INFORMAL

SECTOR
Clementina Ivan-Ungureanu
Training: Essential SNA: Building the basics
Addis Ababa, 13-16 February 2012
 Characteristics of informal
sector
Big diversity
- By countries, different regions within the same
country, different parts of the same city.;
- Different activities, different types of enterprise,
- Different reasons for participating.

Informal activities range

- from street vending, shoe shining, food processing
and other minor activities requiring little or no capital
and skills and with marginal output,
- to those involving a certain amount of investment in
skills and capital and with higher productivity, such
as manufacturing, tailoring, car repair and
mechanized transport.
Reasons for participating in
the informal sector :
- pure survival strategies undertaken by individuals
facing a lack of (adequate) jobs,
- unemployment insurance or other forms of
income maintenance,
- the desire for independence and flexible work
arrangements
- the prospect of quite profitable income-earning
opportunities,
- the continuation of traditional activities
• Informal sector was treated as a rezidual due to
the insufficient absorptive capacity of the formal
economy
 Content of the
presentation

• Definition
• Measurement methods
Definition
 The 2008 SNA definition
The informal sector may be broadly characterized
as consisting of units engaged in the production
of goods or services with the primary objective
of generating employment and incomes for the
persons concerned. These units typically
operate at a low level of organization, with little
or no division between labour and capital as
factors of production and on a small scale.
Labour relations - where they exist - are based
mostly on casual employment, kinship or
personal and social relations rather than
contractual arrangements with formal
guarantees
 The 2008 SNA definition
- Production units have the characteristic of household
enterprises.
- The fixed and other assets used do not belong to the
production units as such but to their owners; capital
goods such as buildings or vehicles may be used for
business and household purposes
- The units as such cannot engage in transactions or
enter into contracts with other units
- The owners have to raise the necessary finance at
their own risk and are personally liable, without limit,
for any debts or obligations;
- Expenditure for production is often indistinguishable
from household expenditure
 Criteria to identify the
informal sector
General essential criteria:

Legal organization Unincorporated

enterprise
Ownership Household

Type of accounts No complete set of

accounts
Product destination At least some
production for sale or
barter
 Criteria to identify the
informal sector ( cont)
Additional operational criteria:
-size limit of the enterprise
- non-registration of enterprise and/or of
employees in an enterprise within some arm
of government;
– economic activity: non-agricultural activity
including units mainly involved in agricultural
sector and performing secondary non-
agricultural activities;
– location of units: urban and rural areas.
Two categories of informal
enterprises
Two subsets:
a. Unincorporated enterprises without
employees. The ILO term for such units
is “informal own-account enterprises”,
b. Unincorporated enterprises with
employees. The ILO term for such units
is “enterprises of informal employers”
 Clarifying the use of
familiar terminology
• Sector- “informal sector” does not have the
same basis as the usual use of the word
sector throughout the SNA.
• Enterprise- as used in the ILO description of
the informal sector is, in the SNA sense, more
like an establishment since it is only the
productive activity that is considered and not
the existence of a complete set of accounts.
• The SNA does not use the expression formal
sector any unit that is not informal is formal
 Informal sector and
Informal economy
The informal economy is considered as comprising
informal employment both inside and outside
informal enterprises:
-Informal employment in informal enterprises
(small unregistered or unincorporated
enterprises;
-Informal employment outside informal enterprise
including: domestic workers, casual or day
workers, temporary or part-time workers
industrial outworkers (including home-workers),
and unregistered or undeclared workers.
 Informal employment
ILO defines
-formal employment = employment under
terms that bring associated benefits
such as paid leave and pension
entitlement.
-informal employment = all other forms of
employment not formal
 Informal employment
Distinction between a job and an employee, one
employee being capable of holding several jobs.
Categories of jobs considered by the ILO:
a. own-account workers (the self-employed in SNA
terms),
b. heads of unincorporated enterprises with employees,
treated as employers,
c. family workers contributing labour to the
unincorporated enterprise,
d. employees
e. members of producers’ cooperatives
 Informal employment (cont)
Formal enterprises provide informal jobs
only as employees or contributing family
workers.

Households (in the ILO sense) provide

informal jobs as own-account workers and
employees and no formal jobs.

Informal units may offer any of the five types

of informal jobs
 Definition of Informal
Employment
• Informal employment could be:
- In formal sector
- In informal sector
- Other part of the economy: in
households engaged in agriculture,
production for own final use and
production of services employing paid
workers
 Identification of units in
informal sector
I. To identify those unincorporated enterprises within
the whole of the SNA households sector that are
candidates to be included.
Excluded:
- Institutional households such as prisons, religious
orders and retirement homes;
- Households with no production activity (that is do
not include an unincorporated enterprise);
-Households whose only activity is the production of
services from owner-occupied dwellings, the
production of services by employing domestic
staff, or both.
Identification of units (cont)

II. Split the production

- market production according to the SNA
criterion whereby most or all output is
sold,
- output for own final use where some is
sold
- output exclusively for own final use.
 UNITS

Non- Financial Government HOUSE

financial HOLDS

NPISH

Institutio Market Non-market

nal HH production production

HH registered or Goods for Services

have a no. of own FC for own
employees FC

INFORMAL
SECTOR

Without employees With employees

”informal own ”enterprises of informal
account enterprises” employment”
Measurement
methods
 Objectives of the
measurement
• Simply to monitor the evolution of the informal sector
employment in term of number and characteristics;
• To obtain information about the demand of
households for goods and services produced by
informal sector
• Number and characteristics of enterprises from
informal sector
• Value of the production, by type, contribution to GDP
• Conditions and constraints under which informal
sector operate, its organization and relationship with
formal sector
 Measurement methods
Depend on the objectives and the capacity
( financial and human resources).

Bearing in mind that often in countries with a

large informal sector resources are limited,
national statistical offices should prioritize
their strategic objectives for estimating the
informal sector
 Measurement methods
(cont)

• The choice for a method depend on :

- Users needs
- Organization of statistical system
- Data sources
- Resources available
Measurement methods (cont)

Are based on surveys or the results from tax

audits:
- to conduct a special survey on the informal
sector;
– to expand the coverage of the existing regular
surveys, such as labour force or household
surveys, with information pertaining to the
informal sector;
– to carry out mixed household–enterprise surveys
 Survey tools
Depending on their objectives, countries
use a variety of survey tools for
measuring the informal sector:
- independent ad hoc surveys,
- mixed household-enterprise surveys,
- labour force or other household surveys,
enterprise/
- establishment surveys and economic
censuses.
 Main types of surveys
1. Household surveys
2. Enterprise surveys
3. Mixed household-enterprise surveys
 1. Household surveys

 Objective
to monitor the evolution of informal sector
employment and informal employment in
terms of the number and characteristics of
the persons involved and the conditions of
their employment and work.
Main surveys:
1.1LFS
1.2 HIES
 1. 1 LFS
Measurement Objectives
– Monitor evolution of IS employment
– Presents characteristics of employees,
employment conditions
– Data on labour inputs can be used in
conjunction with informal sector surveys to
extrapolate data on other characteristics,
e.g. value-added
 1.1 LFS (cont)

• Methodological Considerations
– Additional questions or module to LFS
– Ask all people employed during reference period
– Ask in respect of both main and secondary jobs
– Probing questions needed for often unreported
activities, e.g. unpaid work, women’s own-
account/home-based activities, secondary
activities of farmers, government officials, formal
sector employees
 1. 1 LFS (cont)

• Limitations/Concerns
– Seasonality
– Data about informal sector enterprises
versus informal sector entrepreneurs
– Estimation of number and characteristics of
informal sector enterprises is not possible
– Disaggregation by economic activity
depends on the sample size and design
 1. 2 HIES
• Measurement Objectives
- HH demand for goods and services produced in
the informal sector
• Methodological considerations
- Data on each expenditure item
• Limitations/Concerns
-Provide household final consumption, not total
demand
- Not separation between informal and formal
expenditures
 2. Enterprise surveys
Objective: to monitor the number and
characteristics of the informal sector units.
Provide:
-the number and characteristics of the
businesses involved;
-their production activities, income generation,
and fixed capital;
- the conditions and constraints under which
they operate;
- their organizations and relationships with the
formal sector, etc
2. Enterprise surveys (cont)

Methodological considerations
– Prerequisite: sampling frame
– List frame often not available or do
not cover household enterprises
– Establishment or economic censuses
can be used as list frame or sampling
frame
 2. Enterprise surveys (cont)

• Limitation
- Do not cover households activities
- Do not present the diversity and mobility of
informal sector activities
- Depend on the BR quality
- High costs,
- Possible overlaps and /or failure to capture
enterprises such as in-home food
processing, ambulant trade, construction
 3. Mixed household and
enterprise surveys
This approach includes:
3.1 The modular approach: informal sector
attached to household survey (mixed HH
and enterprise surveys)
3.2 The stand-alone approach: informal
sector survey designed as an independent
survey
3.3 Integrated approach: informal sector
surveys as part of a survey system
designed to meet several objectives
 3.1 Modular approach
Objective:
To monitoring trends in the informal sector
over time, if the base survey (the
household survey) is conducted regularly
and an informal sector module is
attached at sufficiently frequent intervals
 3.1 Modular approach (cont)

• Methodological Considerations
-ISS sample is a sub-sample of the HH survey
(LFS or HIES)
- Conducted simultaneously or consecutively
- Allows regular/sustainable IS data collection
- Have a complete coverage and identification of
IS entrepreneurs in the sample of HH
- Information on informal sector can be linked to
other data from the HH survey
 3.1 Modular approach (cont)

Limitations:
- Need for a suitable base survey (survey
operations and response burden)
- Frequency/reference period of base
survey
- Base survey samples are not selected
for informal sector purposes
 3.2. The stand-alone approach:
Independent IS survey
• Objective
Provide information concerning:
- Production of informal sector by activities and
size
- Employers/own-account workers in informal
sector classified by activity/type of work place
- Concentration of small establishments;
- Income/socio-economic data of informal
sector
 3.2. The stand-alone approach:
Independent IS survey (cont)
Methodological considerations
A multi-stage design
• (i) selection of areas (census enumeration areas)
as primary sampling units;
• (ii) listing or interviewing of all households in the
sample areas;
• (iii) selection of sample households with owners
of informal sector enterprises (household
unincorporated enterprises with some market
production)
• (iv) interview of sample householders and
enterprise owners
 3.2. The stand-alone approach:
Independent IS survey (cont)
Limitations
- High cost of survey operations,
- Quality of listing (type of activity, basic
characteristics data needed for
stratification)
- Complex survey operations : sample
design, sample weighting and
estimation procedures estimation
procedures, qualified survey staff ,
sound training of interviewers, etc.).
 3.3. Integrated approach:
informal sector surveys
Objectives:
- data collection for the informal sector,
- labour force characteristics,
- household income and expenditure, etc.
This approach is especially useful for
countries that do not have a regular
household survey to which an informal
sector survey can be attached
 Integrated “1-2”survey
Objective:
• To measure both informal sector and informal
sector employment

• It consists of two phases:

- The first phase is a household survey and
- The second phase is an enterprise survey.

The first phase survey is also crucial for

constructing the sampling frame for the
enterprise survey.
 Integrated “1-2”survey (cont)
Data is collected in two phases:
• I phase: Labour Force Survey
- Collect data on employment, adding questions
on informal employment
- Integrate questions in LFS to identify Household
Unincorporated Enterprises for Market (HUEM)
• II phase; HUEM Survey
- Use first phase data to construct sampling
frame for HUEMs
- Collect data on HUEM
Integrated “1-2”survey (cont)
• In a ‘1-2’ survey, the sample areas are selected on the basis
of the sample design for phase 1. Within the sample areas,
HUEMs may be associated with:
- households within the sample areas,
- households outside the sample area, and
- small units in the business register.
Thus, ideally, the sampling frame of HUEMs in a ‘1-2’ survey
can be constructed by compiling the small units in the
business register, identifying the HUEMs ‘belonging’ to
households within the sample areas and a listing operation
which would identify the HUEMs belonging to households
outside the sample area. Or, alternatively, this frame can be
constructed through a complete listing of all HUEMs in
sample areas
 Integrated “1-2”survey-
concepts
• Informal units typically operate at a low level of
organisation, with little or no division between
labour and capital as factors of production and
on a small scale. Expenditure for production is
often indistinguishable from household
expenditure.

• Activities are not necessarily performed with

the deliberate intention of evading the payment
of taxes or social security contributions, or
infringing labour or other legislations or
administrative provisions.
 Integrated “1-2”survey-
concepts (cont)
• Labour relations are based mostly on
casual employment, kinship or personal
and social relations rather than
contractual arrangements with formal
guarantees
• The informal sector is a sub-sector of
the household institutional sector in the
system of national accounts
Integrated “1-2”survey-concepts
(cont)

• To be excluded: all incorporated

enterprises, government institutions.
• At least some production must be
marketed, which excludes production of
goods and services exclusively carried out
for own final use
• Own-accounts workers / informal
employers
Integrated “1-2”survey-concepts (cont
HUEM= Household Unincorporated Enterprises for
Market
Legal organisation
Production units that are not constituted as
separate legal entities independently of their
owners
Accounting practices
Production units that do not keep a complete set of
accounts (no separation between private life and
business)
Product destination
Production units with at least some market output
(not for own final consumption) for sold /
bartered
Integrated “1-2”survey-
scheme
 Households enterprises
Producing at least some goods and services for market Producing goods and
(HUEMs) services
Formal sector Informal sector only for own final use

Agri- Non
Non Agricultural Non Agricultural
cultural agricultural
agricultural activities agricultural activities
activities activities
activities activities
Numbe r of surve ys o n the info rma l se c to r a c ro ss c o untrie s a nd me tho ds of
da ta c o lle c tio n

Re g io n Afric a Asia & Pa c ific La tin Ec o no m ie s To ta l

Typ e o f surve y Am e ric a in tra nsitio n
Mixe d surve y 15 2 4 1 22
La b o ur Fo rc e Surve y 8 6 14 5 33
Ho use ho ld s surve y 11 - 5 2 18
Esta b lishm e nt
c e nsuse s a nd 11 4 - - 15
surve y
To ta l 45 12 23 8 88
So urc e : Info rm a l se c to r: Sta tistic a l d e finitio n a nd Me a sure m e nt issue s, P. G e nna ri, p a p e r
p re se nte d to the O EC D/ UNESC AP/ ADB wo rksho p , 2004, Ba ng ko k
 Estimation strategy
The building of the informal sector estimation
strategy may be based on the following issues:
- Defining the meaning of the informal sector and
identifying its components;
- Deciding the best applicable criteria for defining
the informal sector;
- Assessing the data sources and developing the
own method;
- Improving the sources and the estimations
 Concluding remarks
• The informal sector represents an important
part of developing economies, and
governments and international organizations
• Attention on understanding what proportion it
represents,
• Why it exists
• How it operates so
Measuring it is an important challenge for
developing countries