Proceedings of 31st International Business Research Conference
27 - 29 July 2015, Ryerson University, Toronto, Canada
ISBN: 978-1-922069-80-1
Overcoming the Problems Impeding the Sustainable
Integration of Informal and Formal Sectors of an
Economy: Focusing on the Nigerian Economy
Ifeanyi Ike Ugboaja
This study investigated aspects of the informal economy in Nigeria. Issues
investigated included motivations by workers and employers for opting for the
informal economy, as opposed to the formal economy, reasons that employers in
the formal economy do not create more jobs, and causal factors implicated in low
levels of job creation. It was concluded that, in the absence of an aggressive effort
to curb corruption in government, invest widely in job training and actions to
encourage increased FDI and increased entrepreneurial activity within Nigeria, the
economy will continue to be dominated by the informal sector to the detriment of
the country as a whole.
Track: Management
Introduction
Addressing issues and problems associated with the integration of the
informal sector of an economy into its formal sector is beset with barriers related to
(a) the definition of an informal sector of an economy (b) perceptions of the
existence and the relationship of an informal sector with respect to an economy’s
formal sector, (c) the identification of entities and individuals that are or should be
included in the informal sector of an economy, (d) identifying the most effective
strategies for the integration of the informal sector of an economy into the formal
economy, (e) identifying and overcoming the barriers to the implementation of
plans for the integration of the informal sector of an economy into the formal
economy, and (f) creating a system that will assure the sustainability of the
strategy. This study investigated and analyzed these issues with a specific focus
on the economy of Nigeria. Nigeria was selected as the focal economy for this
study because of the high level of informal economic activity in the country.
Ogbuabor and Malaolu (2013) found that “the size of Nigeria’s informal economy
hovered between 53.6 – 77.2% of official GDP, while the average size was 64.6%
of GDP” (p. 97). Awojobi, Ayakpat, and Adisa (2014) reported a level of 57.9% for
2013, which, for practical purposes, is compatible with the finding by Oshikoya
(2008). Oshikoya (2008) added that the economy of Nigeria “remains largely
informal, with a significant share of transactions in the economy unreported” (p.
33). The proportional size of the informal economy in Nigeria, as reported by
Oshikoya (2008), “is highest among its peers and twice the average of 28.8
percent for its peers” and is “six times higher than that of the United States”, which
was 8.8% in 2008 (p. 33). Four research questions were investigated with respect
to the informal economy in Nigeria. Thee research questions were as follows:
______________________________________________________________
Keller Graduate School of Management-DeVry University Atlanta GA, 430 Havant Way
Lawrenceville GA 30045, USA, Email: iugboaja@devry.edu
Proceedings of 31st International Business Research Conference
27 - 29 July 2015, Ryerson University, Toronto, Canada
ISBN: 978-1-922069-80-1
o Research Question 1: What reasons best explain why workers
choose to participate in the informal economy, as opposed to
participating in the formal economy?
o Research Question 2: What reasons best explain why employers
choose to participate in the informal economy, as opposed to
participating in the formal economy?
o Research Question 3: What reasons best explain why employers in
the formal economy do not create more job positions?
o Research Question 4: What causal factors, as perceived by labor
leaders and formal economy employers, best explain why employers
in the formal economy do not create more job positions?
Literature Review
Habib-Mintz (2009) stated that: “The informal economy exists in both
developing and developed nations, though it is most often associated as an engine
of economic dynamism in developing countries. The concept is generally defined
as the sum of economic income generating activities outside of the formal
economy, which are registered, tax paying and legal” (p. 1). Cling, Razafindrakoto,
and Roubaud (2012) noted that: “Most jobs in the developing countries are found
in the informal economy, which plays a predominant role in developing economies.
Word even has it that the global economic crisis has increased the weight of the
informal sector due to job losses in other economic sectors” p. 553). Chinguno
(2010) found that globalization has resulted in the “erosion of work in the core of
the formal economy and the subsequent exponential rise of the informal economy
in many developing countries” (p. 367). Jackson (2012) found that, “The informal
economy has grown in importance within sub-Saharan Africa, yet there are
debates about its rol4e within national economies that appear not to take
cognizance of the interests and the weak power base of those working within the
informal economy” (p. 2901). Lebaron and Ayers (2013) argued that the informal
economy in Sub-Saharan African countries is creating a new form of slavery, in
that it “must be understood as a social relationship of insecurity and exploitation
whose acceleration in recent decades is traceable to broader shifts in the relations
of production and social reproduction” (p. 873). Williams and Lansky (2013)
countered this argument, stating that: “Over the past decade or so, studies have
begun to show that some informal employment is not due to a lack of choice but
more a matter of choice because of the greater autonomy, flexibility and freedom
found in this sphere” (p. 365). Akinwale (2012) noted that: “Unemployment
remains high in Nigeria due to disintegration between the formal and informal
sectors, among other factors. While the unemployed largely focus on the formal
sector in search of jobs, there is inadequate interest in the informal sector. Yet,
this sector provides livelihoods for the majority of the population” (p. 315).
Proceedings of 31st International Business Research Conference
27 - 29 July 2015, Ryerson University, Toronto, Canada
ISBN: 978-1-922069-80-1
Methodology
As indicated in the introduction to this paper, four research questions were
investigated. Hypotheses were tested in relation to each research question. The
hypotheses were tested in their null forms. The hypotheses were as follows:
H10: There is no statistically significant relationship between worker
decisions to participate in the informal economy, as opposed to the
formal economy, as a dependent variable, and (a) skills lack, (b)
educational deficit, (c) lack of job openings, and (d) payroll taxes
deducted in the formal economy, as independent variables.
H11: There is a positive statistically significant relationship between worker
decisions to participate in the informal economy, as opposed to the
formal economy, as a dependent variable, and (a) skills lack, (b)
educational deficit, (c) lack of job openings, and (d) payroll taxes
deducted in the formal economy, as independent variables.
H20: There is no statistically significant relationship between employer
decisions to participate in the informal economy, as opposed to the
formal economy, as a dependent variable, and (a) governmental
regulation of employers in the formal economy, (b) employee wage
levels in the formal economy, (c) provision of employee benefits
required in the formal economy, and (d) business operations taxes
required in the formal economy, as independent variables.
H21: There is a positive statistically significant relationship between
employer decisions to participate in the informal economy, as opposed
to the formal economy, as a dependent variable, and (a) governmental
regulation of employers in the formal economy, (b) employee wage
levels in the formal economy, (c) provision of employee benefits
required in the formal economy, and (d) business operations taxes
required in the formal economy, as independent variables.
H30: There is no statistically significant relationship between employer
decisions that results in relatively low levels of job creation in the
formal economy, as a dependent variable, and (a) burdensome
governmental regulation associated with employee relations in the
formal economy, (b) employee wage levels in the formal economy, (c)
provision of employee benefits required in the formal economy, and
(d) business operations taxes required in the formal economy, as
independent variables.
H31:There is a positive statistically significant relationship between
employer decisions that results in relatively low levels of job creation
in the formal economy, as a dependent variable, and (a) burdensome
governmental regulation associated with employee relations in the
formal economy, (b) employee wage levels in the formal economy, (c)
provision of employee benefits required in the formal economy, and
(d) business operations taxes required in the formal economy, as
independent variables.
H40:There is no statistically significant relationship between employer
decisions that results in relatively low levels of job creation in the
formal economy, as a dependent variable, and the following causal
Proceedings of 31st International Business Research Conference
27 - 29 July 2015, Ryerson University, Toronto, Canada
ISBN: 978-1-922069-80-1
attributions by labor leaders and formal economy employers [(a)
bureaucratic ineptitude in government, (b) insufficient levels of FDI, (c)
corruption in government dealings with employers in the formal
economy and in the management of governmental revenues and
expenditures, and (d) high levels of taxation affecting businesses in
the formal economy], as independent variables.
H41:There is a positive statistically significant relationship between
employer decisions that results in relatively low levels of job creation
in the formal economy, as a dependent variable, and the following
causal attributions by labor leaders and formal economy employers
[(a) bureaucratic ineptitude in government, (b) insufficient levels of
FDI, (c) corruption in government dealings with employers in the
formal economy and in the management of governmental revenues
and expenditures, and (d) high levels of taxation affecting businesses
in the formal economy], as independent variables.
Data were collected through the administration of survey questionnaires to
samples of four populations groups. The population groups were (a) workers in the
informal economy, (b) employers in the informal economy, (c) employers in the
formal economy, and (d) labor leaders and formal economy employers, the data
collected were used in the testing of the hypotheses. Hypotheses were tested
through the application of multiple regression analysis. The criterion for the
rejection of a null hypothesis was a determination of statistical significance at the
p<0.05 level of probability.
Research Results
The results of the research performed are presented separately in relation
to the research question investigated and the research hypothesis tested. The four
sets of research results are associated with (a) decisions by workers in the
informal economy, (b) decisions by employers in the informal economy, (c)
decisions by employers in the formal economy, and (d) causal attributions by labor
leaders and employers in the formal economy. The results sets are presented
below.
Workers in the Informal Economy
With respect to workers in the informal economy, the research question
investigated was as follows: What reasons best explain why workers choose to
participate in the informal economy, as opposed to participating in the formal
economy? The four reasons assessed as independent variables in relation to this
question were as follows: (a) lack of skills required in the formal economy; (b)
formal education deficit with respect to formal economy requirements; (c)
insufficient job openings in the formal economy; and (d) payroll taxes deducted
from worker pay in the formal economy. The hypothesis associated with this
research question was tested in its null form. The null form of the hypothesis was
as follows: There is no statistically significant relationship between worker
decisions to participate in the informal economy, as opposed to the formal
economy, as a dependent variable, and (a) skills lack, (b) educational deficit, (c)
Proceedings of 31st International Business Research Conference
27 - 29 July 2015, Ryerson University, Toronto, Canada
ISBN: 978-1-922069-80-1
lack of job openings, and (d) payroll taxes deducted in the formal economy, as
independent variables. The research results are presented in Tables 1, 2, and 3,
which may be found below and on the following page.
Table 1: Model Summary – Workers in the Informal Economy
Table 2: ANOVA Results - Workers in the Informal Economy
Table 3: Multiple Regression Coefficients – Workers in the Informal
Economy
Employers in the Informal Economy
With respect to employers in the informal economy, the research question
investigated was as follows: What reasons best explain why employers choose to
participate in the informal economy, as opposed to participating in the formal
economy? The four reasons assessed as independent variables in relation to this
question were as follows: (a) governmental regulation of business operations in
the formal economy; (b) employee wage levels required in the formal economy; (c)
Proceedings of 31st International Business Research Conference
27 - 29 July 2015, Ryerson University, Toronto, Canada
ISBN: 978-1-922069-80-1
provision of employee benefits required in the formal economy; and (d) business
operations taxes required in the formal economy. The hypothesis associated with
this research question was tested in its null form. The null form of the hypothesis
was as follows: There is no statistically significant relationship between employer
decisions to participate in the informal economy, as opposed to the formal
economy, as a dependent variable, and (a) governmental regulation of employers
in the formal economy, (b) employee wage levels in the formal economy, (c)
provision of employee benefits required in the formal economy, and (d) business
operations taxes required in the formal economy, as independent variables. The
research results are presented in Tables 4, 5, and 6, which may be found below
and on the following page.
Table 4: Model Summary – Employers in the Informal Economy
Table 5: ANOVA Results – Employers in the Informal Economy
Proceedings of 31st International Business Research Conference
27 - 29 July 2015, Ryerson University, Toronto, Canada
ISBN: 978-1-922069-80-1
Table 6: Multiple Regression Coefficients – Employers in the Informal
Economy
Employers in the Formal Economy
With respect to employers in the formal economy, the research question
investigated was as follows: What reasons best explain why employers in the
formal economy do not create more job positions? The four reasons assessed as
independent variables in relation to this question were as follows: (a) burdensome
governmental regulation applicable to employee relations; (b) employee wage
levels required in the formal economy; (c) provision of employee benefits required
in the formal economy; and (d) business operations taxes required in the formal
economy. The hypothesis associated with this research question was tested in its
null form. The null form of the hypothesis was as follows: There is no statistically
significant relationship between employer decisions that results in relatively low
levels of job creation in the formal economy, as a dependent variable, and (a)
burdensome governmental regulation associated with employee relations in the
formal economy, (b) employee wage levels in the formal economy, (c) provision of
employee benefits required in the formal economy, and (d) business operations
taxes required in the formal economy, as independent variables. The research
results are presented in Tables 7, 8, and 9, which may be found below and on the
following page.
Table 7: Model Summary – Employers in the Formal Economy
Proceedings of 31st International Business Research Conference
27 - 29 July 2015, Ryerson University, Toronto, Canada
ISBN: 978-1-922069-80-1
Table 8: ANOVA Results – Employers in the Formal Economy
Table 9: Multiple Regression Coefficients – Employers in the Formal
Economy
Labor Leaders and Formal Employers
With respect to organized labor leaders and employers in the formal
economy, the research question investigated was as follows: What causal factors,
as perceived by labor leaders and formal economy employers, best explain why
employers in the formal economy do not create more job positions? The four
reasons assessed as independent variables in relation to this question were as
follows: (a) bureaucratic ineptitude; (b) low levels of foreign direct investment
(FDI); (c) corrupt behavior on the part of bureaucrats and politicians; and (d) high
levels of taxation, especially employee-related taxation. The hypothesis associated
with this research question was tested in its null form. The null form of the
hypothesis was as follows: There is no statistically significant relationship between
employer decisions that results in relatively low levels of job creation in the formal
economy, as a dependent variable, and the following causal attributions by labor
leaders and formal economy employers [(a) bureaucratic ineptitude in government,
(b) insufficient levels of FDI, (c) corruption in government dealings with employers
in the formal economy and in the management of governmental revenues and
expenditures, and (d) high levels of taxation affecting businesses in the formal
economy], as independent variables. The research results are presented in Tables
10, 11, and 12, which may be found on the following page.
Proceedings of 31st International Business Research Conference
27 - 29 July 2015, Ryerson University, Toronto, Canada
ISBN: 978-1-922069-80-1
Table 10: Model Summary – Labor Leaders and Employers in the Formal
Economy
Table 11: ANOVA Results – Labor Leaders and Employers in the Formal
Economy
Table 12: Multiple Regression Coefficients – Labor Leaders and Employers
in the Formal
Economy
Discussion of Findings
The results of the hypothesis testing of the Research Question 1 (What
reasons best explain why workers choose to participate in the informal economy,
as opposed to participating in the formal economy?) found that the four
independent variables together explained 88% of the reasons workers in the
informal economy choose the informal economy, as opposed to the formal
economy (F = 29.411; Significance = 0.0001). The null hypothesis was rejected.
With respect to the comparative explanatory power of the four variables, however,
Proceedings of 31st International Business Research Conference
27 - 29 July 2015, Ryerson University, Toronto, Canada
ISBN: 978-1-922069-80-1
the shortage of jobs in the informal economy was by far the strongest explanatory
variable, followed in turn by insufficient education, and lack of skills. Payroll taxes
levied on workers had a negative impact on worker decisions.
The results of the hypothesis testing of the Research Question 2 (What
reasons best explain why employers choose to participate in the informal
economy, as opposed to participating in the formal economy?) found that the four
independent variables together explained 88% of the reasons employers in the
informal economy choose the informal economy, as opposed to the formal
economy (F = 29.411; Significance = 0.0001). The null hypothesis was rejected.
With respect to the comparative explanatory power of the four variables, however,
the benefits that are provided to workers in the formal economy was the strongest
explanatory variable, followed in turn by employee wage levels in the formal
economy, and governmental regulation. Taxation had a negative impact on
employer decisions.
The results of the hypothesis testing of the Research Question 3 (What
reasons best explain why employers in the formal economy do not create more job
positions?) found that the four independent variables together explained 88% of
the reasons employers in the formal economy do not create more jobs (F =
29.411; Significance = 0.0001). The null hypothesis was rejected. With respect to
the comparative explanatory power of the four variables, however, taxation on
employers in the formal economy was the strongest explanatory variable, followed
in turn by the near absence of governmental incentives, and governmental job
training support. Human resource development – education – was not perceived
as an important factor in these decisions.
The results of the hypothesis testing of the Research Question 4 (What
causal factors best explain why employers in the formal economy do not create
more job positions?) found that the four independent variables together explained
88% of the causal factors that result in fewer jobs being created in the formal
economy (F = 29.411; Significance = 0.0001). The null hypothesis was rejected.
With respect to the comparative explanatory power of the four variables, however,
corruption (or, at least, perceived corruption in government (politicians and
bureaucrats) was the strongest indicated explanatory variable, followed in turn by
low levels of FDI and bureaucratic ineptitude. Employee-related taxes were
perceived as an important causal in relation to job creation.
Conclusion
The principal conclusion drawn from the findings of the research reported in
this paper is that the federal government in Nigeria is the prime culprit in the
continued dominance of the informal economy in the country. In the absence of an
aggressive effort to curb corruption in government, invest widely in job training and
actions to encourage increased FDI and increased entrepreneurial activity within
Nigeria, the economy will continue to be dominated by the informal sector to the
detriment of the country as a whole.
Proceedings of 31st International Business Research Conference
27 - 29 July 2015, Ryerson University, Toronto, Canada
ISBN: 978-1-922069-80-1
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