Abstract:
Informal sector has been found to be a critical instrument for reducing the poverty in urban
people. It is prominently used to improve the livelihood of urban households where it is believed
to be underexploited in research and hence is indispensible to examine its real effectiveness. To
this end, this study aims to assess the effect of informal sector on urban poverty reduction. A
cross-sectional survey data collected from 235 urban households (96 participant and 139 non-
participant) using multi-stage sampling techniques from Arba Minch Town. Both Descriptive
statistics and econometric model were applied for analysing quantitative data. PSM method was
employed to analyse the impacts. The result of the study showed that level of education and
family size of households were found to have negative relationship whereas age of the household
head and access to remittance were found to have positive contribution to poverty reduction.
Moreover results obtained from PSM show that participation in informal sector has a
significant, positive and robust impact on the outcome variable measured using household
consumption expenditure. The sensitivity analysis also shows that the impact result estimates are
insensitive to unobserved selection bias and independent to the chosen matching estimators.
Based on the result this study recommended that it is better off the government make some policy
and regulation for this sector in order to prevent the formal sector from unwanted competition
and Government should constrict strategies for informal sector to enhance to transform to
formal sector.
