12 November 2007 Zeynep Orhun, Statistics Division

Informal Sector:Statistical Concepts

What are we going to discuss today?

• Why are we interested in informal sector statistics?

• What are some related concepts?• How do we define informal sector?• What are the key criteria to facilitate data

collection?• What are various tools to collect data on IS?• DA Project on Interregional Cooperation on the

Measurement of Informal Sector and Informal Employment: Unified Data Collection Strategy

• Incorporating estimates into national accounts

Problem: Lack of sound data

• Informal sector not covered in official statistics

• Inadequate information on contribution of informal sector to GDP and labour market

• Data collections typically ad hoc studies (i.e. not part of regular national statistical systems) and with limited scope

• Available data not internationally comparable• No time series data • Poor analysis and dissemination

Consequences: Statistics to Policy

• Potentially significant underestimation of the GDP

• Lack of info on differential characteristics of informal sector enterprises in the use of technology, access to credit, training, markets, etc.

• Lack of info on input-output relations between formal and informal sector enterprises

• Lack of info on informal sector’s contribution to employment and employment characteristics

Type of informal sector statistics needed

• Total # of informal sector units• Production and incomes generated

through informal sector activities• Conditions of creation and operation

of informal sector units• Total employment in informal sector

units

Scope of Non-Observed Economy

• Illegal• Underground/Concealed• Household production for own final

use• Activities missed in data collection• Informal sector

NOE Components and Production Units

Illegal Production

Goods or services prohibited by law

Producer/service provider unlicensed

Illegal production is included in SNA 1993 production boundary in order to avoid erroneous attributions in financial accounts/transactions.

Monetary

Non-monetary

Underground/concealed activities

• Not clearly separated from illegal production• Mainly unreported income from production of legal goods and

services (monetary/non-monetary)• Certain activities may be productive and also legal but deliberately

concealed from public authorities to:

    (a)  Avoid the payment of income, value added or other taxes;

    (b)  Avoid the payment of social security contributions;

    (c)  Avoid having to meet certain legal standards such as minimum wages, maximum hours, safety or health standards, etc.;

    (d)  Avoid complying with certain administrative procedures, such as completing statistical questionnaires or other

administrative forms.

E.g. construction, service industries where small enterprises dominate

Household production for own final use

(a) Production of agricultural products and their subsequent storage

(b) Production of other primary products such as mining salt, cutting peat, the supply of water

(c)  Processing of agricultural products

(d)  Other kinds of processing such as weaving cloth; dress making and tailoring; the production of footwear; the production of pottery, utensils or durables; making furniture or furnishings; etc.

*Storage of agricultural goods and supplying of water are included in

the production boundary as an extension of production activities.

Statistical Underground

Activities missed due to data collection deficiencies

such as:

(a) Undercoverage of enterprises

(b) Non-response by enterprises (not imputed)

(c) Underreporting by enterprises

Informal Sector

• No unified definition hampering:– Comparable datasets– Comprehensive guidelines– Promotion of international standards

• There are international guidelines (15th ICLS, 17th ICLS)

Differences in Definitions Across CountriesAzerbaijan Complete NOE definition except for illegal activities

Kazakhstan Complete NOE definition (refers to hidden and informal activities)

Kyrgyzstan Covers hidden (deliberately concealed or missed in data collection) and informal activities (carried out by individual producers or unincorporated enterprises which belong to individuals or households; based on informal relations and produce goods and services completely or partially for their own consumption).

Turkey Unregistered economy

Turkmenistan

NOE covers essentially non-government units

Uzbekistan Informal economic activities (informal sector includes the activities of households and individual entrepreneurs working with or without licenses)

What is a household unincorporated enterprise?

(a)Fixed/other K does not belong to production unit but to

owner(b) Enterprises cannot engage in transactions or enter

into contracts with other units, nor incur liabilities on their own behalf

(c) Owners have to raise the necessary finance at their own risk and are personally liable, without limit, for any debts or obligations incurred in the production process

(d) Expenditure for production is often indistinguishable from household expenditure

(e) Capital equipment may be used indistinguishably for business and household purposes

Non-marketMarket(all or most of output marketed)

Informal sector

Formal sector

Informal sector

Owner occupied dwelling services

Other activities

Paid domestic services

ServicesAgriculturalAgriculture, forestry, fishing

Formal sector

Producing goods & services for own final use

GoodsNon-agricultural

Producing at least some goods & services for market

Non-marketMarket(all or most of output marketed)

Informal sector

Formal sector

Informal sector

Owner occupied dwelling services

Other activities

Paid domestic services

ServicesAgriculturalAgriculture, forestry, fishing

Formal sector

Producing goods & services for own final use

GoodsNon-agricultural

Producing at least some goods & services for market

Household Unincorporated Enterprises

Starting point for data collection

Informal Sector Criteria, 15th ICLS

(a) Size: The number of employees on a continued basis (in practice can be total # employees or engaged) is under a specified size (depends on national context, not the best criterion as there may be small enterprises which are perfectly formal).

(b) Non-registration: The enterprise is not registered under pertaining national legislation (such as factories’ or commercial acts, tax or social security laws, professional groups’ regulatory acts, or similar acts, laws or regulations established by national legislative bodies).

*ICLS recommended the exclusion of agriculture from scope of informal sector measurement due to practical reasons (and we abide by this recommendation in our project).

Criteria for Identifying IS Enterprise

Essential• Legal

organizationUnincorporated enterprise

• Ownership Household• Type of

accountsNo complete set of accounts

• Product destination

At least some market output

Criteria: Additional & OptionalAdditional Operational• #employed/

engagedSpecific to country

• Non-registration Specific to country

Optional• Kind of economic

activityPossible exclusion of:

– Agriculture and related activities

– Paid domestic services• Geographic area Possible exclusion of rural

areas

Informal Sector based on Delhi Group Recommendations

• For international comparability-- narrower definition based on the largest common denominator of currently used national definitions.

• 3 essential criteria + additional criteria to be applied simultaneously: – Productive units with less than five paid

employees, and – Productive units not registered, and– Exclusion of households employing paid

domestic employees

Framework of IS Definition

Informal own-account enterprises

Enterprises of informal employers

Other own-account enterprises

Other enterprises of employers

Household Unincorporated Enterprises

Own-account enterprises

Enterprises of employers

Informal Sector

Informal Own-Account Enterprises

• Operated by own-account workers, either alone, or in partnership with members of same or other households

• May employ family workers and occasional employees, but not employees on continuous basis

• Include all or exclude those registered under certain specified national legislation

Enterprises of Informal Employers

• Owned and operated by employers, either alone or in partnership with members of same or other households, and employ one or more employees on continuous basis– Employees (hired on continuous

basis) below a specified number– Non-registration of the enterprise– Non-registration of employees (labour

laws)

Employment and Informality

Informality of employment is characterized by absence of contracts, social protection, entitlement to benefits and

not being subject to labour legislation and income taxation.• Informal employment versus informal sector

employment Given a reference period:• Employment in informal sector = all jobs in ISEs or all

persons who were employed in at least 1 ISE irrespective of status (can be main/2nd job)

• Informal employment = total # informal jobs in formal or informal sector enterprises or households

NOE Components and Employment

THANK YOU!

www.unescap.org/stat/isie

12/11/2007 Zeynep Orhun, Statistics Division

Informal Sector: Measurement Methods

How do we collect data on IS and IE?

Household SurveysInformal Sector Surveys

Labour Force Surveys

Household IncomeExpenditure Surveys

Establishment Surveys

Mixed Household Enterprise Surveys

Household Surveys: LFS• Measurement Objectives

– Monitor evolution of IS employment– # and 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

• 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

Household Surveys: LFS

• Limitations/Concerns– Seasonality– # of IS enterprises versus IS

entrepreneurs– Disaggregation by economic activity

depends on the sample size and design

Household Surveys: HIES• Measurement Objectives

– HH demand for goods and services produced in the informal sector

• Methodological considerations– Info on each expenditure item, distribution

based on place

• Limitations/Concerns– Does not provide total demand but household

final consumption only

Informal Sector Surveys• Measurement objectives

– Collect detailed structural information (# and characteristics of businesses, employment, income generation and K equipment of ISEs, conditions/constraints of operation, relations to formal sector/public authorities

• Tools– Establishment Surveys– Mixed Household and Enterprise Surveys

ISS : Establishment Surveys• Methodological considerations

– Prerequisite: sampling frame – List frame often not available or do not cover

hh enterprises– Establishment or economic censuses can be

used as list frame or sampling frame (PSUs) (depending on the time lag of ISS)—USUs would need update

• Limitations/Concerns– High cost– Omissions– Duplications

ISS : Mixed HH and Entreprise Surveys

• Methodological Considerations– Based on area sampling and conducted in 2 phases– Phase 1 (HH Survey): Sampling frame through

household listing/survey in selected areas or PSUs (all businesses and owners are identified)

– Phase 2 (Enterprise Survey): All or a sample of business owners interviewed

– Post-sampling identification– Possible to analyze jointly various activities of the same

individuals/hh– Possible to link informal sector activities/business owner

characteristics with household characteristics contribution of family members (women and children)

Mixed Surveys: Independent Informal Sector Surveys (1)

• Methodological Considerations– Multi-stage design

• Selection of areas as PSUs• Household listing or interviewing• Selection of sample hh with owners of potential IS businesses

as USUs• Main interviewing of sample households and business owners

– Density of informal sector entrepreneurs and type of activity (stratified sampling)

– Info on density of employers/own-account workers in the enumeration areas classified by activity/type of work place/# employees; concentration of small establishments; stratification of enumeration areas by income/socio-economic criteria; other info obtained during listing or data collection for ISS; local expert knowledge.

Mixed Surveys: Independent Informal Sector Surveys (2)

• Limitations/Concerns– High cost of survey operations, especially Phase 1– Quality of listing (type of activity, basic

characteristics data needed for stratification)• Listing of hh and hh-based business operators,

establishments (different area sampling frames may be used—different geographical clustering)

• Listing may be expanded into survey to ensure coverage• Different sampling fractions are used for different strata

to have adequate sampling units from each stratum

– Complex survey operations; sample weighting and estimation procedures

Mixed Surveys: Modular Approach (1)

• Methodological Considerations– ISS sample is a sub-sample of the base survey

(LFS or HIES)– Conducted simultaneously or consecutively– Allows regular/sustainable IS data collection– Complete coverage and accurate identification

of IS entrepreneurs in the sample hh– Same sampling weights can be used as the

base survey– Information on IS can be related to other info

from the base survey

Mixed Surveys: Modular Approach (2)

• Limitations/Concerns:– Need for a suitable base survey (survey

operations and response burden)– Frequency/reference period of base

survey– Base survey samples are not selected

for IS—areas or hh (disaggregation, distribution, representation)

Mixed Surveys: Integrated Surveys

• Methodological Considerations– Special modular approach to meet several

objectives (IS, labour force, hh income and expenditure data collection)

– Incorporate sample design requirements for IS measurement into the survey design (efforts increase # of IS entrepreneurs and have better representation of different activities during sample allocation and selection)

• Limitations/Concerns– Complex; response burden– Often limited to urban areas

MODULAR APPROACH APhase 1•Same sample of PSUs as base•Sample list of USUs for base/ISSPhase 2•Same sample of USUs for base/ISS•Simultaneous conduct for base/ISS

MODULAR APPROACH BPhase 1•Same sample of PSUs as base•Different list of USUs for ISSPhase 2•Different sample of USUs for ISS•Consecutive survey for ISS, e.g. 1-2-3

INDEPENDENT ISS APPROACH APhase 1•Specific sample of PSUs •Selection of PSU not based on IS•Household listingPhase 2•Joint listing/interviewing of all IS hh &activities irrespective of work place•No stratification of samples of USUs

INDEPENDENT ISS APPROACH BPhase 1•Specific sample of PSUs •Selection of PSU based on IS (by industry)•Household surveyPhase 2•Separate listing/interviewing of all IS establishments & households •Stratification of samples of USUs

To have sound data:• Avoid replacement• Improve response rate • Mitigate effects of reference period• Consider effects of seasonal

variations• Allocate adequate resources for data

editing

THANK YOU!

www.unescap.org/stat/isie