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Full Project on Impact of Informal Sector on Employment Generation

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                                                                                               CHAPTER ONE




  1. Background to the Study

Economic activity that falls outside the purview of government accounting is known by various names as informal, hidden, underground, black, gray, clandestine, illegal, shadow, and parallel (Thomas, 1992; Feige, 1990; Schneider & Enste, 2000). According to Tanzi (1999), “there cannot be any question that the informal economy is a real phenomenon with important implications that deserve attention and study”. Of greatest concern is that this activity is unrecorded, and, as such, official national income accounts statistics do not accurately represent the true state of the country’s economy.


The informal sector is made up of more small-scale businesses of which street trading constitutes a very high proportion of the total population which is estimated at about 60 percent in 2015 (NBS, 2016). The informal sector constitutes the distribution of goods and services that are not registered and regulated by the state or local government in contexts where similar activities are regulated (Sinclair, 1978; United Nations, 1996). Such unregulated activities assume different names in different circumstances. Hope (1997, 2001) produced a catalogue of names describing various aspects of the informal sector such as subterranean, underground, unofficial, hidden, shadow, invisible, black, small-scale, micro-enterprises, and the second economy. These terms are informative of different aspects or activities that fall in this sector and serve to argue that it excludes those activities legally proscribed and sanctioned, which are indeed by their nature criminal, underground or hidden (United Nations, 1996). Suffice to argue that the informal sector is, in this regard, perceived with respect to the formal sector; the visible, official, the large-scale and first or most significant sector- comprising of government or public service and the private sectors – banking, factory based manufacturing, import and export of goods and services, what Santos (1979) termed the upper circuit of the economy. The argument is that, most of these terms suggested by Hope (1997) is less appropriate in defining street trading because it is not underground, invisible or hidden since it is carried out in the open with or without official recognition. Defining the informal sector in terms of its characteristics would therefore be more appropriate to situate street trading. Some of the characteristics of the informal sector activities are: small scale in size, labour intensive, low fixed costs, use of simple technology, reliance on family labour, use of personal or informal sources of credit, non-payment of taxes, relatively easy to establish and exit, and so on (Hart, 1973; Fidler and Webster, 1996; Hope, 2001).


The nature of the labour markets in sub-Saharan African is characterised by their formal and informal sectors. Particularly characterized by this dichotomy is the urban labour market. The differences between the formal and informal sectors can be seen in the light of the segmentation between the different parts of labour market. In Nigeria, as in other parts of Africa, segmentation relates mainly to economic phenomenon. Workers in the formal sector have higher levels of education than those in the informal sector, and since these firms are likely to have technologies requiring more skills and on-the-job training, the workers are likely to be more skilled (Engel, 1987).


The small size of the formal labour market also reflects the constraints facing the sector, such as high risks, poor infrastructure and lack of social capital (Engel, 1987). Due to the forgoing, the formal sector has become increasing unable to generate employment and this has underscored the informal sector’s importance in absorbing the increasing labour force in the country. At the policy level, deliberate government policies directed at employment generation had not lived up to expectation. For instance, the NEEDS strategy, the Millennium Development Goals (MDGs) which was later domesticated in the 7-point agenda of President Yar’Adua in 2007 and President Goodluck’s Transformation Agenda involving You Win, Sure-P, and so on, have not satisfactorily addressed unemployment in the country. The dimension of unemployment in Nigeria transcends the normal inadequate job opportunities and resource underutilisation; it includes the gross mismatch between job expectation and the actual job availability. The problem has become exacerbated to the extent while many household members do not have any stable source of income; others are merely striving for survival. Recent studies have shown that about 70% of the people live below the poverty line (NBS, 2012); it is no doubt that unemployment is contributory to this. Thus many stakeholders in employment issues are worried about this development and have sought for alternative sector with high labour carrying capacity, ostensibly like the informal sector. These trends have contributed to the rapid expansion in the informal sector employment. An increasing number of household are becoming dependent on the informal sector activities as a source of income and employment in both rural and urban areas.

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