The Effect of Informal Sector on Urban Household Income: The Case of Chiro Town, West Hararghe Zone, Oromia Regional State, Ethiopia

Abstract

This study assesses the effect of informal sector activities on urban household income in Chiro Town, Ethiopia. As a critical yet underexplored livelihood source in emerging towns, the informal sector's role is analyzed through a cross-sectional study of 288 households selected via a multistage sampling technique. Data were analyzed using descriptive statistics and multiple linear regression. The findings indicate that participation is primarily driven by a lack of formal employment (61.1%), with major constraints being a shortage of working space, unstable customer demand, and complex licensing. Regression results reveal that household income is significantly influenced by the type of informal activity. Compared to street vending, engagement in the service sector has a strong positive effect on income (B=934.307, p=0.001), while construction work has a significant negative effect (B=-900.507, p=0.007). Furthermore, being female, working more hours, and having more experience positively affect income, whereas larger family size and older age suppress it. The study concludes that the informal sector is an indispensable survival mechanism that exhibits significant internal economic stratification. We recommend targeted interventions, including sector-specific skills training, simplified formalization processes, and the provision of secure workspaces and credit access, to enhance the sector's productivity and its contribution to household welfare.

Keywords: Informal Sector, Urban Household Income, Livelihoods, Street Vending, Chiro Town, Ethiopia