Does Informal Employment Respond to Growth Opportunities?

Informal employment accounts for the majority of employment in many developing countries, yet its relevance to growth, and its links with the formal sector, remain poorly understood. A widely held view is that informality eventually gives way to formality as countries develop. In this paper, we examine the effects of growth opportunities — in the form of export-induced demand in Bangladesh — on four types of employment: formal, casual, unpaid, and self-employment. At an aggregate level, export-induced demand increases the levels of all four types of employment. We also conduct a district-level analysis, constructing a shift-share measure of trade exposure that relies on national, industry-level variation in exports, coupled with pre-existing, district-level shares of employment by industry. We find that the direct impact of trade is to increase labor force participation and formal employment. When we also include the indirect impacts of trade, in the form of induced demand through supply chain linkages, we find an even larger impact on labor force participation. The results also suggest that trade triggers an immediate increase in both formal and casual employment, as well as a longer-run increase in self-employment. We conclude that labor response to growth opportunities such as trade is not limited to formal employment, and a more nuanced understanding of informality in the growth process is needed.