The low skill trap in India’s informal sector

The covid-19 crisis and economic slowdown in India has worsened the economic situation of the poor and low-skilled workers in the informal sector. But even when the country was growing faster, these workers struggled to escape the poverty trap, shows a new UNU-Wider study.

The research, by Rajesh Raj Natarajan and others, shows that between 2004 and 2012, most of India’s poorest and low-skilled workers remained stuck in “dead-end” work status with inferior pay and conditions, despite high economic growth.

Limited skills and insufficient working capital acted as the main obstacles to upward mobility for this group of workers, the paper suggests.

The findings are based on data for over 37,000 workers from the India Human Development Survey (IHDS) of 2004–2005 and 2011–2012. The authors classify the informal workers into self-employed and wage-earners, and lower-tier and upper-tier workers.

Upper-tier informal work refers to unregistered enterprises in the informal sector that employ workers, and those who have technical and vocational training, such as plumbers and electricians. The lower-tier workers are the poorest and least-skilled workers, such as street vendors and waste collectors.

The authors show that self-employed workers, both in the formal and informal sectors, show relatively more upward mobility than wage workers. Among the wage workers, the churn rate is higher among upper-tier wage earners in the informal sector, but is limited among the low-tier workers. This is especially true for women and rural workers, and those who are less educated or are from the lower castes.

Transitioning from low-tier informal employment to upper-tier informal employment are able to lift their incomes by 33.1% on average as compared to those who stay in the same category. Moving to upper-tier formal employment increases incomes by 63.9%, the authors say.

Also read: Transitions between informal and formal jobs in India

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