Enterprise Surveys Enterprise Note Series Gender Labor Productivity, Firm-size and Gender: The Case 2011 of Informal Firms in Argentina and Peru Mohammad Amin A commonly held view is that female-owned businesses suffer from many disadvantages compared to male-owned businesses. These disadvantages lead, in turn, to relatively lower levels of efficiency and smaller firm-size among female-owned businesses—the female- owned firms under-performance hypothesis. Using data on unregistered firms in Argentina and Peru, the female-owned firms under-performance hypothesis is confirmed. The gender based Enterprise Note No. 22 difference in efficiency and firm-size holds within the full sample and no more than 25 percent to 30 percent of the difference can be explained by variations in firm characteristics. The gender based gap in performance also holds within various sub-samples of firms, although the magnitude of the difference does vary across the sub-samples. Introduction quartile of GDP per capita, the estimates increase to There is a growing body of evidence which suggests between 29 and 57 percent (La Porta and Shleifer 2008). that relative to male-owned businesses, female-owned Second, anecdotal evidence suggests that the informal businesses suffer various disadvantages leading to their economy has a disproportionately larger presence of lower efficiency—the female-owned business under- females than males compared with the formal economy. performance hypothesis. Firm performance is typically Hence, the informal economy is particularly important for measured by firm-size, labor productivity or various gender related issues. estimates of total factor productivity. However, a key This note uses recently collected data on informal or shortcoming of this literature is that it is almost entirely unregistered firms in Argentina and Peru, collected by focused on developed countries and the formal or the the World Bank’s Enterprise Analysis Unit in 2010.1 The registered sector. For example, focusing on the formal data cover 384 firms in Argentina and 480 firms in Peru. sector in the United States, Brush et al. (2006), among Firms were randomly selected from two cities in Argentina others, find that the average revenue of female-owned (Buenos Aires and Rosario) and two cities in Peru (Lima firms equaled US$151,130, about 26 percent of revenue and Arequipa). It is important to note that due to lack of World Bank Group for male-owned businesses. Moving from firm-size to proper sampling frames, these surveys are not necessarily profitability, Sabarwal and Terrell (2008) find that female- representative of the informal economy at the country owned businesses in the formal sector in 26 transition or even the city level. Hence, the results presented below countries are significantly less profitable than male-owned pertain to the structure of the informal firms surveyed businesses. The authors attribute the bulk of this difference rather than the informal economy per se. Extension of to the relatively smaller size of female-owned firms. these results to the broader informal economy requires Formal analysis of male- vs. female-owned businesses due caution. in the informal or the unregistered sector of developing The female-owned business under-performance countries is important for at least two reasons. First, hypothesis is analyzed using labor productivity measured the informal economy is large, especially in developing by sales per worker in a regular month (USD, log values) countries. Recent estimates suggest that globally, between and firm-size measured by total sales in a regular month 23 percent and 35 percent of all economic activity occurs (USD, log values).2 Female-owned businesses include all in the informal economy; while for countries in the lowest businesses that have a female largest owner. The remaining For example, consistent with the anecdotal evidence, Figure 1 Labor productivity is higher for female-owned businesses are much more common in male than female-owned businesses the service sector than in manufacturing (60 percent vs. ■ Female-owned ■ Male-owned 48 percent). However, this preference for the service sector is irrelevant since the gender based gap in labor 6 productivity holds for both sectors (figure 2). The same Labor Productivity (logs) 5 4 holds for firm-size. Similarly, male-owned businesses are 3 more likely to use machinery and also have more years of 2 managerial experience than female-owned firms. However, 1 as figure 2 shows, the female-owned under-performance 0 hypothesis holds irrespective of the use of machinery and Full Argentina Peru Buenos Rosario Arequipa Lima years of managerial experience. These findings regarding sample Aires managerial experience and the use of machinery also hold Source: Enterprise Surveys. for firm-size. firms are classified as male-owned businesses. Results for Figure 2 Dispelling some of the reasons for labor productivity and firm-size are roughly similar. lower productivity in female-owned Labor productivity and firm-size are lower for firms female-owned businesses ■ Female-owned ■ Male-owned 6.0 On average, output per worker (without logs) equals Labor Productivity (logs) 5.9 5.8 US$411 in the full sample, varying between US$358 for 5.7 5.6 female-owned businesses and US$473 for male-owned 5.5 5.4 businesses. This implies that a typical worker in a female- 5.3 5.2 owned business produces only 76 percent of the output 5.1 5.0 of a worker in a male-owned business.3 Figure 1 shows 4.9 Manufacturing Machine Managerial No additional the comparison in log values and confirms a significantly use experience (below median) employees lower4 labor productivity for female-owned firms in Service No machine Managerial With additional use experience employees various sub-samples with the exception of Lima city. (above median) Similar results hold for firm-size. For example, in the full Source: Enterprise Surveys. sample, a median-sized female-owned firm is about 61 percent the size of the median-sized male-owned firm. Gender specific difference in labor Can female-owned firms’ under-performance in labor productivity and firm-size are robust to productivity be explained by gender based differences, if various firm characteristics any, in firm-size? The data show that about 75 percent of female-owned businesses are run by the owner without Explanations of lower labor productivity for female- vs. any additional employees, but only 62 percent of male- male-owned businesses may lie in, for example, women owned businesses have no employees. However, figure 2 working fewer hours or working from home vs. outside reveals that the productivity gap in female-owned firms to accommodate household duties; the greater difficulty holds, and to a roughly similar degree, whether the owner women face in accessing finance and other infrastructure uses additional employees or not. services; discrimination against women in the product and input markets; less experience among women in Household responsibilities do not explain the managing businesses (glass ceiling effect); poorer quality female-owned businesses’ productivity under- of both their own and parental education among women; performance hypothesis and concentration of women in less productive (poorer) cities and less productive sectors (vertical discrimination). In most countries, women are the primary caregivers in While some of these factors are important (shown below), the family. The informal sector is more likely to offer flexible collectively they explain no more than 25 to 30 percent working hours and the possibility of working from home of the gender based gap in labor productivity. The same which may be attractive to women with household duties. holds for firm-size. Such household duties may impinge on business activity Not all the potential explanations mentioned above are leading to lower productivity and smaller firm-size among relevant for the individual cases of Argentina and Peru. female-owned compared with male-owned businesses. 2 The survey provides useful information by single owners and largest for the rest on some of these variables. For example, Excluding the city (divorced, widows, widowers).” However, about 39 percent of female-owned these differences by marital status are businesses compared with 31 percent of Lima, 52 percent small (statistically insignificant). In short, of male-owned businesses operate of female-owned vs. female-owned businesses perform worse from inside as opposed to outside 38 percent of male- than male-owned businesses irrespective the household premises (home-based of the location of the business, the hours businesses). Excluding the city of Lima, 52 owned businesses of operation and the marital status of percent of female-owned vs. 38 percent of are home-based. the owner. A similar result applies to male-owned businesses are home-based. firm-size. In short, the extra burden of Similarly, female-owned businesses operate household duties on women does not for less than 50 hours a week compared with a significantly appear to be the primary reason for the under-performance higher figure of 56 hours for male-owned businesses. Can of female-owned businesses. lower working hours or the greater proclivity to work from home explain the lower productivity of female-owned businesses? Another interesting variable is the marital status Use of family or unpaid labor does not matter (single, married or divorced/widowed) of the firm owner for female-owned firms’ productivity under- that could shed light on the possible impact of household performance hypothesis duties on the relative performance of female-owned Due to lack of alternative employment, members of the businesses. family of the owner may take part in the family business. Figure 3 shows that, on average, female-owned businesses Family labor is relatively cheap (low opportunity cost) and have lower labor productivity than male-owned business hence there may be a tendency to use such labor even when among both groups, home-based business and those its contribution to output at the margin is minimal. The key operating from outside household premises. There is some point here is that if female-owned businesses are more likely evidence that the gender based gap in labor productivity to use family labor or other unpaid labor then this could is significantly larger among home-based businesses than explain lower performance among female-owned businesses. the rest, but this finding should be treated with some However, the survey shows that about 18 percent of the caution since it does not hold at the individual city level.5 labor force among female-owned firms is comprised of Results for the number of hours a business operates are family members compared with marginally higher 19 percent roughly similar, with the gender based labor productivity for male-owned firms. Similarly, the proportion of unpaid gap decreasing significantly as the number of hours worked workers in the total labor force is very small for both male- increases in the full sample (figure 3), but not necessarily at and female-owned businesses (3 and 2 percent, respectively). the individual city level. Looking at marital status, female- Exploring further, the results show that female-owned firms’ owned firms’ under-performance in labor productivity is productivity under-performance is roughly the same among smallest for firms with owners that are married, followed firms that use family labor and those that don’t. Another factor that could alter the opportunity cost of labor and hence labor productivity is the education level of the owner, Figure 3 Household duties do not fully whether or not the owner has a job in the formal sector or is explain the lower labor productivity searching for one. The gender based gap in labor productivity of female-owned businesses is large and significant across all these sub-groups, although ■ Female-owned ■ Male-owned it does show some variation. For example, labor productivity of female-owned businesses is approximately 81 percent of 6.0 male-owned businesses for the sample of firms where the Labor Productivity (logs) 5.8 5.6 owner has a secondary or higher education. For the remaining 5.4 5.2 firms, however, the corresponding figure is much lower at 5.0 57 percent. The results discussed in this paragraph regarding 4.8 labor productivity also hold for firm-size. 4.6 4.4 Operates Hours of Single Divorced/ Are obstacles to doing business more binding from inside operation widowed household (below median) for females, lowering their efficiency? Operates Hours of Married from outside operation The survey reports on a number of obstacles to doing household (above median) business and potential benefits from registration as perceived by the firms. If women compared with men are Source: Enterprise Surveys. 3 sample. It also holds within various sub-samples. Some Figure 4 Lower labor productivity among commonly observed factors such as location, sector, female-owned firms is not driven firm-size, hours of operation and education level of the by gender based differences in owner can potentially explain about 25 percent to 30 perceived obstacles to doing business percent of the gender based gap in labor productivity and firm-size. Explaining the remaining difference is a ■ Female-owned ■ Male-owned fruitful area for future work. Registration improves market access Registration does not improve market access Access to finance Notes is an obstacle Access to finance is no obstacle 1. The Enterprise and Informal Surveys implemented in Latin Corruption is an obstacle America and Caribbean countries, are jointly conducted by the Corruption is no obstacle World Bank and the Inter-American Development Bank for this Crime is an obstacle geographic region. 2. Data limitations do not allow using total factor productivity (TFP) Crime is no obstacle 4.8 5 5.2 5.4 5.6 5.8 6.0 or other related performance measures. Labor Productivity (logs) 3. The percentage figure drops to 72 percent if we exclude four observations that show relatively high or low levels of labor Source: Enterprise Surveys. productivity. 4. That is, at the 5 percent level of significance. The significance levels were obtained from regression analysis with Huber-White more likely to find these obstacles binding then this could robust standard errors. Regression results were also checked against explain the lower productivity among female-owned potential outliers in the data. businesses. Figure 4 shows how the gender based gap in 5. With the exception of Rosario, all other cities show that the female labor productivity varies across firms that report whether under-performance is bigger within the set of firms that operate registration improves access to markets, infrastructure from inside as opposed to outside household premises. However, services and government services or not, as well as firms for no individual city is this difference statistically significant at the 5 percent level. that report corruption, crime and access to finance as significant obstacles or not. Across all these sub-groups, References labor productivity is lower for female-owned businesses; Brush, C., N. Carter, E. J. Gatewood, P. Greene and M. Hart. and although the magnitude varies, it is not significant. It 2006. Growth Oriented Women Entrepreneurs and Their Businesses is safe to conclude that relatively lower labor productivity (New Horizons in Entrepreneurship). Cheltenham, UK and among female-owned businesses cannot be explained Northampton, MA: Edward Elgar. away by gender based differences in the perceived severity of the obstacles shown. A similar conclusion holds for La Porta, R. and A. Shleifer. 2008. “The Unofficial Economy and Economic Development,” Tuck School of Business Working Paper the gender based gap in firm-size. No. 2009-57. Available at http://ssrn.com/abstract=1304760 The average productivity of labor of a female-owned informal business in Argentina and Peru equals 76 percent Sabarwal, S. and K. Terrell. 2008. “Does Gender Matter for Firm of a male-owned business in the sample under study. Performance? Evidence from Eastern Europe and Central Asia,” The corresponding figure for firm-size is 61 percent. IZA Discussion Paper Series No. 3758. Available at http://www. That is, the female-owned firms’ under-productivity iza.org/en/webcontent/publications/papers under-performance hypothesis is not rejected in the The Enterprise Note Series presents short research reports to encourage the exchange of ideas on business environment issues. The notes present evidence on the relationship between government policies and the ability of businesses to create wealth. The notes carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this note are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. 4