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1.2.2 Statistical definitions

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Alessio Lupi10 May 2018

2. A brief history of 40 years of conceptualisation and data collection on the informal economy

2.2. Statistical definitions

A brief summary, rather than detailing all international definitions used in the statistical surveys, is relevant here. The current definitions used, applied with national variations and adaptations, are two-pronged. The first is the establishment-based definition of the informal sector adopted in 1993, which followed the footsteps of the ILO Kenya report (1972) and was based on subsequent research on the ‘modern’ informal sector of micro-enterprises in sub-Saharan Africa. The other is the job-based definition of informal employment, which returns to the original idea of Hart (1971), but ismore foundedon the rapid increase of the process of labour externalisation and the development of outworkers, home-based workers and precarious jobs correlated with globalisation. Both definitions overlap in some way and require an explanation about their scope in the labour force and among the institutional sectors of the System of National Accounts.

The informal sector was defined by the 15th International Conference of Labour Statisticians (ILO, 1993a,b), as one comprisedof enterprises of own-account workers and enterprises of informal employers (a dichotomisation that could remind one of the two-tier or two sub-sectors identified by analysts). It refers to the characteristics of the economic units in which the persons work: legal status (individual unincorporated enterprises of the household sector); non registration of the economic unit or of its employees; size of fewer than five permanent paid employees;at least some production for the market. The conference recommended mixed (household-establishment) surveys in order to capture the informal sector. In this approach, all economic units operated by a household member were enumerated in the sampled households, then surveyed in a second stage through an establishment questionnaire. Later on in 1997, the Delhi Group on Informal Sector Statistics was set up by the UN Statistical Commission in order to improve and develop the definition and data collection of this sector. The group has met regularly since, and the reports and contributions are available on the Ministry of Statistics and Programme Implementation of India website (www.mospi.nic.in).

The 17th ICLS (ILO, 2003) has adopted guidelines for defining informal employment as that which comprises all jobs carried out in informal enterprises, as well as in formal enterprises by workers and especially employees “whose employment relationship is, in law or in practice, not subject to national labour legislation, income taxation, social protection or entitlement to certain employment benefits (advance notice of dismissal, severance pay, paid annual or sick leave…) because of non declaration of the jobs or the employees, casual or short duration jobs, jobs with hours or wages below a specified threshold, (…), place of work outside premises of employer’s enterprise (outworkers), jobs for which labour regulations are not applied, not enforced, or not complied with for any other reason”.

Informal employment is therefore usually defined by the absence of social protection, non-payment of social contribution (mainly health coverage) or the absence of written contract (but this criterion can only be applied to paid employees and is consequently narrower than social protection). Nevertheless, individuals may benefit fromsocial protection through the contribution of another member of the family. Consequently the appropriate definition should be related to the payment of social contributions by the workers concerned rather than to the entitlement of the workers to social benefits.

This new extended definition of informality is interesting in that it meets a usual practise in various parts of the developing world (in Latin America and some countries of Asia) where labour force surveys are often used to collect data on social protection coverage. As a consequence, the absence of social protection rather than the absence of written contract (which applies to wage employees only) has become the prevalent criterion for the measurement of informal employment. The introduction of questions in order to capture social protection (especially health protection) has rapidly disseminated in countries where household surveys are less commonor did not include such questions. Nevertheless, practises continue to be diverse across regions and countries: the ideal consists ofdata collection through labour force surveys or other household surveys capturing both informal employment and informal sector employment, but this practise still remains rare.

Chart 1 below simplifies the complexity of both concepts and shows that they are not mutually exclusive as components of the labour force. Chart 2 attemptsto shed light on the position of the informal sector and informal employment among the institutional sectors of the System of National Accounts (SNA).

Chart 1: Components of the informal sector and of informal employment in the labour force.

 

Individuals/Jobs

    Informal Formal

Economic units / Enterprises

Informal sector

 (1)

(2)

  Formal sector (3)  (4)

Households

Paid domestic workers

(5)

(6)

  Production of goods for own final use (7) -

 

The two cells in grey cover the ‘informal sector’ while the four cells in double line cover ‘informal employment’:

- employment in the informal sector = (1) + (2)

- informal employment = (1) + (3) + (5) + (7)

- employment in the informal economy = ((1) + (2)) + ((3) + (5) + (7))

Cell (2) conveys that within the informal sector some individuals may have a formal job. It is important to note that informal employment is not inclusive of the informal sector in totality, as it is possible that the criteria for non-registered units and employees is not used in the national definition. This may also occur due to the fact that some workers in the informal sector benefit from social security as beneficiaries of parents or spouses who are registered. Such a category is assumed to be small. The main category is cell (3), which represents informal jobs outside the informal sector and in the formal sector. This category is assumed to be enormous and continually growing. Finally, cells (5) and (7) are components of the households themselves. The households are the employers of paid domestic workers and the production of goods for own final use refers predominantly to subsistence agriculture or subsistence activities in general which do not go to the market.

In order to avoid inconsistencies between the definitions of the two concepts, it can be useful and practical to consider that the informal sector is a component of the informal economy. This is also the definition adopted and applied in this paper, namely, employment in the informal economy is comprised of all persons (whatever their employment status) working in informal enterprises, as well as all persons working informally in other sectors of the economy, i.e. formal enterprises, households with paid employees (domestic workers) or own-account workers producing goods (primary goods or manufactured goods) for the household’s own final use. By definition, all contributing (unpaid) family workers are classified in informal employment. Formally paid employees working in the informal sector (a category which may exist where the definition of informal sector does not use the criterion of registration of the employees) and unpaid family workers working in the formal sector are equally classified in informal employment. Thisunderstandingslightly diverges from the ILO definition of informal employment,and thus in order to avoid misunderstandingbetween the two approaches they have been merged in the context of this paper to refer to the concept of informal economy, a broader concept than that of informal employment.

Measuring the contribution of the informal sector and informal employment to GDP requires an understanding of where these activities and jobs are positioned in the various institutional sectors of the SNA. Chart 2 hereafter attempts to make such an understanding easier: the informal sector is a sub-sector of the household institutional sector – it is only a part of it (and not necessarily the most important part) and does not belong to any of the other institutional sectors. Informal employment, on the other hand, cuts across all institutional sectors, including government, and cannot be defined according to the fundamental unit of the SNA, i.e. economic units. Informal employment needs to be measured within the labour input matrix, an instrument ensuring that all jobs and all hours of work are taken into account in the measurement of the contribution of each institutional sector to the value added of all industries that compose the GDP.

 

Chart 2: Components of informal sector, informal employment and employment in the informal economy by institutional sectors in the System of National Accounts

 

Institutional sectors

Sub-sectors

Jobs

      Formal Informal

Enterprises/Economic units/Institutional Sectors

General Government

Non-Financial Corporations

Financial Corporations

Non Profit Institutions serving Households

 

1

2

Enterprises/Economic units/Institutional Sectors Households: Unincorporated enterprises Formal 3 4
Enterprises/Economic units/Institutional Sectors Households: Unincorporated enterprises Unincorporated Enterprises: Informal sector 5 6
Enterprises/Economic units/Institutional Sectors Households: Others Production of goods for own final use - 7
Enterprises/Economic units/Institutional Sectors Households: Others Paid domestic services 8 9

Employment in the informal sector = (5) + (6)

Informal employment = (2) + (4) +(6) + (7) + (9)

Employment in the informal economy = ((5)+(6))+((2)+(4)+(7)+(9))

Source: Charmes (2013)

Summary of current definitions

In summary, the informal economy is comprised of micro-enterprises operated on a small scale by individual entrepreneurs, as well as of producers for own-account and paid employees who are not covered or not contributing to social security. It should not be confounded with the so-called “shadow” or “illegal” economy.

Statistically speaking, employment in the informal economy is comprised of:

i) employment in the informal sector of micro-enterprises (operating under a certain size threshold in terms of the number of paid employees or number of workers - registered or not - according todiffering national definitions),

   ii) informal employment outside the informal sector itself, comprised of:

         a) informal employment in the formal sector, i.e. paid employees not covered by social security,

         b) domestic workers not covered by social security,

         c) employment in production activities for own final use.

In National accounts (i.e. GDP), the informal sector is a sub-sector of the household institutional sector, which also includes paid domestic workers as well as production activities for own final use. These components are generally clearly identified in the national accounts of countries that compile the detailed accounts of the household sector.

Informal employment in the formal sector contributes to all other institutional sectors but is rarely identified in national accounts.

 

 

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