Beyond the formal economy: employment and income perspectives in Tanzania

Abstract

This study investigates employment and earnings levels in Tanzania's informal and formal sectors, as well as the factors that determine them. Despite growth in the economy, insufficient job creation in the formal sector has rendered the informal sector an inevitable source of employment for youths. We use the Blinder-Oaxaca decomposition to examine the disparity between formal and informal earnings, and Quantile Regression to investigate the factors that determine earning differentials across income groups. Among key findings are: first, there are major differences in average earnings between the formal and informal sectors, with the informal sector having lower average earnings; second, women's earnings are lower in both sectors and across other sectors; and lastly, the formal sector has a higher percentage of employees who work a second job than the informal sector. Employee characteristics, gender, taking on another work, relocating to a rural location, and transferring to private employment and the informal sector are the factors that contribute to earnings disparities. The following policy implications are drawn: investing in education is crucial for raising earnings; women's participation in higher paying activities is important for empowering them; and an overall improvement in employee earnings is important for reducing the need to get a second job to supplement their incomes. JEL: E24; E26; O17