition: 12
4.2 Labor Force Characteristics 13
Chapter Five
CONTRIBUTION OF THE INFORMAL SECTOR TO GDP 14
5.1 Labor Productivity 14
Chapter Six
LIMITATIONS & RECOMMENDATIONS 16
6.1 Limitations 16
6.2 Recommendations 16
Chapter Seven
CONCLUSION 17
REFERENCES 18
 ABSTRACT

The informal sector plays a significant role in the labor markets of Bangladesh, accounting
for around 89% of all employment. It is also a major contributor to the country's GDP,
accounting for around 64%. The informal sector is characterized by a lack of formal
contracts, social protection, and access to finance. Informal workers are often more
vulnerable to poverty and exploitation.

This study examines the role of the informal sector in the labor markets of Bangladesh. It
draws on a variety of data sources, including labor force surveys, household surveys, and
qualitative interviews with informal workers and employers.

The study finds that the informal sector is a major source of employment for women, young
people, and rural residents. It also provides employment opportunities for people with low
levels of education and skills. However, informal workers often face lower wages, longer
working hours, and poorer working conditions than formal workers.

The study also finds that the informal sector plays an important role in the development of the
Bangladeshi economy. Informal businesses are often innovative and adaptable, and they can
play a key role in driving economic growth. However, the informal sector also faces several
challenges, including access to finance, infrastructure, and markets.

By supporting the informal sector, Bangladesh can create more jobs, reduce poverty, and
promote economic growth. The study's findings underscore the complex nature of labor
markets in Bangladesh, emphasizing the need for comprehensive policies that foster inclusive
economic growth, provide social security, and ensure equitable opportunities for all segments
of the workforce, encompassing both the formal and informal sectors.
 Chapter One

INTRODUCTION

The labor markets in Bangladesh are at a pivotal juncture, characterized by the coexistence of
formal and informal employment sectors. The informal sector, in particular, has emerged as a
defining feature of Bangladesh's economic landscape. With a labor force exceeding 60
million, Bangladesh grapples with the intricate dynamics of these dual sectors, each offering
distinct contributions and challenges. This study embarks on a journey to unravel the
intricacies of Bangladesh's labor markets, with a particular focus on the indispensable role
played by the informal sector.

This paper conducts a comprehensive analysis of the informal sector's impact on

Bangladesh's labor markets. Drawing from a variety of data sources, including labor force
surveys, household surveys, and qualitative interviews with both informal workers and their
employers, it aims to offer a multifaceted perspective on the informal sector's significance
within the country's labor landscape. This research delves into the dynamics, challenges, and
opportunities associated with the informal sector, offering a deeper understanding of its role
in Bangladesh's economy.

1.1 Relevance
The significance of this study cannot be overstated. The informal sector in Bangladesh is the
livelihood of a substantial portion of the population, providing employment, income, and
economic stability to millions. Understanding the inner workings of this sector is essential,
not only for comprehending labor market dynamics but also for shaping effective policies
that foster inclusive growth and social welfare. As the labor market constitutes a cornerstone
of Bangladesh's socio-economic landscape, this study aims to offer insights into the factors
underpinning employment patterns and income distribution in the country.

1.2 Scope
This paper encompasses a comprehensive examination of Bangladesh's labor markets, with a
central emphasis on the informal sector. The study aims to explore the multifaceted aspects of
this sector, including its contributions to job creation, income distribution, and its overall
impact on the nation's economic resilience. It also delves into the challenges faced by those
employed within the informal sector, with a particular focus on issues related to job security,
access to social protection, and basic amenities.
1.3 Objectives
The main objectives of this paper are:
● To investigate the contributions of the informal sector to Bangladesh's labor market in
terms of job creation, income distribution, and economic stability.
● To examine the challenges encountered by workers in the informal sector, including
issues related to job security, access to social protection, and basic amenities.
● To analyze the policy implications of the informal sector's prominence and offer
practical recommendations for advancing formalization while preserving its
indispensable role within the economy.

1.4 Overview of Subsequent Sections

The following sections of this paper will delve into each of these aspects in greater detail. We
will commence with a review of the existing literature to provide a context for our study.
Subsequently, we will present the research methods employed, followed by an analysis of the
contributions of the informal sector to Bangladesh's labor market. The challenges faced by
informal sector workers will be explored, leading to a discussion of policy recommendations.
Finally, we will conclude with a synthesis of our findings and their implications for the labor
markets in Bangladesh. This study aims to offer a comprehensive and insightful
understanding of the labor market dynamics in Bangladesh, with a particular emphasis on the
pivotal role played by the informal sector.
 Chapter Two

OVERVIEW OF LABOR MARKETS

2.1 Population & Labor Force Composition

The growth of the population can be an asset for development if effectively harnessed.
However, between 1999-2000 and 2015-16, the population increased by 34.15 million, while
the working-age population only grew by 24.25 million. Simultaneously, the number of
people employed increased by 20.53 million. This indicates that the rate at which the labor
market is expanding is considerably lower than the overall population growth rate. This poses
a significant concern for sustained development, as it suggests that we are struggling to fully
utilize the available labor force.

Furthermore, up to 2010, the labor force survey showed a male-dominated working-age

population. However, in recent years (2015-16), the female portion of the working-age
population has surpassed the male portion. This shift underscores the need for more skilled
female workers to drive the country's development. Nevertheless, it's worth noting that the
number of employed females still lags behind that of males. The trend in the unemployment
rate among the labor force is not consistent, but there has been a sharp increase in
unemployment, for both males and females, up to 2015-16.

Table 1: Changes in the Size of Labour Force and Composition

Population Working age Employed Unemployed

Year Male Female Male Female Male Female Male Female

1999-00 64.09 60.26 38.3 35.9 31.1 7.9 1.1 0.7

2002-03 68.33 65.08 41.2 39.6 34.5 9.8 1.5 0.5

2005-06 70.04 67.26 43.01 41.58 36.1 11.3 1.2 0.9

2010 74.15 73.59 47.85 47.74 37.9 16.2 1.6 1

2015-16 79.6 78.9 48.4 50.3 41.76 17.77 1.3 1.3

(BBS, 2017) (Titumir, 2013)

Figure 1 illustrates the percentage changes in the labor force categorized by gender. It is
evident that, in all instances, the percentage increase in the female labor force surpasses the
percentage change in the male labor force. Notably, over the last seven years, the rate of
change in the female labor force, at 5.36%, is almost five times higher than the rate of change
in the male labor force, which stands at 1.15%. This gender disparity in labor force growth
points to a notable shift and potentially signifies a changing landscape in the labor market
dynamics.

Fig 1: Changes in Labour Force (percentage) in Bangladesh (BBS, 2017)

2.2 Changes in The Youth Labor Force Compared To 1999-2000

As expected the total growth rate of the youth labor force is higher in urban areas than in
rural. While the labor force, including the youth labor force, in Bangladesh is still
predominantly male, the growth rate of this scenario is different.

Fig 2: Changes in the Youth Labour Force Compared to 1999-2000 (BBS, 2017)
The female population in the youth labor force is higher (almost double) than the male in
both areas (rural and urban). Moreover, fig 3 shows that the growth rate in the case of males
shows a decreasing trend throughout the period whereas, in the case of females, it shows an
increasing trend.

2.3 Present Status of The Youth Labor Force

Table 1 reaffirms the trend of a higher female population than males in the working-age
group, which extends to the youth labor force, with females comprising 40.9% compared to
30.6% for males. This gender dynamic remains consistent across all three age groups
analyzed.

Table 2: Youth labor force distribution (% in total labor force)

Age Group Male Female Total

15-19 7.7 7.9 7.8

20-24 9.9 14.1 11.1

25-29 12.9 18.8 14.6

Total 30.6 40.9 33.5

(BBS, 2017)

2.4 Labor Force Participation Rate:

The Labor Force Participation Rate (LFPR) is a metric that represents the percentage of
working-age individuals actively participating in the labor force. This rate offers insights into
the proportion of the population available for work, which is vital for the production of goods
and services. It serves as a significant indicator for assessing economic growth and is utilized
to track developments within the labor market. (Titumir, 2013)

The working-age population has been categorized into three groups, and consistently, the
highest labor force participation rate is observed in the second group, encompassing
individuals aged 30-64, across rural, urban, and national levels. Notably, the participation rate
of females is nearly half that of males in both rural and urban areas. Given the
male-dominated nature of the labor force, there is minimal disparity in labor force
participation rates between males in rural and urban areas. Conversely, due to increased
engagement in agricultural activities, the labor force participation rate of females is higher in
rural areas compared to urban areas.
Table 3: Labor force participation rate in percentage (aged 15 or older by age group,
sex, and area)
Rural Urban Bangladesh
Age Group
Male Female Total Male Female Total Male Female Total
15-29 69.7 32.8 50.6 69.4 31.1 48.6 69.6 32.3 49.9
30-64 94.8 44.4 69.5 94 32.5 64.4 94.6 41 68
65+ 54.6 11.9 35.7 44.1 8.2 28.6 52.3 11.1 34.2
(BBS, 2017)

2.5 Employment-Population By Sector And Gender

Assessing the employment-population by sector and gender is a multifaceted task. The most
recent survey from 2015-16 reveals that, in both agriculture and non-agriculture sectors, male
labor predominates. Although the data doesn't display a consistent pattern, among the most
recent three Labor Force Surveys (LFS), male employment in agriculture reached its lowest
point in 2015-16. Interestingly, during that period, female employment in agriculture was at
its highest. In contrast, male employment in the informal sector has exhibited an upward
trajectory in the last three surveys, while female employment in this sector lacks a
discernible, consistent trend.

Fig 3: Employment population by sector and gender (BBS, 2017)

 Chapter Three

CHARACTERISTICS OF INFORMAL SECTOR ENTERPRISES

The preceding chapters' findings highlight the substantial presence of the informal sector in
Bangladesh's economy. The paper reveals that 77% of the working population is engaged in
informal sector enterprises, while it illustrates that informal sector activities contribute to
43% of the Gross Domestic Product (GDP). Given its significant but often vulnerable role in
the economy, it is imperative not to underestimate the importance of the informal sector when
crafting policies aimed at enhancing the well-being of those involved in this sector.

Therefore, to gain a deeper understanding of informal sector enterprises, this chapter focuses
on delineating the characteristics of these entities, which we refer to as Household
Unincorporated Enterprises with at least some market production (HUEMS). Specifically,
this chapter delves into the reasons behind the selection of specific current business activities,
the methods of financing, and the challenges encountered, as reported by HUEM operators.
By examining these aspects, we aim to shed light on the dynamics of the informal sector and
provide valuable insights for policy formulation to improve the conditions and opportunities
for those operating within this sector. (ADB, 2012)

The labor market of Bangladesh is a dynamic and complex ecosystem, marked by a diverse
range of employment opportunities, encompassing both formal and informal sectors. While
the formal sector plays a crucial role in the country's economic growth, it is the informal
sector that employs a substantial portion of the labor force. This unique labor market
landscape demands attention, particularly in the formulation of policies that aim to address
the specific needs and challenges faced by those engaged in informal sector activities.

Understanding the characteristics of the informal sector, particularly through Household

Unincorporated Enterprises with market production (HUEMS), is paramount. This involves
examining the motivations behind the choice of specific business activities, the methods of
financing these endeavors, and the obstacles faced by HUEM operators. By delving into these
aspects, we can gain valuable insights into the informal sector's functioning and devise
policies that not only support its continued growth but also enhance the well-being of those
contributing to its vibrancy.
Furthermore, the labor market of Bangladesh exhibits notable gender disparities, with
variations in labor force participation rates and employment patterns between males and
females. These distinctions are especially pronounced in rural and urban areas. A deeper
analysis of these gender dynamics is essential to guide policies that foster greater gender
equity and women's participation in the labor market.

In conclusion, the labor market in Bangladesh is a multifaceted realm, characterized by the

coexistence of formal and informal sectors, gender disparities, and distinctive employment
patterns. Comprehensive research and a nuanced understanding of these dynamics are
essential for the formulation of policies that promote sustainable economic growth, social
welfare, and inclusive opportunities for all segments of the workforce. As we continue to
explore and analyze these aspects, we can refine our approach to foster a labor market that is
not only productive but also equitable and supportive of all its participants.

Fig 4 Reasons for Choosing the Business Activity (%) (ADB, 2012)
 Chapter Four

EMPLOYMENT IN FORMAL AND INFORMAL ECONOMY

This chapter offers insights into the characteristics of jobs with informal employment
arrangements and their comparison with formal jobs, using data from the 2010 expanded
Labor Force Survey. In Bangladesh, labor force surveys (LFSs) occur every 3-5 years. The
last survey before 2010 took place in 2005 and served as the foundation for official labor
statistics. Questions distinguishing between formal and informal job arrangements were
integrated into the 2005 LFS questionnaire, which also contains socio-demographic
workforce data, facilitating comprehensive analysis.

Informal jobs typically involve work performed by wage earners under verbal agreements or
employment arrangements that do not involve formal written contracts. In essence,
distinguishing formal from informal wage jobs involves identifying the presence of minimum
legal entitlements for employees. Some common methods for this distinction include
examining the presence of work contracts, access to social protection benefits, or a
combination of these factors to delineate formal from informal job arrangements. These
insights into the characteristics of different employment arrangements are crucial for
understanding the dynamics of the labor market and informing labor-related policies and
strategies.

4.1 Formal and Informal Employment Condition:

As per the QLFS 2015-16, individuals in Bangladesh are categorized as working in the
informal sector based on a combined definition. This operational (statistical) definition
encompasses both the informal nature of the individual job and employment within the
informal sector. Specifically, it includes:

● All individuals engaged in informal employment based on the nature of their job,
which covers all employed persons in the non-agricultural sector, including wage and
salaried workers (employees) without access to a pension or retirement fund.
● All contributing family workers.
● All employers and own-account workers in informal sector enterprises, which are
operationally defined as private unincorporated enterprises involved in
non-agricultural activities and lack formal registration.
● All own-account workers employed in private households.
The engagement of the labor force in formal employment at the national level is
approximately one-sixth of the engagement in informal employment. Notably, in both rural
and urban areas, male labor participation in the formal sector exceeds that of females. In
urban areas, the involvement of both male and female workers in formal employment is
26.4% and 9.4%, respectively, which is higher than in rural areas, as anticipated. This
discrepancy reflects the concentration of formal employment opportunities in urban centers
and a gender-based gap in labor participation within the formal sector.

Fig 4: Formal and Informal Employment Conditions (2015-2016) (BBS, 2017)

4.2 Labor Force Characteristics

Among the country's nearly 149 million population, there is a nearly equal distribution of
men (50.7%) and women (49.3%). The majority of the population resides in rural areas,
accounting for 77.1% of the total population. Regarding the labor force, 69.7% are men, and
30.3% are women, with 76.4% working in rural areas and 23.6% in urban areas.

According to the 2010 Labor Force Survey, 95.3% of the 56.7 million labor force participants
were employed, leaving only 4.7% unemployed. Employment rates were slightly higher
among men (96 out of 100) compared to women (94 out of 100). Conversely, unemployment
rates were higher among women (5.8%) compared to men (4.2%). Additionally, rural areas
exhibited a higher employment rate at 95.9% compared to the urban areas' 93.4%. This
discrepancy is primarily due to the prevalence of agricultural employment in Bangladesh's
predominantly agricultural economy. (ADB, 2012)
 Chapter Five

CONTRIBUTION OF THE INFORMAL SECTOR TO GDP

The informal economy plays a vital role in the economy of developing countries such as
Bangladesh. There are more than 48 million informal jobs in Bangladesh. A major
component of the informal economy is the informal sector. Whereas the informal economy
generally refers to jobs offering informal employment arrangements, regardless of whether
they are undertaken in formal or informal enterprises, the informal sector is just the collection
of all informal enterprises.

5.1 Labor Productivity

This section examines the efficiency of labor utilization for generating economic output
within informal enterprises in Bangladesh. Generally, productivity metrics encompass factors
like changes in capital, intermediate inputs, technical efficiency, economies of scale, and
enterprise capacity utilization, as outlined in the OECD Manual on Measuring Productivity.
There are two common methods for measuring productivity: (i) the gross output-based labor
productivity approach, and (ii) the value-added-based labor productivity approach. The gross
output-based approach gauges the labor required per unit of output, while the
value-added-based approach directly correlates with established income-based standards of
living. In this section, we employ a labor productivity metric similar to the value-added-based
approach. Specifically, we divide the total Gross Value Added (GVA) of the informal sector,
calculated from survey data, by the total number of jobs in the informal sector. For the sake
of comparison, we also provide labor productivity figures for the formal sector. To facilitate
this, we refer to the term "value added of the formal sector" as the sum of the GVA of formal
businesses and subsistence/private households.

Table 4: Labor Productivity by Type of Economic Activity

According to survey results, in Bangladesh, the
total labor productivity per job, calculated by
dividing the Gross Value Added (GVA) by the
total employment, was Tk191,831 ($2,756) in
2010. The labor productivity per job for various
economic activities is presented in Table 4.
Notably, labor productivity per job in
high-capitalization sectors like mining and
quarrying, financial intermediation, real estate,
and electricity, gas, and water was high in the
formal sector. Conversely, real estate, trade, and
manufacturing exhibited the highest labor
productivity per job in the informal sector. The
formal sector's labor productivity surpassed that
of the informal sector by nearly six times.
Specifically, a typical job in the formal sector
contributed Tk821,664 ($11,805) in value-added
terms, while an average job in the informal
sector contributed Tk53,319 ($766).

Figure 5 further illustrates the substantial

difference in labor productivity between the
informal sector and the rest of the economy.

Fig 5: Labor Productivity in the Formal**

and Informal Sector (Tk thousand)

In the industry sector, labor productivity in the formal sector was 33 times higher than in the
informal sector. Similarly, in the services sector, labor productivity in the formal sector was
seven times higher than in the informal sector. On the other hand, in agriculture, labor
productivity in the informal sector was 25% higher than in the formal sector.

Overall, the estimates in this chapter support the conclusion that the informal sector plays a
significant role in the economy.
 Chapter Six

LIMITATIONS & RECOMMENDATIONS

6.1 Limitations
1. As a result of time limitations, I was unable to carry out the extensive analysis I had
originally intended for in this paper.
2. Owing to the limited online information sources, the data presented in this paper may
not be as comprehensive as preferred.

6.2 Recommendations
1. Invest in skill development and vocational training programs to enhance the
employability of the labor force, particularly in the informal sector.
2. Develop policies and initiatives aimed at facilitating the transition of informal sector
workers into the formal economy.
3. Implement measures to reduce gender disparities in labor force participation and
wages.
4. Provide support to small and informal enterprises, including access to credit,
technology, and market linkages.
5. Enhance the collection of labor market data, including gender-disaggregated
information, to better understand the changing dynamics of the labor market.
6. Establish robust social safety nets to protect vulnerable workers in the informal sector.
7. Encourage entrepreneurship and self-employment through training and access to
credit.
8. Invest in rural development programs to diversify rural economies, reduce
overreliance on agriculture, and create non-farm employment opportunities in rural
areas.
9. Explore strategies to integrate the informal sector into the formal economy while
respecting the unique characteristics and needs of informal workers and businesses.
10. Ensure policy coherence across various sectors, such as education, labor, and business
regulation, to create an enabling environment for economic growth and employment
generation.
 Chapter Seven

CONCLUSION

In conclusion, this study on the labor markets in Bangladesh has offered a comprehensive
overview of a multifaceted landscape marked by the coexistence of formal and informal
sectors. Through the exploration of the characteristics of informal sector enterprises, this
research has provided insights into the dynamics of this vital segment of the economy.
Additionally, the study delved into the employment patterns within both the formal and
informal economy, shedding light on the nuanced dynamics of labor force participation, job
arrangements, and gender disparities.

One of the critical findings of this study is the substantial contribution of the informal sector
to the country's Gross Domestic Product (GDP), underscoring its significance as a resilient
and essential component of the economy. This highlights the need for policies that not only
recognize but also support the welfare and development of those engaged in informal sector
activities.

In sum, this study has illuminated the pivotal role of the informal sector within Bangladesh's
labor markets and its economy at large. By delving into the intricate relationships between
formal and informal employment, it has contributed valuable insights to inform policy
decisions that aim to foster inclusive growth, gender equity, and social welfare in
Bangladesh's labor markets.
 REFERENCES

ADB. (2009). Informal Employment in Bangladesh. ADB Economics Working Paper Series.

ADB. (2012). The Informal Sector and Informal Employment in Bangladesh. Asian

Development Bank.

BBS. (2017). Quarterly Labour Force Survey (QLFS) 2015-16. Bangladesh Bureau of

Statistics.

Mankiw, N. G. (2014). Principles of Microeconomics. Cengage Learning.

Raihan, S. (2010). Informal sector in Bangladesh: Implications for growth and poverty.

Indian Journal of Labour Economics, 53(2), 251-265.

Titumir, R. M. (Ed.). (2013). Accumulation and Alienation: State of Labour in Bangladesh.

Unnayan Onneshan.