Estimation and Survey methods for the Informal Sector

Jacques CharmesUniversity of Versailles-St Quentin en Yvelines, Centre of Economics and Ethics for Environment andDevelopment (C3ED)47 bd Vauban78047 Guyancourt, FranceJacques.Charmes@bondy.ird.fr

The adoption of a new international definition for the informal sector has given a great impetus tomethods of estimation and surveys of this sector in the various regions of the world. Global figures on size(in terms of numbers involved and share of labour force) and contribution (in terms of output, value added,income and share of GDP) have by now been made available for a number of countries, eventually for timeseries and at least for several years in the past two decades; and it is hoped from recent concern andprogress that more and more data will be disaggregated by sub-sector, industries, status in employment andabove all by sex. The new definition set forth four main criteria: legal status and accountancy (excluding incorporatedand quasi-incorporated firms accordingly), employment size or registration alternatively. In addition,primary activities and non market activities are out of the scope of informal sector, even when somecountries continue to include subsistence agriculture in their estimates of informal sector. Within theinformal sector so defined, the criterion of status in employment allows to distinguish two sub-categories:own-account enterprises which do not employ permanent employees but may employ casual or familyworkers, informal employers’ enterprises which do employ permanent employees, with respect to thealready mentioned alternative criteria.

In practice, these criteria are very operational in that population censuses and labour force surveysusually collect information on status in employment and sector of industry (and agriculture is inclusive ofnon market activities) and as such allow the identification of the own-account workers and more broadly theself-employed, that is a good proxy for the first sub-category of the informal sector (i.e. the own-accountand the family workers). However this type of estimate leaves the second component (the informalpermanent employees) out and overall estimates of the informal sector need the availability of at least oneof the mentioned criteria for identifying the formal employees: yet the criteria of legal status, accountancy,employment size and registration, are commonly used to define the scope of the surveys which intend tocover the formal sector and are usually available in these surveys and sources; they are generally recorded inthe surveys of formal enterprises, so as the indirect estimates of the informal sector rely on the comparisonof various sources.

Furthermore, these criteria are easy to collect from the employers and own-account workers inhousehold surveys and are actually more and more often collected in these surveys. But it is morequestionable as to the other members of the labour force (employees, family workers who may not be fullyaware of these characteristics of the enterprise in which they work).

Despite their shortcomings and weaknesses, indirect estimates remain a current, widely-used anduseful means of obtaining macro and sectoral indicators on the informal sector. However, the availability ofinformal sector surveys, especially of the type "mixed survey", is the best source for measuring the informalsector. Pros and Cons of these two approaches, which are more complementary than in competition, will bepresented.

1. Estimation methods for the informal sectorAt the exception of Latin American countries and of a few Asian countries, most countries still rely

on indirect estimates for measuring the size and even more the contribution of the informal sector to theeconomy, although direct figures may be occasionally available in some of them, depending on theimplementation of a single informal sector survey.

Indirect estimation methods are based on the residual balance technique which consists in choosinga specific definition of the informal sector (for instance registration, or employment size) from which thesize of the sector can be inferred. With regard to the labour force, the main purpose is to segment thepopulation of wage employees enumerated in the population census or the labour force surveys, in order to

determine which ones belong to the informal sector (enterprises of informal employers) and which ones tothe modern sector. It is in fact practically impossible to apply strictly the concept of informal sector, insofaras surveys do not generally include questions on the economic unit in which the employee works.Comparisons have then to be made with sources on establishments or enterprises (surveys or administrativerecords). Consequently, assumptions are necessary to build estimates:i) the exhaustive source (population census or labour force survey) may distinguish between occasional andpermanent employees, whereas the registration source hardly ever reveals this distinction, or cannot countthe occasional workers. Employment in the modern sector is therefore limited to permanent jobs. Henceoriginates the risk of attributing to the informal sector temporary or casual employees, apprentices andfamily workers who may belong to the modern sector.ii) whatever the level of detail found in the exhaustive source, choice of registration source will generally berestricted, in a given country, to one of the following cases :

- figures for permanent employees will originate from a complementary questionnaire distributed tofirms that have filled in the Statistical and Fiscal Declaration (SFD), the results of which are not alwaysavailable (Niger for example), or from the register of firms (Tunisia, 1996),

- figures for permanent employees will be derived from a census or rather a survey intended to beexhaustive regarding the modern sector (for example Burkina Faso, Benin),

- wage employees are taken as those registered with the Social Security Fund, providing that domesticworkers can be distinguished and that registered seasonal workers (notably in construction and publicworks) will not erroneously inflate the figures (Mauritania for example),

- wage and non-wage workers figures are those in firms or establishments of a size beyond a certainthreshold (conforming with the definition adopted), when a census of establishments is available (Guinea,Benin, Mauritania, Tunisia, 1982).

In most cases therefore there is at least one source that can be used. The degree of approximation willdepend on the quality of the source used. It would be wrong, however, to reject the residual balancetechnique on the grounds that these approximations make it unreliable: the distribution of family workers,apprentices and employers involve only small numbers.

The residual balance technique can also be used for estimating the contribution of the informal sectorto the GDP and consists in comparing the value added by sector of industry in the National Accounts withthe value added in the formal sector of this industry as it results from the statistical source used. But unlessnational accountants have been in the situation of using the results of recent informal sector surveys (andthis also implies that National Accounts have been elaborating a new base year), the comparison betweenthe indirect estimation of employment in the informal sector and the indirect estimation of its contributionto the GDP only reveals circular reasoning: low productivity and low income per capita in the informalsector simply result from initial assumptions formulated on the basis of current economic thinking ratherthan on empirical evidence.

2. Survey methods for the informal sector2.1. Household surveys

Following the adoption of the 1993 definition, household surveys, and especially mixed (householdx enterprise) surveys, have been recommended as the best means to capture the informal sector. Mixedsurveys certainly did not wait for the new definition to be implemented and some African (Mali 1989) orLatin American (Mexico 1989) countries experienced them before: they are actually the way taken bysampling procedures to extend up to a third degree (and to a third observation unit) the classical two-degreemethod of sampling: enumeration areas are selected at the first degree, then households at the seconddegree, and finally businesses at the third degree.

The principle of these surveys consists in selecting a representative sample of households and, inthese selected households, to identify those own-account workers and employers who, according to thecriteria of the new definition, belong to the informal sector. At this point, two different methods have beenexperimented: the first one administers the business questionnaire immediately after the identification of thehousehold members involved in informal sector activities; the second one administers such a questionnaireat a second stage, after having carefully recorded the address of the business unless it take place in thehousehold itself (home-based work) or may be difficult to find out after a while (street vendors, mobileactivities, work on building sites, transport). And actually the gap between the two approaches is not sowide, as many call-backs are necessary when at the first and unique interview, the concerned respondent is

absent, being likely at work: then it can appear that the easiest way for filling the questionnaire will be toreach the informal sector operator on his worksite.

Mixed surveys can take three different designs, depending on the type of household survey to whichthe business questionnaire is to be attached:i) labour force survey (or a shorter equivalent of it) is the most common and logical procedure which hasbeen extensively used until now (Mexico, 1989; Mali, 1989 and 1996; Niger, 1994; Tanzania, 1994; Kenya,1999) because of its convenience and adequation to the issues to be addressed: when coping with themeasurement of labour force and economic activities, statisticians look for the comprehensiveness of theirapproach and they must check and take for granted that all informal businesses are correctly andexhaustively recorded, be they home-based or street-based, principal or secondary, permanent, occasional orseasonal, performed by the self-employed as well as by the dependent workers (as their second job); this is atypical objective of labour force surveys and a mixed survey which would not address this issue could missthe whole point of the approach.ii) income-expenditure surveys (or budget-consumption, or living standard survey) may be an alternativeprocedure as far as they also address the preceding issue of comprehensiveness. In addition, data onhousehold income and expenditures are greatly improved by the collection of data on income from businesswhile the knowledge of the household living standard makes the business socio-economic behaviour moreunderstandable. Chad experienced this type of mixed survey in 1995, and the World Bank surveys(undertaken and repeated in a great number of countries) on the Social Dimension of Adjustment (SDA) aswell as the Living Standard Measurement Study (LSMS) can be classified in this type of approach althoughthey collected data only on the two main informal non-farm activities of the household.

iii) sometimes the first step of the mixed surveys has been restricted to a simple list of householdmembers engaged in self-employment as in the baseline micro and small enterprise survey of Kenya (1993and 1995). This approach logically evolves towards the labour force survey approach (Kenya, 1999).

A special mention is to be made of a three-stage mixed survey combining a labour force approach(first stage), an informal sector approach (second stage) and a household consumption and expenditureapproach (third stage) undertaken at capital level in Yaounde (1993, 1994) and Antananarivo (1995, 1996).

The advantages of mixed surveys are a) to address the aim of exhaustiveness in the counting ofinformal businesses, b) to give a sufficient importance and weight, in the survey, to data collection onoutput, value added and income generated by the enterprises.

When labour force surveys as such (not mixed) are used for collecting and providing data on theinformal sector, they can only meet the first of these two aims. And one of their main weaknesses is that thecharacteristics of the enterprise are usually not very well known from the dependent workers, so that theclassification of the employees is somewhat biased by the uncertain reliability of responses or by a highnon-response rate to the questions on enterprises features. However several years of experience have shownthat Latin American countries successfully provide annual figures on the size and structure of the informalsector, as well as trends for the past two decades. Thailand got involved in the same approach since 1994.2. Enterprise or establishment surveysEstablishment censuses (and consecutive sample surveys) are usually taken as an old-fashioned approachfor surveying the informal sector. They actually fail to capture the diversity of informal sector activities asthey do not cover the households and this is why mixed surveys are now preferred and recommended.However, the experience of several countries in this approach should convince not to systematically rejectsuch a methodology, even when it is insufficient for comprehensive coverage. Egypt regularly undertakeestablishment censuses every ten years, in parallel with population censuses, and this simultaneity is in itselfvery instructive for the knowledge and understanding of the informal sector. Tunisia also carried out suchcensuses at national level (1975 and 1982) but now prefers to implement and update a national register ofestablishments. Until recently, India was regularly undertaking area sampling on establishments to cover theso-called "unorganised sector": it is now carrying out a mixed survey and testing the international definitionof the informal sector. At a lower level (capital cities), many countries have experienced establishmentcensuses to build a sampling frame for surveying establishments and enterprises. Despite its weaknesses,this approach should not be too rapidly held up to public obloquy for at least three reasons: a) they are themethods which allowed to test improvements in the recording of business incomes (length and adaptation ofthe reference period, seasonal variations, indirect questions for probing the income levels, etc.), but suchprogress can easily be internalised in mixed surveys, although it is not always observed; b) they are the onlymethod which allows to throw a light on the so-called "missing middle", a challenge of informal sectoreconomic theory: according to a currently admitted assumption, there would not be any possible transition

from the informal sector to the formal sector, provided that no intermediary sector is currently observed inthe surveys. Tunisia 1982 establishment census proved that this missing middle is a statistical illusion: theintermediary sector is comprised of small establishments which usually are declared and are actuallyrecorded as independent; c) they are the only sources which, until now, have collected and provided detaileddata on a very specific category of the informal sector, namely the street vendors: in fact, severalestablishment censuses have extended their scope to street vending (Benin, 1992; among others) and provedto be a major source of data for this segment which deserves concern from policy-makers. Therefore,according to national circumstances (for instance the existence of a wide category of informal employers)and statistical needs expressed by users (the willingness to support this sub-category of the informal sector),establishment censuses have still an important role to play in strategies oriented towards the measurement ofinformal sector.

In conclusion, major progress have been made in the measurement of a sector, the size of which, thecontribution as well as the potential for growth are admittedly important. Mixed surveys combining anhousehold approach with an establishment approach, are recognised as the most efficient andcomprehensive way towards its capture. Notwithstanding such a clear statement, there is still room left forindirect methods of estimation and for establishment surveys which both contribute to a better knowledge ofthe sector, in domains going beyond or across the scope of mixed surveys.

REFERENCESILO (1993 a). Statistics of employment in the informal sector. Report for the XVth International Conferenceof Labour Statisticians, 19-28 January 1993, Geneva.ILO (1993 b). Report of the Conference. Report of the XVth International Conference of LabourStatisticians, 19-28 January 1993, Geneva.Hussmanns, R. (1997). Informal sector: background and statistical definition, in Afristat (1997):Proceedingsof the seminar "the informal sector and economic policy in sub-Saharan Africa", 10-14 March 1997,Bamako.Roubaud, F. (1997). Statistical measurement of the informal sector in Africa: data collection strategies, inAfristat (1997):Proceedings of the seminar "the informal sector and economic policy in sub-SaharanAfrica", 10-14 March 1997, Bamako.

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ENGLISH SUMMARYThe new international definition for the informal sector, adopted in 1993, has given a great impetus to datacollection on this sector and to procedures for indirect estimates of its size in the labour force and of itscontribution to GDP. Mixed surveys, combining an household approach with an establishment approach,are now recommended and currently implemented, as they succeed in covering these activitiescomprehensively. However the need for macro-economic data on the informal sector justifies the interest ofpolicy-makers and users for indirect estimates and establishment surveys in this sector.