The urban informal sector in an adjusting economy: The case of Pakistan

Abstract

Urban Informal Sector plays an important role to absorb surplus labour and income generation in developing countries. In Pakistan the importance of the sector has been widely recognised, however, most of the studies stress only to the manufacturing activities in the sector. In contrast this study much focuses to the services sector in the informal sector. The present paper explores whether the earnings function specification in this sector conforms to the basic assumptions of the classical regression: whether the condition of homosedasticity and normality hold and therefor whether the conventional tests can be performed. Mincerian earnings function have been estimated in this paper and primary data collected from twin cities (Rawalpindi/Islamabad) of Pakistan has been utilised. For the purpose, firstly sample has been divided into self-employed and wage earners and then into five small scale economic activities namely petty trading, domestic servant, transport, repair and maintenance services and other personnel services. To make the sense of regression coefficients, robustness and normality tests have been applied which lacked in previous studies. Mincer (1974) standard model specification has been checked by including the interaction term proposed by Richard Sabot and found Mincer's standard model appropriate for the urban informal services sector of Pakistan. Investment in physical capital along with human capital is proposed because solely investment in human capital would produce qualification inflation in the sector.