INFORMAL SECTOR

Clementina Ivan-UngureanuTraining: 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 definitionThe 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 employmentILO 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 employmentDistinction 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. employeese. 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

Financial Government

NPISH

HOUSEHOLDS

Institutional HH

Market production

Non-market production

HH registered or have a no. of employees

INFORMAL SECTOR

Goods for own FC

Services for own FC

Without employees ”informal own account enterprises”

With employees ”enterprises of informal 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 methodsDepend 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 theinformal 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 toolsDepending 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 surveys1. Household surveys2. Enterprise surveys3. 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:1.1LFS1.2 HIES

1. 1 LFSMeasurement 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 surveysObjective: 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 approachObjective: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

• ObjectiveProvide 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 considerationsA 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”surveyObjective:• 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 organisationProduction units that are not constituted as

separate legal entities independently of their owners

Accounting practicesProduction units that do not keep a complete set of

accounts (no separation between private life and business)

Product destinationProduction 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 (HUEMs)

Formal sector Informal sector

Producing goods and services only for own final use

Non agricultural activities

Agricultural activities

Non agricultural

activities

Agri-cultural

activities

Non agricultural

activities

Agricultural activities

Number of surveys on the informal sector across countries and methods of data collection Region Type of survey

Africa Asia& Pacific Latin America

Economies in transition

Total

Mixed survey 15 2 4 1 22 Labour Force Survey 8 6 14 5 33 Households survey 11 - 5 2 18 Establishment censuses and survey

11 4 - - 15 Total 45 12 23 8 88 Source: Informal sector: Statistical definition and Measurement issues, P. Gennari, paper presented to the OECD/UNESCAP/ADB workshop, 2004, Bangkok

Estimation strategyThe 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 soMeasuring it is an important challenge for

developing countries