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Chapter 2 Concepts, definitions and sub-classifications of

informal sector and informal employment

Ramesh KolliECA consultant

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Outline of Chapter

• Introduction • Informal sector• Informal employment• Non-use of ‘informal economy’ as a statistical term• Production units (17th ICLS) and institutional sectors• Links between the concepts of informal sector/employment

and non-observed economy• Sub-classifications

Introduction

• 15th ICLS (1993) adopted a Resolution concerning statistics of employment in informal sector – to assist national statistical offices in developing definitions,

classifications and methods of data collection for the informal sector. – covers issues relating to the definition of the informal sector and the

design, content and conduct of informal sector surveys. – It represents the only international statistical standards on the topic

• 17th ICLS (2003) endorsed guidelines concerning a statistical definition of informal employment to complement the 15th ICLS Resolution, following suggestions by the Expert Group on Informal Sector (Delhi Group)

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Informal Sector (1)

Starting point defining informal sector was the following 15th ICLS resolution

“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 to 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.”

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Informal Sector (2)• Informal sector definition is based on the characteristics of production units

(enterprises) (enterprise approach), rather than in terms of the characteristics of the persons involved or of their jobs (labour approach).

• Choice of this definition gives rise to defining employment in informal sector (as distinct from informal employment)

• Informal sector enterprises are a subset of household unincorporated enterprises– Here, the term ‘enterprise’ refers to any unit engaged in the production

of goods or services for sale or barter, irrespective of:• employing workers or self employed• undertaken inside or outside the business owner’s home• in identifiable or unidentifiable premises or without a fixed location.

– The meaning of the term ‘sector’ follows the SNA, so that the definition of the informal sector refers only to the productive activities of households that are within the SNA production boundary.

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Informal Sector (3)

• 15th ICLS resolution recognises that the characteristic features of household unincorporated enterprises described in the SNA correspond well to the concept of the informal sector as commonly understood. – Including the composition of unincorporated enterprises

• informal own-account enterprises• enterprises of informal employers

• The first three criteria of the definition of informal sector enterprises in the 15th ICLS resolution refer to the – legal organization of the enterprises, – their ownership and – the type of accounts kept for them.

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Informal Sector (4)

• Informal own-account enterprises– depending on national circumstances, either all own-account enterprises

or else only those that are not registered under specific forms of national legislation should be considered informal.

• Enterprises of informal employers– defined in terms of one or more of the following three criteria:

• small size of the enterprise in terms of employment;– size limit for enterprises of informal employers was not specified

by the 15th ICLS resolution, so it can be varied according to the needs of countries

• non-registration of the enterprise (defined as for informal own-account enterprises);

• non-registration of its employees.

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Informal Sector (5)

Thus, the criteria defining informal sector enterprises are:• Legal organization: enterprise not constituted as a legal entity separate

from its owner(s)• Ownership: enterprise owned and controlled by member(s) of

household(s)• Type of accounts: no complete set of accounts, including balance sheets• Product destination: at least some market output• Kind of economic activity• Number of persons engaged/employees/employees employed on a

continuous basis: fewer than ‘n’; and/or• Non-registration of the enterprise, and/or• Non-registration of the employees of the enterprise

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Informal Sector (6)Scope of informal sector surveys and treatment of special cases• 15th ICLS resolution adopted a number of additional recommendations regarding

the scope of informal sector surveys and the statistical treatment of borderline cases between the informal sector and other sectors

• Productive activities outside the SNA production boundary– The scope of the informal sector is restricted to activities within the

production boundary as defined in the latest version of the SNA.• Production for own final use – excluded from informal sector• Agricultural activities – excluded, but farm households non-agricultural activities

included provided they meet the criteria of informal sector• Rural areas – included• Professional and technical services – included• Outworkers (Homeworkers) – included provided they are not employed by formal

sector• Paid domestic workers – left to countries (15th ICLS); excluded (17th ICLS)

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Informal Sector (7)

• Current international data comparability problems result from :– differences in the concepts on which the statistics are based;– differences in the kinds of economic activity covered, mainly agriculture;– differences in the criteria used to define the informal sector, for example,

employment size of the enterprise or establishment as against non-registration of the enterprise;

– use of different cut-off points for the employment size criterion;– the inclusion or exclusion of paid domestic workers employed by

households, or of producers of goods exclusively for own final use by their household;

– inclusion or exclusion of persons with a secondary job in the informal sector; and

– inclusion or exclusion of persons engaged in professional or technical activities.

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Informal Sector (8)

Recommendations of the Delhi Group to enhance the international comparability of informal sector statistics1. All countries should use the criteria of legal organization (unincorporated enterprises), of

type of accounts (no complete set of accounts) and of product destination (at least some market output).

2. Specification of the employment size limit of the enterprise in the national definition of the informal sector is left to the country’s discretion. For international reporting, however, countries should provide figures separately for enterprises with fewer than five employees.

3. Countries using the employment size criterion should provide disaggregated figures for enterprises which are not registered, as well as for enterprises which are registered. In the case of multiple-establishment enterprises, the size limit should apply to the largest establishment.

4. Countries using the criterion of non-registration should provide disaggregated figures for enterprises with fewer than five employees as well as for enterprises with five and more employees.

5. Countries that include agricultural activities should provide figures separately for agricultural and non-agricultural activities.

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Informal Sector (8)

Recommendations of the Delhi Group to enhance the international comparability of informal sector statistics6. Countries should include persons engaged in professional or technical activities

if they meet the criteria of the informal sector definition.7. Countries should include paid domestic services unless these are provided by

employees.8. Countries should follow paragraph 18 of the 15th ICLS resolution regarding the

treatment of outworkers/homeworkers. Countries should provide figures separately for outworkers/homeworkers included in the informal sector.

9. Countries covering urban as well as rural areas should provide figures separately for both urban and rural areas.

10. Countries using household surveys or mixed surveys should make an effort to cover not only persons whose main job is in the informal sector, but also those whose main job is in another sector and who have a secondary activity in the informal sector.

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Informal Sector (9)

Definition of employment in the informal sector

1. Persons exclusively employed in the informal sector2. Persons employed both in and outside informal sector

2.1 Persons whose main job is in the informal sector2.2 Persons with one or more secondary jobs in the

informal sector• This is the total jobs performed in the informal sector

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Informal employment (1)

• Jobs performed in informal sector vs. persons employed in informal jobs.

• Conceptual framework of informal employment comes from 17th ICLS • Job-based concept of informal employment, as a person can engage in

multiple jobs with formal/informal characteristics• Emerged due to the development of more casual arrangements

between owners of enterprises and those contributing labour services in the form of informal employment.

• Informality of employment is characterized by absence of contracts, social protection, entitlement to certain employment benefits and not being subject to labour legislation or taxation.

• Broadly, the informal employment comprises informal jobs both in informal and formal enterprises and in households

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Informal employment (2)Conceptual framework for informal employment

• Informal employment: Cells 1 to 6 and 8 to 10• Employment in the informal sector: Cells 3 to 8• Informal employment outside the informal sector: Cells 1,2,9 and 10• Cells in dark shade refer to jobs that do not exist, cells shaded in light blue refer to formal jobs, unshaded

cells refer to informal jobs 15

Production units

by type

Jobs by status in employment

Own-account

workers

Employers Contributing

family

workers

Employees Members of

producers’

cooperatives

Informal Formal Informal Formal Informal Informal Formal Informal Formal

Formal sector

enterprises1 2

Informal sector

enterprises3 4 5 6 7 8

Households 9 10

Informal employment (3)

In summary, informal employment is defined as comprising:a) own-account workers and employers employed in their own informal

sector enterprises (household unincorporated enterprises with at least some market production that are unregistered or small in terms of the number of employed persons (e.g., fewer than five employees);

b) all contributing family workers;c) employees holding informal jobs, i.e., employees not covered by legal

protection or social security as employed persons, or not entitled to other employment benefits such as paid annual or sick leave;

d) members of informal producers’ cooperatives (not established as legal entities); and

e) own-account workers producing goods exclusively for own final use by their household (if considered employed).

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Non-use of ‘informal economy’ as a statistical term

• 17th ICLS was opposed to the use of term ‘employment in the informal economy’, to refer to the sum of employment in the informal sector and informal employment outside the informal sector

• Viewed that for statistical purposes, it would be better to present statistics on informal sector and on informal employment separately

• However, the informal sector concept, as defined by the 15th ICLS resolution, needed to be retained because it had become part of SNA and number of countries were collecting statistics on that basis

• Accordingly, while other ILO publications and some documents published by other organizations use the term ‘informal economy’, this manual prefers to use the terms ‘informal sector’ and ’informal employment’.

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Production units and institutional sectors (1)• 17th ICLS classification of production units is consistent with 2008

SNA institutional units by sector• 17th ICLS - all production units included in the SNA institutional

sectors ‘non-financial corporations’, ‘financial corporations’, ‘general government’ and ‘non-profit institutions serving households’ are considered formal sector enterprises

• Depending upon their characteristics, household unincorporated enterprises with at least some market production are either formal or informal sector enterprises.

• Thus, formal sector enterprises may be found in any of the five SNA institutional sectors

• But informal sector enterprises only within the household sector• 17th ICLS does not consider housing services of owner-occupiers of

dwellings in production (SNA includes), as there are no labour inputs

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Production units and institutional sectors (2)

Institutional units (SNA) and production units (ICLS)

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Links between the concepts of informal sector/employment/NOE (1)

• 17th ICLS requested that the links between the concepts of informal sector, informal employment and NOE be indicated

• NOE handbook– places informal sector in the broader context of NOE and relates it to

four other concepts with which it is often confused: • Underground Production (deliberate concealment of legal

activities from public authorities to avoid taxes, etc.)• Illegal Production (forbidden by law, but transactions have

mutual consent)• Household Production for own final use (production of goods,

own construction, imputed rents, and services produced with paid domestic servants); and

• Statistical Underground (missed due to deficiencies in data collection programme)

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Links between the concepts of informal sector/employment/NOE (2)

2008 SNA • Defines 'illegal production' as comprising

– (a) the production of goods or services whose sale, distribution or possession is forbidden by law, and

– (b) production activities that are usually legal but become illegal when carried out by unauthorized producers (drug trafficking and illegal medical treatment)

• 'Concealed (or underground) production' – Production activities that are legal when performed in compliance with

relevant standards or regulations but are deliberately concealed from public authorities to avoid paying income, value added or other taxes, paying social security contributions, etc.

• acknowledged that it might not always be easy in practice to draw a clear line between underground production and illegal production.

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Links between the concepts of informal sector/employment/NOE (3)

• The manual used these definitions to distinguish three types of production activity:

(a) activities which are legal and not underground; (b) activities which are legal but underground; and (c) activities which are illegal

(a) As defined by the 15th ICLS (excluding households employing paid domestic workers)(b) Households producing goods for own final use and households employing paid domestic workers

• Informal sector enterprises exist in all three types and therefore, need to be accounted

• The above data further needs to be broken down by formal and informal22

Production units Production activitiesLegal Illegal

Not underground UndergroundFormal sector enterprisesInformal sector enterprises (a)Households (b)

Sub-classificationsRecommended Desirable

Infl. sector enterprises

number of enterprises broken down by • kind of economic activity

and • by type of informal

sector enterprise (informal own-account enterprises or enterprises of informal employers)

• By type of workplace (home of enterprise owner, other fixed location, no fixed place); location (urban or rural);

• number of persons engaged; type of ownership (individual ownership, household ownership, business partnership with members of other households);

• relation with other enterprises (independent producers or producers working under subcontracting arrangements for other enterprises).

• In addition, it may be useful to classify informal own account enterprises further according to the composition of their workforce, distinguishing

• single-person units from multiple-person units and, among the latter, users of occasional hired labour from non-users of such labour.

Employment in the infl. sector

statistics on persons employed in the informal sector by • status in employment and • By kind of economic

activity

other variables include: sex; age; marital status; relationship to the household reference person; migration characteristics; educationalattainment; reason for working in the informal sector; occupation; hours of work; other jobs currently held in or outside the informal sector; nature of employment (permanent, temporary, seasonal, casual); amount of income; etc.

Infl. employment

status in employment of the job and by the type of production unit in which the job is undertaken

useful to disaggregate the different types of informal jobs further, especially those held by employees ((ICSE-93).

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Thanks