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Introduction
An important feature of developing countries is that a large proportion of the labor force is employed in the informal sector, which is characterized by providing low incomes for its workers. Incomes in the informal sector can be so low that workers are unable to provide the basic necessities of life for their families. Since workers in a developing country are unlikely to get any monetary support from the government when unemployed, they cannot afford to stay idle. Instead, they do some work to survive, but often report themselves as employed, and consequently, the conventional measure of unemployment estimated from labor force surveys tends to underestimate the true extent of unemployment in society. Thus, many developing countries have low open unemployment rates, but still suffer from acute poverty because of the low earnings of a large segment of their employed work force.1
In this paper we propose a modification of the standard unemployment rate so that it includes not only people who are unemployed, but also those earning below a subsistence income from work. In the development of a new measure, people whose earnings are less than the minimum (subsistence) wage are regarded as underemployed.
The issue of poverty is different from the issue related to those not earning a decent wage, When the labor market is weak, and thus, people cannot find a job with a decent wage, they tend to substitute unemployment with underemployment (i.e. they accept jobs with low pay instead of remaining unemployed with no income). Thus, underemployment defined in terms of low earnings reflects a lack of demand in the labor market. The issue of poverty is much broader in the sense that it encompasses many complex factors such as intra-household allocation of resources, non-labor income, and various household characteristics. Although underemployment as defined in this study may influence poverty, the two phenomena are not the same.
Underemployment is generally defined in terms of working fewer hours. If a person is working fewer hours voluntarily, it is not an issue of the weakness of the labor market. It is, in fact, an issue of personal choice. For instance, a person who works only one hour per week and still gets above the subsistence wage cannot be classified as underemployed. Instead, we would classify him/her as fully employed. However, suppose a person is willing to work more hours, but unable to find a job, then he/she may be called underemployed, provided that he/she does not earn the subsistence wage. This situation can occur because of a weak labor market.
Unemployment and underemployment (defined in terms of earnings lower than a predetermined subsistence level) are related issues in the sense that people substitute one for the other depending on labor market conditions. This paper combines these two aspects of labor markets and arrives at a new index of unemployment, which satisfies certain desirable properties. The methodology developed is applied to Brazil's unit record household surveys covering the period from 1995 to 2004.
Footnote:
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The International Labour Organisation puts a special emphasis on productive employment. See Productive Employment for the Poor (ILO, 1992).
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- 162Kb ~ 1 min (13 pages)
