Most developing countries have a minority of workers in the formal sector (getting a regular pay cheque) and a majority in the informal sector (usually self-employed).
The assumption is typically that formal sector workers get paid more than informal ones. In the famous Harris-Todaro model, for example, urban wages are higher than rural wages, so why doesn’t everyone migrate to the cities? Because not everyone can get a lucrative formal sector job. Most migrants end up instead either unemployed or in the informal sector, where they earn very little.
This certainly used to be the case in PNG. In the 1980s, one study of urban households showed that those with a wage earner earned more than twice as much per person as those without a wage earner.
But since then, the urban minimum wage has fallen steeply. As we showed in an earlier blog, adjusting for inflation, the minimum wage today is only about a quarter of what it was in the 1980s. The estimated weekly income of an individual on the minimum wage in PNG is K280, excluding any overtime or allowances. That’s what a low-skilled worker – a security guard or cleaner – could expect to earn.
But the minimum wage of course applies only to the formal sector. How much can an informal sector worker expect to earn?
The informal sector is very diverse, and a proper survey would be needed to answer that question. But to make a start, let’s look at a single case study.
The betelnut vendor I spoke to sells betelnut in a populated residential area of Port Moresby. Her peak trading hours are in the mornings and afternoons, when she gets a lot of traffic from employed residents, heading to work in the morning or returning home for the evening. She works long hours, about 18 hours a day, 7 days a week. She says she gets through 50 kg of betelnut in a week, which she purchases for around K80-200 per 10 kg bag. From each bag, she says her profit is around K120. The selling price for a betelnut has increased from K1 to K2 in recent times so her income has also increased, more than keeping up with inflation. Given the habitual nature of betelnut chewing, demand seems to be stable.
In addition to this, her capital requirements are negligible. As is common practice, the vendor has a table set up outside a local trade store: the light from the store illuminates her market in the evenings for free. She lives within walking distance of a wholesale betelnut market, eliminating the need for expensive public transport when she needs to get new stock. Given these low costs, her profits from sales are her earnings. And all her earnings go to support her family.
According to this single case study, it is possible for an individual in the informal sector to earn about K600 per week. That’s more than twice what an individual in the formal sector would be earning on the minimum wage.
It’s important to note that this vendor might not be typical, given her favourable geographical location, long hours and high-demand merchandise. There is certainly a lot of variation in informal sector earnings. That said, a study from 2003 of 248 Port Moresby women traders found that their daily profit was equal to the weekly minimum wage – an even more extreme disparity than in our single case. And a large survey from the mid-2000s found that the income of women roadside sellers in Madang was more than three times the national minimum wage.
The finding that informal wages are higher than formal has several implications.
Why does anyone work in the formal sector if they can earn more in the informal sector? In fact, both informal and formal urban sector jobs may be limited in PNG. There are only so many betelnut or market sellers that the city can absorb. Entry is not actually free to the informal sector. Succeeding in the informal sector requires networks and courage – and often very long hours, as our example shows.
Also, when we think about migration decisions, workers may be as attracted by the informal sector options as by the prospect of a formal sector job. The idea that PNG (already one of the most rural countries in the world) is not going to experience more urban migration and that urban migration should be discouraged makes no sense. Rather, urban infrastructure needs to be expanded to keep pace with growing urban populations.
The situation in urban PNG is not in line with standard economic theory. It used to be the case that the formal sector workforce in PNG comprised the privileged few, but no longer. With unskilled workers earning much less in the formal sector than they used to, and informal workforce opportunities having grown, self-employed informal sector workers can today earn much more than the minimum wage.
Given how low the minimum wage is, that is a very good thing. It is also a positive for a country with so much gender inequality that women are so well represented in the informal sector, dominating the sales of fresh and cooked food, and of betelnut. Expanding opportunities for informal sector workers, in both urban and rural areas, is critical for the people of PNG.
Disclosure
This research was undertaken with the support of the ANU-UPNG Partnership, an initiative of the PNG-Australia Partnership, funded by the Department of Foreign Affairs and Trade. The views are those of the author only.
This is a very interesting post, although it raises more questions than it answers. The single case study from Port Moresby (the successful and hard-working female betel nut seller) may or may not be representative, as Kelly Samof makes clear. The story he tells about her is useful, because it dramatises differences which can be found in Port Moresby between the formal, regulated minimum wage and the earnings of (some?) operatives in the urban informal economy. As Kelly freely admits, this case may not be representative of earnings of other betel nut sellers (let alone the earnings gained from performing other informal activities in the city).
There are things I would like to know about this betel vendor. Is there some special relationship between her and the owners of the shop outside which she sells her betel nut? For example, is any other seller free to set up a table outside this shop? It seems to be an ideal position, so wouldn’t you expect her to have some competition? If she is making so much money why haven’t other sellers set themselves up beside her? Clearly she has a locational advantage, and enough capital to buy bags of betel on a regular basis. Is there any relationship between her and the owners of the shop?
Also the 2003 study to which Kelly refers (which I was unable to download, for security reasons) appears to show an even greater difference between informal earnings and formal, regulated wage earnings. This makes me wonder: if betel nut sales are so profitable why didn’t more sellers enter that market also? Were there barriers to entry which prevented new sellers from competing prices down? The same question should be asked about the other study he referenced. This concerned ‘roadside’ vendors in Madang, and purported to show an even more extreme discrepancy between vendor earnings and betel sellers’ profits. By the way, this Madang case was a rural study, not an urban one. Anyway, it would be interesting to know whether some sort of monopoly was being enforced by local landholders to allow such profits to be made.
Kelly also asked, why does anyone accept minimum wage employment in Port Moresby, if informal earnings are (relatively) so high? Back in 1973, Keith Hart wrote about the informal economy in Accra (Ghana). He reported that non-wage (i.e., informal) incomes were more unreliable than inadequate. Returns to non-wage employment varied widely from period to period, around mean levels often higher (occasionally much higher) than unskilled wages (as appears to be the case with Kelly’s lady betel nut vendor). But because of this unreliability people were often reluctant to surrender low-paying wage employment, opting instead to juggle the demands of such work with the opportunistic, though sporadic, activities of the informal economy. People in low-paying formal jobs were often engaged in informal ‘side-hustles’ (or ‘moon-lighting’) which could be more rewarding than their official salaries. People who deal with public servants in government offices or hospitals in Port Moresby may recognise this situation.
Finally, I want to make a point about language. Put simply, there is no such thing as an informal ‘sector’. This is because economic informality occurs in every economic sector – primary (e.g., agriculture), secondary (e.g., manufacturing) and tertiary (e.g., services). It is also found in both the private (entrepreneurial) and government (state) sectors. To get the vocabulary right, we should be speaking of ‘economic informality’ conducted within an ‘informal economy’. Forget about the informal ‘sector’!
Hi John,
Thank you for your interesting points and questions.
Here are a few responses;
I enquired with the vendor, and it turns out the shop owners are leasing the shop from her relatives so that must give her an advantage.
From my experience of living in Port Moresby and interacting with buai sellers on an everyday basis, a lack of working capital to purchase new stock seems to be the biggest difference between those who make sizable profits and those who don’t. New sellers start with small amounts of capital, purchase their betelnut, make a profit and spend most of their profit on daily needs. Only those who plan and put aside money to purchase new stock tend to realise larger profit gains over time as they remain consistent with their sales, as opposed to sellers who enter the market to make a quick buck and get out.
Also, perhaps the market is saturated. All the good spots to sell betel nut have gone, and no one has to walk far to buy betel nut. So it is hard for new entrants to come into the market, and there is no incentive for any existing seller to undercut the market.
Finally, although this informal worker earned well, she has to work very hard (18 hours a day 7 days a week), and endure bad weather and the risks of being outside in Moresby. Not everyone is willing to put up with such risks and costs.
Great piece Kelly. In 2020, few of my students interviewed about 100 street vendors in four bus stops (Waigani, Gordons, 4 Mile & Koki) to assess the impact of covid-19 on street vendors – after restrictions eased. The vendors mostly sold betel nut, smoke, and at the time face masks. They make a decent amount, more than the minimum wage in urban areas. And even though selling at bus stops is discouraged, they pay “tax” to the policemen and women: the police get buai from the vendors without paying for it, and turn let them sell at non-designated areas. Covid-19 restrictions meant they couldn’t sell at the bus-stops, and some suffered as they rely on street sales. Others who got around the restrictions, however, made more money when the prices went as high as K10 at the height of covid 19 (I remember on particular day when gold prices collapsed below zero, my neighbours were selling one buai for K10 – buai was more expensive than gold 😂).
True indeed.