Gender differences in the determinants of earnings in the informal sector: A case study of microenterprise borrowers in Quito, Ecuador

This dissertation contributes to recent efforts to fill the gap in existing knowledge and policy debate with regard to women's business ownership in the informal sector, and to the development of a theory of income determination in the informal sector in the developing country context. A case study of a microenterprise credit program, PRODEM, run by the Fundacion Ecuatoriana de Desarrollo in Quito, Ecuador, is used to explore the hypothesis that the determinants of business earnings are different for women and men microbusiness owners. Two models of self-employed and small employer business earnings are developed and tested, using primary data collected by the author during 1985 and 1986. The first model uses a standard formulation of the type applied to workers and the self-employed in the formal sector, based largely on the effects of human capital, assets and credit. The second formulation seeks to improve the explanatory power of the earnings model for women microentrepreneurs by incorporating the effects of household-business linkages. The findings of the estimation of both standard and household-business linkage models support the hypothesis that determinants of business earnings differ between women and men microbusiness borrowers. The standard, human capital-based model fails to predict women's net business earnings, even when controlling for the previous year's income level, asset size, and the type of business. Household-business interactions proved to be important determinants of earnings for self-employed women, but they were not as important for men. Individual variables representing household-business linkages had asymmetrical effects on male and female earnings. These results strongly indicate that there are underlying structural differences in the determination of male and female earnings among informal sector business owners. The analysis developed in the study makes possible an identification of some of the factors explaining women's low levels of earnings in informal sector businesses relative to men's, and the constraints that must be addressed in order to improve women's incomes. Because the study is based on the experiences of participants in a credit program, it also provides an opportunity to assess the effectiveness of credit as a tool for improving the livelihoods of women and men. However, although both women and men who participated in the PRODEM credit program increased their net earnings, the study did not demonstrate that the credit was a significant determinant of these changes.