# **6.3 Characteristics of Informal Firms by Productivity Level**

In parallel with the above exercise that considered low- versus high-welfare workers, we profile low versus high productivity firms. Using Grimm et. al. (2012) as a guide,<sup>60</sup> we divide the sample into two groups. Firms in the 90<sup>th</sup> percentile or above of profits per worker – a proxy for productivity - are labelled “high productivity” while firms with profits per worker below the 90<sup>th</sup> percentile are considered “low productivity.”<sup>61</sup> Men are disproportionately owners of the most productive informal firms. Figure 18 shows that for all three types of informal firms, owners of low-productivity firms are more likely to be women as compared to owners of high productivity firms. The story with regard to age is more nuanced. For the highly educated self-employed, virtually all of the most productive firms have owners aged 25-54, while only about 80 percent of the lowproductivity firms do. However, approximately 20 percent of highly productive employers are 55 and up, while almost none of the low-productivity employers are.

The sector, firm size, and location of the firm is not uniformly correlated with firm productivity; instead, differences emerge by firm type. Among self-employed firms, a disproportionate share of non-food retail is among the 10 percent most productive firms, while employers who provide services are particularly productive. The smallest LE-SE firms are disproportionately among the 10 percent most productive LE-SE firms, as are small (2-5 employees) HE-SE firms (relative to all HE-SE firms) and larger (more than 6 employees) employers. Notably, HE-SE and employers with one employee or less are far overrepresented among low-productivity firms. The results for employers could be the result of self-selection: the top 10% is represented by those very productive informal firms that have more workers (6+) and are in sub-sectors that are more typically high-growth (services) rather than simply trading. Finally, LE-SE who work outside the home are particularly productive.

> 60 Grimm et al. (2012) defines firms that are in the top 90 percent of a composite score composed of profits per worker and value of capita stock, as “top performers” in a study of eight African countries. Adoho et al. (2018) follows the same methodology when studying small firms in the Democratic Republic of Congo. This 10 percent is exogenously set by the researchers. A more recent study (Karlen 2023) allows for the top performers to endogenously emerge from data from Togo through a cluster analysis, finding 18 percent are top performers A similar exercise using data from Côte d’Ivoire finds that 11 percent are in the top tier (Karlen and Johanssen 2023). In Aga, Campos, Conconi, Davies & Geginat (2021) 8% of informal firms have similar characteristics and performance than formal firms (hence they have higher productivity levels). 61 As is common in firm data, a large share of firms reports negative profits and the distribution has long left and right tales. The data do not provide sufficient information to determine if these outliers are caused by measurement error or if they reflect the potential of all firm types to earn very high and very low profits. The distribution of profits per capita heavily overlaps between firm types.

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