Ethnic diversity and informal employment in Ghana

Informal activities are widespread in many developing countries. In many sub-Saharan African (SSA) countries informal economic activities account for more than one-third of economic output and more than two-thirds of employment. Workers engaged in informal activities tend to be less productive and disproportionately more poor. Policy makers therefore face a lingering and difficult policy dilemma on how to tackle the challenges in the informal sector, boost productivity, and create decent jobs.

Many studies explore the links between informality and factors such as poverty, inequality, innovation, wages, entrepreneurship, productivity, and so on. The link between ethnic diversity and levels of informality, however, has often not been considered.

Ghana is an important case study in examining the dynamics of ethnic diversity and informal employment. Evidence suggests that the most ethnically diverse continent in the world is Africa, and that it hosts some of the most diverse countries in the world. Fearon (2003) reports an ethnic fractionalization score of 0.846 for Ghana, making it one of the most ethnically diverse countries in the world, ahead of all countries in Europe, Asia, the Middle East, and Latin America and the Caribbean.

Ghana’s large informal sector accounts for about 80% of the labour force. When we examine how this ethnic diversity affects informal work within Ghana — by comparing levels of ethnic diversity to levels of informality between districts — we find that higher levels of diversity are associated with a higher probability of workers engaged in informal work. This relationship is true for both informal wage and informal self-employment. Specifically, we find that a unit increase in ethnic diversity is associated with up to a 26.3 percentage point increase in the probability of a worker engaging in informal work.

We also find that trust is negatively associated with informal work. An increase in trust is associated with a lower probability of engaging in informal work. Ethnic diversity in Ghana decreases trust and increases the probability of engaging in informal work, indicating that trust is a channel linking ethnic diversity to informal work.

How does ethnic diversity impact informality?

Greater understanding of the impact of ethnic diversity on informal work has policy lessons for influencing the prevalence of informal work. Conceptually, ethnic diversity could increase the probability of informality or decrease the probability of informality, depending on the channels through which diversity operates to influence informality.

The major ethnic groups in Ghana are the Akan, the Mole Dagbani, the Ewe, the Ga Adangbe, the Guan, the Gurma, the Grusi and the Mande-Busanga. Each ethnic group has further subdivisions which share a common cultural heritage, history, language, and origin. For instance, the Akan are further divided into the Asante, Fante, Akwapim, Akyem, Akwamu, Ahanta, Bono, Nzema, Kwahu, and Safwi and the Ga-Adangbe include the Ga, Adangbe, Ada, and Krobo or Kloli. Even the Ewe, who constitute a single linguistic group, are divided into the Nkonya, Tafi, Logba, Sontrokofi, Lolobi, and Likpe.

Though no region of Ghana is ethnically homogeneous, an overriding feature of the country’s ethnic polarization is a north–south divide. The southern half of the country is dominated by the Akan. Since colonial times, infrastructural development in health, education, and productive projects has been concentrated in the south, leaving the north relatively underdeveloped. 

North–south disparities have shaped and sustained the disparities between various ethno-linguistic groups in the country. These ethno-spatial inequalities in infrastructure and wellbeing have resulted in a north-to-south flow of migration which impacts the level and composition of informal work in the country.

The urban centres, particularly in the south, are the most ethnically diverse because of this migration. Migrant workers often end up in informal positions in retail, street vending, and domestic work among others. For instance, head porters in Accra, popularly known as ‘kayayei’, are predominantly young women from the northern regions of Ghana where poverty is endemic. In urban centres, people from Kwahu work largely in retail and the Ewe often find work in crafts, such as carpentry.

Policy lessons

Our study shows that ethnic diversity presents implications at various levels, especially for countries like Ghana where diversity levels are high. We use data from two waves of the Ghana Socioeconomic Panel Survey, measure ethnic diversity at the district level, and examine the impact of ethnic diversity on various measures of informal work. Our measures of informal work are consistent with Danquah et al. (2019), who construct measures of informal work following the definition proposed by the International Labour Organization (ILO).

Our findings show that levels of ethnic diversity have strong associations with levels of informality — a unit increase in ethnic diversity is associated with up to a 26.3 percentage point increase in the probability of a worker engaging in informal work. Therefore, in addition to economic and institutional factors considered in the literature, sociocultural factors such as ethnic diversity have an important role in explaining the prevalence of informality.

It is important for policy makers to understand the source of ethnic diversity and how it impacts levels of informality. Bridging the spatial infrastructure gap between north and south needs to be vigorously addressed. Policy makers can and should design appropriate skills and training programmes for workers in the informal sector to boost their skills and productivity in the short term. In the long run, more productive informal workers or enterprises can be formalized as they grow and perceive the benefits of becoming formal.

The views expressed in this piece are those of the author(s), and do not necessarily reflect the views of the Institute or the United Nations University, nor the programme/project donors.