The Informal Economy of Pakistan

Author Muhammad Danish Raza is graduate in Economics from National Defence University, Islamabad.

The Informal economy constitutes around 64 percent of Pakistan’s total economy. Its estimated size is $457 billion. It is the main reason why economic policies fail to achieve their intended targets, as the unregistered portion of the economy remains unaffected from the potential impact of these policies. Therefore due to the lack of accurate information about this hidden sector,  country’s limited economic resources are not optimally utilized.

Pakistan’s economy is largely based on the services sector. Therefore, the role of labor force becomes crucial in sustaining the economy. Since females  make 49.2 percent of the total population of Pakistan, it is equally important to consider their role in shaping the labor force of the country as well.

However, the undocumented economy of Pakistan poses severe challenges to the fundamental rights of the informal laborers. Resultingly, it gives rise to the serious socio-economic issues including lack of social security, legal protection and fair wages to the unregistered labor.

In particular, women face greater vulnerabilities in hiring, wages and workplace conditions. Many of the Pakistani women engage in informal work, including agriculture, handicrafts, and domestic labor, etc. They often earn lower wages than men and are not registered in the formal financial system. According to the latest report of the International Labor Organization (ILO), Pakistan has one of the largest gender pay gaps (GPG)  in the world with GPG ranging from 25 % to 30 % when assessed on hourly and monthly basis, respectively.

Furthermore, the gender disparities extend beyond wages. Women face issues such as unsafe working environment and lack of legal support against workplace harassment. Similarly, the absence of health benefits, maternity leave, and skill development programs obstructs their professional growth. Resultingly, the economic contribution of the female labor force remains undervalued in Pakistan’s informal sector.

The challenges posed by the informal economy extend beyond the gender disparities. The large informal economy of Pakistan results in tax revenue losses, making it difficult for the government to finance the necessary expenditures in healthcare, education and infrastructure.

To address these challenges, policy measures are required to formalize the informal economy. This can be achieved by simplifying the tax system, introducing incentives for registration, and enforcing labor laws which ensure fair wages and social protection for all workers. Additionally, addressing gender disparities through equal pay policies and targeted skill development programs can help create inclusive and equitable labor market. These steps are vital in formalizing Pakistan’s undocumented economy and ensuring sustainable economic growth.