Measuring Informal Sector and Informal Employment

National Workshop on Informal Employment and Informal Sector Data Collection: Strategy, Tools and Advocacy Amman 13-15 April 2008

Presentation Plan
A Brief Background Definitions of Informal Sector and Informal Employment Main Uses of Informal Economy Data Methods of measuring Informal sector Strategies of Data Collection Advantages and Disadvantages

Informal Sector A Brief Background (1)

ILOs Report of a Comprehensive Employment Mission to Kenya (1972) used the term informal sector. Since then the term has gained acceptance in international official documents. Initially, labour statisticians considered informal sector as composed of urban working poor migrated from rural areas in search of work. Later, recognised as an important employment-, productionand income- generating sector present as much as in rural areas as in urban areas

Informal Sector A Brief Background (2)

Though the term informal sector is of relatively recent origin, the idea of such a segment of economy has existed since long. Particularly for ensuring complete coverage of the national accounts statistics, building an adequate database especially for this segment has been a matter of concern since the early 1950s.

Informal Sector A Brief Background (3)

The official statisticians have referred to this segment or a closely comparable one by various names like unregistered, unorganised and unrecorded segment of the economy. The coverage of the segment of the economy referred to by these terms were indeed varied.

Informal Sector A Brief Background (4)

The 15th ICLS (1993) adopted a resolution relating to statistics of employment in the informal sector. This provided an international statistical standard definition of informal sector. The SNA 1993 identified informal sector as one of the segments of economy that are not covered or not adequately covered in the national accounts.

Non-observed Economy (NOE)

In measuring the activities within 1993 SNA production boundary exhaustively, the 5 problem areas that are most likely to be non-observed are:
Underground Illegal Informal sector Household production for self consumption Deficiencies of basic data collection programme. [OECD manual (2002) on Non-Observed Economy (NOE)]

Informal sector a part of NOE

Clearly, the NOE problem areas are not mutually exclusive. But, the informal sector is the most important component in many countries, especially in developing countries. Besides obtaining exhaustive estimate of GDP, measuring contribution of informal sector serves important purposes relating to economic policies.

Definition of Informal Sector

The three main criteria of defining the informal sector, as adopted by the 15th ICLS, refer to
Absence of legal organisation (unincorporated enterprises) Type of accounts (no complete set of accounts) Product destination (at least some market output)

Consistent with the 15th ICLS, the SNA 1993 (and its update) defines informal sector as a subset of the household sector.

Definition of Informal Employment(1)

Primarily, for consistency with the framework of SNA, informal sector was defined by enterprise approach, i.e. in terms of characteristics of the enterprises; instead of labour approach, based on the characteristics of the workers and their employment conditions. The labour statisticians were even then aware that this definition would not be able to capture all forms of informal employment .

Definition of Informal Employment(2)

The concept of employment in informal sector does not embrace the concept of informal employment, i.e. persons employed in jobs under informal arrangements. As defined by Hussmanns (2001), informal employment comprise employment in the informal sector plus jobs of the following groups of workers:
(i) own-account workers who produce for own final use only; and contributing family workers; (ii) employees with informal jobs in formal sector enterprises and employees in unincorporated private enterprises engaged in non-market production.

Definition of Informal Sector further details (1)

The two conditions:
(i) unincorporated enterprise and (ii) absence of accounts

follow from that it is a subset of household sector. The criterion production for market excludes
household enterprises with no market production own account construction, services of paid domestic workers.

Definition of Informal Sector further details (2)

Exclusion of household enterprises with non-market production, leads to a problem of uniform application. Some agricultural activities are carried out solely for subsistence, while others for selling the produce in the market. Thus it is additionally proposed that all agricultural activities be excluded from the purview of informal sector, though it may be quite significant in most of the countries with large informal sector.

Definition of Informal Sector further details (3)

There are other criteria that are proposed for definition of informal sector like
exclusion of enterprises above a specified size in terms of employment exclusion of persons engaged in professional or technical activities like doctors, lawyers and engineering consultants.

The Delhi Group has been working on framing a uniform definition of informal sector ILO is expected to give a final shape to it very soon.

Definition of Informal Employment further details (1)

The 15th ICLS definition of informal sector is not a dichotomous sub-sectoring of the economy. It suggests a trichotomy formal, informal & neither. The last category includes household enterprises like
those engaged solely in agricultural activities, or production of goods solely for own final use or production of services employing paid domestic workers.

All employment in this category is treated as informal employment in addition to those in informal sector.

Definition of Informal Employment further details (2)

Further, there is informal employment in formal sector, whose identification requires a clear definition of informal jobs. Informal employee jobs: employment contract not subject to standard labour legislation, taxation, social protection or entitlement of certain employment benefits. [Hussmanns (2001)] Such jobs are mostly undeclared, casual or of short duration, either without employment contracts or with short-term contracts.

Informal Economy Data Main Uses (1)

Informal economy comprises all informal sector enterprises and informal employment. Data on informal economy are of interest to mainly two groups of users:
labour statisticians & economists for labour welfare policy making and national accountants for attaining exhaustive coverage of National Accounts Statistics.

Informal Economy Data Main Uses (2)

The main requirements for labour welfare related policy making are data on
entitlements, benefits, conditions of work and social protection of informal employment; structure of informal sector like their productive activities, employment- and income-generation, conditions and constraints of operation and links with the formal sector.

The national accountants - mainly concerned about attaining exhaustive coverage - need data on production-related parameters of informal sector.

Methods of measuring Informal Sector

Two broad groups of methods:
Macro-model methods National accounts methods to achieve exhaustiveness

Both these groups of methods attempt to measure NOE (also referred to as shadow economy, hidden economy, underground economy), in general, - of which informal sector is but a component albeit the major component.

Macro-model Methods
Macro-model methods as termed in the Handbook produce an estimate of the entire NOE by means of a single model. The Handbook not considered useful in obtaining exhaustive estimates of GDP or NOE and tend to tend to produce spectacularly high measures Three broad types:
Monetary methods Global indicator method Latent variable methods

Monetary Methods
These rely on the assumption: unexplained (by the model) monetary developments owes to incomplete coverage of official GDP estimate. Start with Fishers quantity theory equation Obtain an estimate of GDP Difference between the model-based estimate and official estimate is considered a measure of NOE. Three variants:
Transaction method Cash/deposit ratio method Cash demand method

Global Indicator Method

This method uses a single variable like electricity consumption as the indicator of entire economic activity. The difference between the estimate of GDP obtained under the model and the official GDP is claimed to represent a measure of NOE.

Latent Variable Methods

These are multiple regression models with a nonobserved dependent variable and a number of observed explanatory variables. Variants are:
LISREL (linear Independent Structural Relationships) models of Joreskog and Sorbom (1993) Multiple Indicator Multiple Cause approach (MIMIC) - Frey and Weck-Hanneman (1984) DYMIMIC (the dynamic multiple-indicators multiple-causes approach)

GDP compilation in production approach Indirect Methods

Indirect methods of covering NOE in the GDP estimate:
Supply based approaches, including labour input method; Demand based approaches; Income based approaches; Commodity flow approaches.

Labour Input Method (LIM) is the most important procedure that has been in use since 1950s to measure contribution of unorganised sector to GDP.

Labour Input Method (1)

The labour input method (LIM) of estimating value added / output for the informal segment (for an economic activity or a group of economic activities) consists of: obtaining an estimate of labour input from Population Census and / or Labour Force Survey (LFS) using other sources for the informal segment obtaining estimates of output or value added per unit of labour input for the informal segment from Establishment Survey; and multiplying the estimate of labour input by the estimate of per unit value added / output to arrive at an aggregate estimate of value added / output.

Labour Input Method (2)

This is one of the most effective methods of measuring gross value added (GVA) of informal sector usually by economic activity. Since
most often, the enterprise surveys fail to cover all enterprises. again, costs actually incurred for hiring (casual) labourers are often shown as services charges rather than compensation of employees and hired labour not included in labour input.

In such cases, this procedure can be give a more exhaustive coverage, since LFS data give more complete coverage of labour input.

Labour Input Method (3)

Measuring the value of production of goods and services by LIM, therefore, demand a fair degree of precision in the estimates of labour input (number of workers adjusted for multiple employment) based on data from households (LFS) and Gross value added per worker (GVAPW) from enterprises obtained from enterprise survey (ES), separately for activity groups.

Data Needs
The requirements of estimates on informal economy can be summarised as follows: For Informal Employment:
parameters defining informal employment (LFS) terms & conditions of employment (LFS) structural information (ES) productivity (ES)

For Informal Sector:

parameters defining informal sector enterprise (ES) production related parameters (ES), including labour input, output, intermediate consumption and GVA.

Data Collection Strategies (1)

For measurement of informal employment and informal sector employment the LFS is the best instrument. Requires inclusion of some additional questions relating to definitions.
[ILO Compendium of Official Statistics on Employment in the Informal Sector (2002)]

Informal sector production can be measured thru enterprises surveys covering the informal sector.

Data Collection Strategies (2)

The main options of colleting data on production of informal sector are as follows: 1. List-frame based establishment survey 2. Area frame based establishment survey 3. Area frame based mixed household and enterprise surveys and 4. Area frame based Integrated 1-2 surveys

Data Collection Strategies (3)

List-frame based establishment survey:
business register does not usually cover the informal sector units List-frame has to be developed from a general economic/establishment census But, census do not ensure full coverage. Thus, list-frame based establishment surveys can not ensure complete coverage of informal sector.

Data Collection Strategies (4)

Thus, area-frame based surveys are essential for complete coverage of informal sector. But the conventional area-frame based establishment survey suffer from the same limitation as the Establishment Census. In these surveys, a list frame of establishments is developed for each selected area unit by door to door enumeration. This procedure is prone to omission of activities carried out inside the owner's home

Data Collection Strategies (5)

The choice of method is, therefore, practically restricted to the two area-frame surveys, viz.
Mixed household enterprise survey and Integrated 1-2survey

Both these methods use a multi-stage (usually twostage) sampling scheme A sample of area units are selected as the first stage unit (fsu) in both the methods. The methods differ at the second-stage.

Mixed household enterprise survey (1)

Variously described in literature. As per the (Draft) Manual on Surveys of Informal Employment and Informal Sector, its sampling frame at the second stage consists of the following:
i. all identifiable establishments outside the owners home located in the selected area unit; ii. household-based enterprises located within home; and iii. the units without any fixed premises of operation

are listed by a structure-to-structure visit. The units of later two categories are listed against and interviewed in the owners households.

Mixed household enterprise survey (2)

Units excluded from the survey coverage are not listed, e.g. agricultural or formal sector establishments and units covered in a list frame based survey. Within-scope units without fixed premises of within owners home are identified through additional questions put to households during listing; and are listed against the household where the proprietor (or a partner of a partnership concern) resides. This way, all establishments within the scope of the survey in the fsu are included in the list.

Integrated 1-2 Survey

This approach consists of two phases:

First phase: a household survey (LFS) and Second phase: an enterprise survey.

The first phase used also for constructing the sampling frame for the enterprise survey. From the sample households in the first phase, the within-scope enterprises owned by the households are identified. In the 2nd phase, a sample of within-scope enterprises that are owned by the households is drawn for the enterprise survey.

Integrated 1-2 Survey

The within-scope enterprises selected for survey may either be

Within the fsu without fixed premises, or Within the fsu with fixed premises Outside the fsu

In all these cases, the enterprise is surveyed. [as indicated in the next slide]

Integrated 1-2 Survey

Households owning/ operating enterprises

Within the sample area

Outside the sample area and with fixed premises Capture at premise

With fixed premises Capture at premise

Without fixed premises Capture at household

Advantages & Disadvantages of the two methods

Mixed Hhd-entp. survey
May be conducted independent of other surveys using EC data Estimate of informal sector employment varies from that obtained from Hhd. Survey. Involves extra costs expectedly marginally more for enterprise listing.

1-2 Survey
Provides data on informal employment & informal sector Estimates of informal sector employment from 2 sources likely to be consistent. Involves extra costs for travel for surveying enterprises outside the fsu.

Main disadvantage of 1-2 Survey

In a stage sampling, efficiency of an estimate depends on how well the inclusion probability of the fsus (pa) are correlated to the fsu-level value of the parameter, e.g. sum of GVAs of all within-scope enterprises of the fsu. In a mixed household enterprise survey, this can be attempted by using EC data. In an 1-2 survey, the choice of size variable for fsu selection is based on distribution of population and not on that of within-scope enterprises.

Possible way out

For an integrated 1-2 survey, population census data may be used as the sampling frame. Area units (fsus) with relatively high concentration of self-employed workers may be put in a separate stratum and
a higher sampling fraction may be used for drawing a sample of fsus from it, by PPS using number of self-employed workers as size variable.

This could be a possible method of capturing a representative sample of informal sector enterprises, in absence of Economic Census data.

Thank You