INFORMAL SECTOR

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INFORMAL SECTOR

• Clementina Ivan-Ungureanu
• Training Essential SNA Building the basics
• Addis Ababa, 13-16 February 2012

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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.

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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

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Content of the presentation

• Definition
• Measurement methods

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Definition
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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

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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

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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
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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.

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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

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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

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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.

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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

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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

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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

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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

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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.

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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.

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Measurement methods
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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

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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
  theinformal sector

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Measurement methods (cont)

• The choice for a method depend on - Users
  needs- Organization of statistical system- Data
  sources - Resources available

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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 householdenterprise surveys

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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.

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Main types of surveys

1. Household surveys
2. Enterprise surveys
3. Mixed household-enterprise surveys

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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

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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

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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, womens
  own-account/home-based activities, secondary
  activities of farmers, government officials,
  formal sector employees

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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.).

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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

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Integrated 1-2survey

• 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.

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Integrated 1-2survey (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

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Integrated 1-2survey (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

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Integrated 1-2survey-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.

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Integrated 1-2survey-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

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Integrated 1-2survey-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

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Integrated 1-2survey-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

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Integrated 1-2survey- scheme
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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

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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