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ARTICLE: Manufacturing is the main contributor in the industrial sector in Pakistan. It has a 14% share in GDP and provides employment to around 9.9 million of the country's workforce. However, in recent years a high share of employment in manufacturing has been concentrated in informal sector activities. Informal sector economic activities are characterized as those taking place in small scale unincorporated enterprises that are not functioning with a separate legal identity independent of their owners and are operating at a low level of organization usually with less than 10 workers. In 2017-18, 63 percent of the manufacturing workforce was in informal employment. The high prevalence of informal employment within the manufacturing sector can be attributed to a number of factors, which mainly include excessive taxation across manufacturing value chain resulting in increase in cost of production, dumping of cheap imports due to poorly negotiated free trade agreements with other countries and the harassment faced by small and medium manufacturing enterprises at the hands of relevant government agencies.

The manufacturing sector has eleven main sub-sectors which include textiles, food products, non-metallic products, fabricated metal, and pharmaceutical. Data from Labour Force Survey 2017-18 can be used to examine the presence of informal workers in-depth within each manufacturing sub-sectors as it collects information at the four digit PSIC industry level and also provides data on employment in informal nature enterprises in each manufacturing sub sectors.

The analysis from LFS 2017-18 reveals that bulk of informal workers within manufacturing are engaged in the textile subsector (53 percent), which is followed by food products (10 percent), fabricated metal (8 percent) and manufacturing of furniture (6 percent). There exists a large gap between the wages of formal and informal sector paid employed workers across all these manufacturing sub-sectors. The average monthly wages stood at Rs. 20,582 for formal workers and Rs. 12,450 for informal workers across the entire manufacturing sector in 2017-18. The highest gap in wages of formal and informal sector workers is seen in the pharmaceutical sub-sector (PKR 13,504), where earnings of informal sector workers (PKR 13,711) are less than half of those in the formal sector (PKR 27,215). This is followed by the fabricated metals and basic metals sub-sector (PKR 12,017 and PKR 11,972). The lowest wage gap is in the manufacturing of furniture, where wages of informal sector workers are in fact slightly higher than those of their formal sector counterparts (PKR 16,891 vs. PKR 15,233).

The above analysis clearly highlights that informal sector workers in the various manufacturing sub-sectors are earning much less than their counterparts in the organized formal sector. In most cases, the informal sector workers in different sub-sectors are earning substantially less than the stipulated minimum wage across all provinces, as they are outside the ambit of labour laws and regulations. Wages of formal sector workers in manufacturing sector are governed by the Payment of Wage Act 1936, which regulates timely payment of wages to industrial workers without any wrongful deductions. It also ensures that salary is paid by 7th of each month in factories/establishments having a workforce of fewer than 1000 workers and by 10th of each month in smaller factories/establishments. In case of delay in payments of wages, the Act empowers a worker to file a claim directly or through a Trade Union or an Inspector, with the Authority appointed under the Payment of Wages Act. All the provincial governments have adopted the Payment of Wages Act 1936, after devolution in 2010.

A large and silent majority of the manufacturing workforce in the country does not have any form of legal protection available, in terms of timely payment of wages, minimum level of wages, decent working conditions and lack of access to any form of work related social security measures. Consequently, such workers are constantly faced with job insecurity, income insecurity, higher vulnerability to occupational injuries/disease and lack of access to any health coverage and old age pensions. Therefore, informal workers are always trapped in a vicious circle of low productivity and poverty, as a result of which the entire manufacturing sector, at the macro level, is working at a lower level of productivity and innovation. Due to this, Pakistan's manufacturing exports are not able to compete in the global export markets and it continues to lose its export share to other emerging exporters like Bangladesh and Vietnam.

Given the important role of the manufacturing sector in Pakistan's economy, the Government urgently needs to tackle this situation. While lowering taxes on manufacturing activities will help in reducing the share of informal employment in the sector, this would need to be complemented by the development of a targeted social protection program for informal workers to provide them a minimum floor of protection in terms of income security and access to essential healthcare. Due to the low financial capacity of such workers to give contribution on a regular basis for health/old age insurance to existing schemes, like the Employees Old Age Benefits Institution or the Employees Social Security Institutions, the programme would need to be financial from general government revenues. However, it is important to provide social protection to the informal segment workers at the earliest, so that they can perform at a higher level of productivity and thereby contribute to the growth and development of the manufacturing sector and help improve Pakistan's competitiveness at the global level.

(The writer is an economist and can be reached at [email protected])

Copyright Business Recorder, 2020