Urban Informal Economy: Causes, Constraints and Transition Intention: In the Case of Wolkite and Butajira Towns

Abstract

Informal sector plays a crucial role in urban poverty alleviation through creating jobs and reducing unemployment. As literature shows there are a number of reasons that drives the informal economy participants to enter to the informal sector and also there are a number of constraints that faces the informal economy participants when engaged in this sector. The main purpose of this study is to assess the cause, constraint and transition intention of urban informal economy participants in case of Gurage zone Wolkite and Butajira towns. Hence, descriptive research design with cross sectional survey was considered. Among the identified reasons by the respondent are “lack of enough capital to enter to formal sector,” “tight and unfair tax administration and regulations in the formal sector”, and “high unemployment “are the critical cause that enforce the urban informal economy participants to be informal. The major constraints that face the urban informal economy participants during operating their business on informal sectors are lack of social protection and labor legislation at the workplace and inadequate regulatory policies and regulations to address unique informal sector problems are highly ranked constraints that face on the participants of urban informal economy in Gurage zone Wolkite and Butajira towns. Based on the finding of the study the researchers recommend that, even if many firms may not be formalizing because of their own strategic reasons, the government shall make simplicity of business registration or licensing cost, equity in the tax system and providing tax-holidays for sometimes, increases the benefits of legal registration like more favorable credit terms and confidence in the taxing administration to enhance the environment for businesses to operate formally.

Keywords: Informal economy, causes, constraint, transition intention