Role Of Informal Sector In Employment Generation In Nigeria

Project and Seminar Material for Economics

Role Of Informal Sector In Employment Generation In Nigeria


This study examines the impact of informal sector on employment generation in Nigeria during the period 1970 to 2010 making use of annual time series data. The empirical analysis rests on the augmented Solow growth analytical framework. Our findings show that informal sector activities have significant impact on absorbing the large pool of labour force in Nigeria. The study contends that human capital formation is positively related to unemployment rate which reflects the dearth of government expenditure on education in the country. Therefore, there is an urgent need for the government to re-examine its policies on informal sector.

Chapter One


Background of the Study

Over the past years, scholars have debated on whether the informal sector should really be seen as a marginalized sector, which mops up excess or entrenched workers or as a vibrant, entrepreneurial part of the Nigeria economy which can stimulate economic growth and job creation. It should be noted that around the world, about two-thirds of all employees work in the informal sector (World Bank, 2009) cited in Atal et al 2013: 34). Informal sector constitutes a significant segment of the Nigerian economy. The sector thereby contributes to the Gross Domestic Product (GDP) and employment and contributes significantly to economic development of Nigeria in general (Omisakin,1999) cited in (Atah et al. 2013: 32).

Available statistics in Nigeria also shows that the informal sector contributes about 60 per cent of the nation’s Gross Domestic Product (GDP). Like many other developing countries, the sector is considered crucial to job creation as it accounts for about 90 percent of jobs in the country. In South Africa, the sector generates 60 per cent of employment and contributes about 28 per cent to the nation’s Gross Domestic Product (GDP) (Federal Office of Statistic. 2012). The foregoing therefore, points to the fact that the informal sector given the needed regulations and support could be a major player in the combat against unemployment problem in Nigeria, as well as in other developing countries.

According to Onyemaechi (2013:62), the informal sector consists of units engaged in the production of goods and services with the primary objective of generating employment and incomes to the persons involved.

Statement of the Problem

There has been a general outcry on the persistent rise in the unemployment rate in Nigeria. This has led an army of angry and desperate unemployed youths prowling cities and the unending influx of youth into the urban areas which has now posed further threat to an already precarious state of national security (Hernando 2013) cited in Atal et al 2013: 34). Government at various levels has introduced various policies and programme aimed at reducing this

menace but to no avail. However, informal sector contribution to economic development in the area of job creation can help to reduce the unemployment problem. The informal sectors in developing countries appear to have been steadily growing in recent times because most people have decided to create their own source of livelihood for survival (Onyemaechi 2013: 66).

Considering the ongoing economic and financial crisis that characterizes the economies of many African countries, including Nigeria, the informal sector has the potential to provide the needed impetus for employment generation. Fapohunda (2012: 39) also notes that the informal sector plays several roles in the growth and development of the Nigerian economy. It provides productive outlets for a large number of people who prefer or have to be self-employed consequently contributing to the national economy in terms of output and employment.

It is against this background that this study aims to examine the role of employment generation in Nigeria. Despite the fact the topic is well documented, efforts have not really been made to explore the dynamism the sector has played and still playing in creating jobs in Nigeria, hence this study aims to fill this gap.

Objectives of the Study

The main objective of this study is to examine the role of the informal sector in employment generation in Nigeria. In order to achieve this objective, the following are the specific objectives:

  1. To understand the informal sector and their activities in Nigeria
  2. To examine the relationship between the initial sector and enjoyment generation in Nigeria
  3. To investigate role the informal sector has played in the employment generation in Nigeria.

Research Questions

  1. What are the activities of the informal sector in Nigeria?
  2. To what extent has the informal sector been able to generate employment in Nigeria?

Significance of the Study

This study is very significant for its timely nature. It will explain the roles of the informal sector in Nigeria and this will make the government pay attention to using the informal sector as a tool for solving unemployment which is a problem confronting the country. The research, policies and recommendations will assist the government and other unemployed youths.

Scope of the Study

This study examines the informal sector in Nigeria including their activities, and understand the role the sector has played in employment generation in Nigeria.

Limitations of the Study

The major constraint faced in this study is in gathering materials.

Definition of Terms

1.) Informal Sector:

It refers to the unregulated, non-formal portion of the market economy that produced goods and services for sale or for other forms of remuneration. It also refers to the sector that consists of units engaged in the production of goods and services with the primary objective of generating employment and incomes to the persons involved (Becker 2004) cited in (Onyemaechi 2012: 61)

2.) Employment Generation:

This is the process involved in engaging the full labour force in productive activities of the economy (Yusuf 2014: 4).

3.) Unemployment:

This refers to a condition of joblessness or lack of employment. In other words, anyone who is fit and available to work but fails to get one may be considered as being unemployed for the concerned period (Olubukola, 2013)

Chapter Five

Conclusion and Recommendations

5.1 Conclusions

The informal sector a varied and heterogeneous sector operating in a number of fields providing services at low cost and within the reach of the consumers. Many of the persons working in that sector have low level of education and have learnt some elementary skills on the job. They are not attracted to the training centers to go for the improvement of their knowledge or skills. However, these small enterprises are providing more than 50% of the employment in the non- agricultural sector and thus contributing in minimizing unemployment problem.
However, the conclusion, which results from this research work seems to concur with observations and recommendations made by many economists. Nigerian government must stop marginalizing the informal sector; on the contrary they should encourage its development by making it official. In this case, access to the credit market will be easier and grants will then be possible. The resulting economic dynamic will then perhaps enable the Nigerian government to reduce the unemployment and misery of both rural and urban areas. Despite this increase in unemployment rates, the rise of employment in the informal sector is observed everywhere and has been particularly rapid in the Nigerian economy.

5.2 Recommendation

In view of the findings of the study, we put forward the following recommendations for policy implementation:

  1. Governments at all levels, particularly the federal government should make pro-active policies towards making the informal sector more attractive for greater employment generation. In the on-going economic and financial crisis that characterise the economies of African countries, including Nigeria, the informal sector has proven its potency to provide the needed impetus for employment generation; even as the existing policy responses to growth of the informal sector have not been encouraging.
  2. Given these observations, government should partner with Non-Governmental organisations (NGOs) in giving financial and technical support, including the subsidization of motorcycle costs and other operational gadgets like helmet so as to reduce the rate of accident and casualties. Banning okada, a common practice, without creating alternative jobs, far from reducing crime will lead to increase in crime rate.
  3. In recognition of the employing capacity of okada riding business among youths, government should formalize and regulate the activities of commercial motorcycle operators so as to strengthen the business. It is believed that by so doing, transport service delivery to the people will be enhanced and earnings of the okada riders will subsequently be improved to optimize their lots.
  4. The National Economic Council and allied ministries should start thinking in the direction of including the informal sector in national income accounting. The effort of the Nigerian government at rebasing the economy in 2014 is a laudable one that should be carried a little beyond its present scope to embrace more of the informal sector activities.

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