Determinants of Labor Force Participation and Wages in Thailand: What is the Role of the Informal Sector?*

• Published date: 01 September 2020
• Author: Nalitra Thaiprasert,Supanika Leurcharusmee,Peerapat Jatukannyaprateep,Jirakom Sirisrisakulchai
• Date: 01 September 2020
• DOI: http://doi.org/10.1111/asej.12219

Determinants of Labor Force Participation and

Wages in Thailand: What is the Role of the

Informal Sector?*

Nalitra Thaiprasert, Supanika Leurcharusmee,

Peerapat Jatukannyaprateep and Jirakom Sirisrisakulchai

Received 17 March 2017; Accepted 20 August 2020

There has been a perennial debate on why the informal economy exists and grows in

developing countries around the world. The present study focuses on the case of Thai-

land, one of the countries with the highest share of informal activities, to clarify whether

its informal workers participate in the informal sector voluntarily or involuntarily. The

conf‌irmation matters for the design of government policies and public welfare. We sepa-

rated the study into two levels. First, at the national level, we used the f‌inite mixture

model to examine the 2010 Population and Housing Census and estimate the wage

equations for formal, voluntary informal and involuntary informal workers. Second, we

focused on a local area for the case of Chiang Mai city, where we surveyed a sample of

393 informal business owners to understand their decision to participate i n the informal

sector. From both levels of study, we found heterogeneity among the informal workers,

who could be classif‌ied into voluntary and involuntary groups. While those in the volun-

tary group stay in the informal sector because workers prefer time f‌lexibility, those in the

involuntary group stay because of family burdens. Both levels of data also showed that

the Thai informal sector is dominated by the voluntary group (>70percent).

Keywords: informal economy, informal business, informal sector, Thailand.

JEL classif‌ication codes: J46.

doi: 10.1111/asej.12219

I. Introduction

There has been constant debate on why the informal economy exists and grows

in both advanced and developing countries. Three major perspectives offer

*

Thaiprasert (corresponding author): Faculty of Economics, Chiang Mai University. Email:

nalitra@gmail.com. Leurcharusmee: Faculty of Economics, Chiang Mai University. Email: supanika.

l@cmu.ac.th. Jatukannyaprateep: Independent Researcher. Email: P.jatukannyaprateep@gmail.com.

Sirisrisakulchai: Center of Excellence in Econometrics, Faculty of Economics, Chiang Mai Univer-

sity. Email: sirisrisakulchai@hotmail.com. We thank Chiang Mai University for the generous

funding for this study. We also thank Suthida Jadsom and Narin Inkhamsaeng for their skillful

research assistance. We are grateful for comments from the 2016 EAEA conference discussant

Dionisius Ardiyanto Narjoko and from other participants, which have helped improve this paper. We

are thankful to the anonymous referees for constructive comments.

© 2020 East Asian Economic Association and John Wiley & Sons Australia, Ltd

Asian Economic Journal 2020, Vol.34 No. 3, 301–326 301

contradictory explanations on this issue. The f‌irst argues that the informal econ-

omy is the product of ‘exclusion’from state benef‌its or part and parcel of the

process of modernization. According to the second perspective, informal activi-

ties are driven by the voluntary decision by workers to ‘exit’the formal econ-

omy to f‌ind better job options. The third sees the informal sector more as a

result of its workers’decision of voluntarily opting to work in this manner due

to social and redistributive rationales, such as social networks and connections

with relatives, friends and neighbors (Fernandez-Kelly, 2006; Williams, 2010;

Williams et al., 2011; Williams and Round, 2011).

Presently, there is a large body of empirical studies that support each of these

three major perspectives. As a result, for each perspective, contradictory views

have formed and evidence against one another has been accumulated. However,

more recent studies (Williams, 2010; Williams et al., 2011; Williams and

Round, 2011) present convincing evidence that the participation of workers/

entrepreneurs in the informal economy can be both voluntary and involuntary,

and that their entry into the informal sector can be due to both exclusion and

exit. In other words, no one theory is universally valid to explain the nature of

the informal sector.

Knowing how informal workers and businesses decide to participate in the

informal sector matters a great deal because it would allow us to better debate

how we should design policy to deal with these individuals and to understand

the related impacts from such policy. We know we should not treat all informal

workers and businesses the same because their needs are not universal, and gov-

ernments have limited budgets. The government needs to be able to identify

who is more vulnerable and what kinds of policies can be applied to th e target

groups, without benef‌itting free riders. In other words, the conf‌irmation of how

big each type of informal worker group is in one countr y is important given the

fact that it can help in designing proper government policies and public welfare

measures for that specif‌ic country.

The main objective of our study is to investigate how large each group of

informal workers in Thailand is, and what factors contribute to their decision to

voluntarily exit the formal sector or exclude them from the formal sector invol-

untarily. With this main objective, we split the study into three parts. Sections

IV.1 and V.1 investigate the decision to exit the formal economy of workers at

the national level, using secondary data from Thailand’s National Statistical

Off‌ice (NSO). This part allows us to statistically estimate the proportion of vol-

untary and involuntary informal workers, as well as identify basic wage determi-

nants for each type of informal worker, which can reveal the key differences

between each group. As the informal economy is complex and detailed data are

required to understand it, Sections IV.2 and V.2 of this study provide an in-

depth analysis of reasons for informal businesses to participate in the informal

sector, using a case study of Chiang Mai city. After understanding who they are

and factors affecting them, Section VI presents policy recommendations for each

group.

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