Informal sector and informal employment: Key concepts and definitions Ralf Hussmanns Head, Methodology and Analysis Unit Bureau of Statistics International Labour Office

ILO Bureau of Statistics: Activities Collection and dissemination of international labour statistics: Yearbook of Labour Statistics, Internet, etc. Development or revision of international standards on labour statistics: methodological work, International Conference of Labour Statisticians (ICLS); Technical assistance in labour statistics (in cooperation with ILO field offices): Technical cooperation projects, advisory missions, training courses, methodological manuals.

International standards on labour statistics: Purposes Provision of technical guidelines for the development of national labour statistics on the basis of accepted best methods and practices Enhancement of the international comparability of labour statistics Protection of labour statistics against public criticism and political interference

International standards: Informal sector and informal employment Resolution concerning statistics of employment in the informal sector (15th ICLS, 1993) Guidelines concerning a statistical definition of informal employment (17th ICLS, 2003)

Purpose of presentation Explain international statistical definitions of the informal sector and of informal employment; Present a conceptual framework that makes it possible to complement statistical measures of employment in the informal sector (IS) with broader statistical measures of informal employment (IE); Show how the two measures can be obtained in using labour force surveys as the source of information.

Concepts Informal sector: enterprise-based. Informal employment: job-based.

Conceptual framework: Employment in the informal economy Production units Informal jobs Formal jobs Informal sector enterprises A B Other units of production C D Employment in the informal sector: A + B Informal employment: A + C Informal employment outside the informal sector: C Employment in the informal economy: A + B + C

Why are statistics on the informal sector (IS) needed? Research and analysis Formulation, monitoring and evaluation of policies and programmes Advocacy purposes: recognise role of IS in job creation, poverty reduction, etc. Improvement of labour statistics and economic statistics Improvement of national accounts (exhaustiveness of GDP measurement)

International statistical definition of the informal sector (IS) Adopted by the 15th ICLS (1993) and referred to in the SNA 1993. IS defined in terms of characteristics of production units/enterprises (enterprise approach) rather than characteristics of persons or their jobs (labour approach). IS defined as subsector of the SNA institutional sector ‘households’. IS can be identified separately in the accounts. Its contribution to GDP can be quantified. Updated 1993 SNA (2009) will include special chapter on IS.

Institutional units (1993 SNA) Corporations (incl. quasi- corporations) Government units (incl. social security funds) Non-profit institutions Households (incl. unincorporated enterprises owned by households)

15th ICLS: Definition of employment in the informal sector All jobs in informal sector enterprises, or all persons who, during a given reference period, were employed in at least one informal sector enterprise, irrespective of their status in employment and whether it was their main or a secondary job. ‘Enterprise’ defined in a broad sense.

15th ICLS: Informal sector concept Informal sector: units engaged in production of goods or services. Primary objective: generation of employment and incomes for persons concerned. Characteristics: low level of organisation; little or no division between labour and capital as factors of production; small scale; labour relations (if any) based on casual employment, kinship, or personal/social relations rather than contracts with formal guarantees.

15th ICLS: Criteria for defining informal sector enterprises (1) Private unincorporated enterprises excluding quasi-corporations (1993 SNA: household unincorporated enterprises, household enterprises) owned by individual household members, several members of the same household, or members of different households: Not constituted as separate legal entities independently of their owners, and no complete sets of accounts available.

15th ICLS: Criteria for defining informal sector enterprises (2) At least some of the goods or services produced are meant for sale or barter. Note: 17th ICLS excluded households employing paid domestic workers from the IS. Engaged in non-agricultural activities, including secondary non-agricultural activities of enterprises in the agricultural sector. Note: The recommendation to exclude agriculture from the scope of the IS, and measure it separately, was made for practical data collection reasons, not for conceptual ones.

15th ICLS: Framework of informal sector definition ILO Household enterprises Informal sector enterprises Other household enterprises Own-account enterprises own-account enterprises Other Enterprises of employers Enterprises of informal employers Other enterprises of employers

15th ICLS: Criteria for defining informal sector enterprises (3.1) Informal own-account enterprises: All own-account enterprises, or only those not registered under specific forms of national legislation (factories’/ commercial acts, tax/social security laws, professional groups’ regulatory acts, etc.) as distinct from local regulations for issuing trade licenses or business permits.

15th ICLS: Criteria for defining informal sector enterprises (3.2) Enterprises of informal employers: Establishment size in terms of employment below a certain threshold (to be determined by countries themselves; Delhi Group: less than 5 employees, for international reporting), and/or enterprise not registered, and/or employees (if any) of the enterprise not registered.

Informal sector: Motives for participation Survival strategy: lack of other jobs and social protection (e.g. unemployment benefits), need to supplement income Desire for independence and flexible work arrangements Higher income than wage employment Traditional activity (e.g. handicrafts) Non-compliance with regulations (e.g. tax payments, social security contributions, labour legislation), reduction of production costs (problems of non-response!)

LFS – Information usually available Socio-demographic characteristics: sex, age, marital status, relationship to reference person of household, level of education, place of usual residence, urban vs. rural area, etc. Household/family characteristics: household/ family size, household/family type, etc. Hours of work and earnings Industry, occupation and status in employment Other job characteristics: full-time/part-time work, job permanency (permanent, temporary, seasonal, occasional, etc. job)

Note: ISIC, Rev. 3/3.1/4: identifies persons working in agriculture and related activities, employed as domestic employees by households, or engaged in the production of goods for own final use by their household. Question on form of registration of the enterprise: covers usually the criteria of non-registration of the enterprise, kind of ownership, legal organisation, and type of accounts.

LFS: Example of questions for measuring employment in the informal sector (1) All respondents: Number of persons usually working in the enterprise (in size classes) If few: Exact number by sex and status in employment Place of work Own-account workers, employers, contributing family workers: Form of registration of the enterprise, or Type of tax payment by the enterprise

LFS: Example of questions for measuring employment in the informal sector (2) Employees: Registration of the enterprise, or Kind of ownership of the enterprise If private: Legal organisation of enterprise If unknown: Type of the enterprise (approximate information) Note: Only few additional questions are needed to measure employment in the informal sector.

QLFS South Africa: Questions on employment in the informal sector (1) Employees: Deduction by employer of income tax from the employee’s wage/salary Employers, own-account workers & contributing family workers: VAT registration of the (household) business Income tax registration of the (household) business

QLFS South Africa: Questions on employment in the informal sector (2) All respondents: Ownership/institutional sector of place of work (government, public enterprise, private enterprise, NPI, household) Number of employees at place of work Self-assessment of place of work (formal sector, informal sector, household)

Criticism of the informal sector concept (1) The term ‘sector’ suggests homogeneity of the units included, while in reality the IS comprises a fairly heterogeneous set of enterprises. In common language, the term ‘sector’ means ‘branch of economic activity (industry)’. The dichotomy ‘formal-informal’ suggests a dualism of the economy/labour market, while in reality there is a continuum.

Criticism of the informal sector concept (2) An enterprise-based definition is unable to capture all aspects of the increasing so-called «informalisation» of employment.

Reminder Don’t blame your dog because it does not behave like a cat!

Informalisation of employment Growth of the informal sector, especially in developing and in transition countries. Increase of various forms of informal (or non-standard, atypical, alternative, irregular, precarious, etc.) employment in most countries, incl. developed countries. Informalisation of employment goes far beyond the informal sector.

Delhi Group (5th Meeting, 2001) « The definition and measurement of employment in the informal sector need to be complemented with a definition and measurement of informal employment. »

Employment in the informal sector and informal employment Refer to different aspects of the informalisation of employment and to different target groups for policy-making. One of the two concepts cannot replace the other. Are concepts that complement each other: both are useful for analytical/policy-making purposes. Need to be defined/measured in a coherent and consistent manner, to be clearly distinguishable. Unaware of the different observation units involved (enterprises vs. jobs), statistics users tend to confuse the two concepts.

Informal employment: Relevance (1) Statistics on informal employment can provide data for some of the decent work indicators being developed by the ILO, or serve as one summary indicator of decent work itself, while statistics on employment in the informal sector can be used as a context indicator for the measurement of decent work.

Informal employment: Relevance (2) Informal employment is being proposed as part of an additional indicator for monitoring of the Millenium Development Goal (MDG) 3 ‘Promote gender equality and empower women’: ‘Gender differences in the structure of employment’, in addition to ‘Share of women in wage employment in the non-agricultural sector’.

17th ICLS: Conceptual framework for informal employment (IE) Purpose: Relate enterprise-based concept of employment in the IS in coherent & consistent manner with a broader, job-based concept of IE. Basis: Employed persons hold jobs having various job-related characteristics, which are undertaken in production units (enterprises) having various enterprise-related characteristics. Observation unit for employment: Jobs rather than employed persons (reason: existence of multiple jobholding). Result: Total employment classified by (i) type of production unit and (ii) type of job.

Production units by type Formal sector enterprises: corporations (incl. quasi-corporate enterprises), non-profit institutions, unincorporated enterprises owned by government units, and those private unincorporated enterprises producing goods or services for sale or barter which are not part of the IS. Informal sector enterprises: as defined by 15th ICLS, but excluding households employing paid domestic workers (as recommended by Delhi Group). Households: households producing goods exclusively for their own final use, and households employing paid domestic workers.

Jobs by type 1. Status in employment (ICSE-93): own-account workers, employers, contributing family workers, employees, and members of producers’ cooperatives. Breakdown by status in employment: needed for definitional purposes and considered useful for analytical and policy-making purposes. 2. Nature of job: informal vs. formal.

Type of cells Dark grey: jobs which, by definition, do not exist (e.g. contributing family workers in household non-market production units). Light grey: formal jobs (e.g. employees holding formal jobs in formal sector enterprises). Unshaded: informal jobs.

17th ICLS: Definition of informal employment Total number of informal jobs, whether carried out in formal sector enterprises, informal sector enterprises, or households, during a given reference period.

17th ICLS: Components of informal employment (1) Own-account workers and employers employed in their own informal sector enterprises (Cells 3 & 4): informal nature of jobs determined by characteristics of the enterprise. Members of informal producers’ cooperatives, i.e. cooperatives not formally established as legal entities, etc. (Cell 8): informal nature of jobs determined by characteristics of the cooperative.

Components: Informal employment (2) Own-account workers engaged in production of goods exclusively for own final use by their household (e.g. subsistence farming, do-it-yourself construction of own dwellings), if considered employed according to the 13th ICLS (1982) definition of employment (Cell 9). Contributing family workers working in formal or informal sector enterprises (Cells 1 & 5): no written employment contracts; employment not subject to labour legislation, social security regulations, collective agreements, etc.

Components: Informal employment (3) Employees holding informal jobs, whether employed by formal sector enterprises, informal sector enterprises, or as paid domestic workers by households (Cells 2, 6 & 10). Note: Definition of informal employee jobs represents major new element of the guidelines.

17th ICLS: Definition of informal jobs of employees Employees are considered to have informal jobs if their 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, etc.). Note: Definition covers (i) de jure informal jobs and (ii) de facto informal jobs.

17th ICLS: Reasons for informal jobs of employees Non-declaration of the jobs or the employees; Casual jobs or jobs of a limited short duration; Jobs with hours of work or wages below a specified threshold (e.g. for social security); Employment by unincorporated enterprises or by persons in households; Employee’s place of work is outside the premises of the employer’s enterprise (e.g. outworkers without employment contract); Jobs, for which labour regulations are not applied, not enforced, or not complied with for other reasons.

Informal jobs of employees: Operational criteria To be determined by countries in accordance with national circumstances and data availability, due to large diversity of informal employment situations found in different countries. Impact on the international comparability of informal employment statistics recognized by 17th ICLS.

Operational criteria used to define informal jobs of employees Lack of coverage by social security system Lack of entitlement to paid annual or sick leave Lack of written employment contract Casual/temporary nature of work

Employees holding formal jobs in informal sector enterprises (Cell 7) Included in employment in the informal sector, but excluded from informal employment. Significance varies among countries, depending upon informal sector definitions used.

Indicators Employment in the informal sector: Sum of Cells 3 to 8. Informal employment: Sum of Cells 1 to 6 and 8 to 10. Informal employment outside the informal sector: Sum of Cells 1, 2, 9 and 10.

Components: Informal employment outside the informal sector Employees holding informal jobs in formal sector enterprises (Cell 2) or as paid domestic workers employed by households (Cell 10). Contributing family workers working in formal sector enterprises (Cell 1). Own-account workers engaged in production of goods exclusively for own final use by their household, if considered employed according to the 13th ICLS definition of employment (Cell 9).

Related issues (1) While problems in assigning jobs to status-in-employment categories affect data on informal employment to a lesser extent than data on employment in the informal sector (classification errors vs. coverage errors), further work is needed to develop methodologies helping to reduce classification errors regarding jobs at the borderline of status-in-employment categories (own-account workers vs. employees vs. contributing family workers).

Related issues (2) Usefulness of developing analytically relevant sub-divisions of the various types of informal jobs (especially those held by employees) as part of further work on classifications by status in employment.

Related issues (3) Development of comprehensive statistics on informal employment in countries, which exclude agriculture from the scope of their informal sector statistics: Need to define informal jobs in non-subsistence agriculture, especially those held by own-account workers, employers and members of producers’ cooperatives, to fill the definitional gap that exists in respect of such jobs.

LFS: Measuring informal employment (1) Additional questions are needed only for the identification of informal jobs of employees. For all other status-in-employment categories the classification of jobs as informal follows directly from the status in employment of the job and/or the characteristics of the enterprise, possibly with exception of the jobs held by own-account workers, employers and members of producers’ cooperatives in non-subsistence agriculture.

LFS: Questions on informal jobs of employees (tested in pilot survey) Q11: Permanent vs. temporary employment Q12: Existence of written employment contract Q13: Payment of social security (pension fund) contributions for the employee by the employer Q14: Possibility to benefit from paid annual leave or compensation for it Q15: Possibility to benefit from paid sick leave Q16: Possibility to benefit from maternity leave Q17: Risk of arbitrary dismissal without advance notice by the employer Q18: Possibility to receive legal benefits and compensation in case of dismissal

Questions used to define informal jobs of employees (LFS as from 2004) Q13: Payment of social security (pension fund) contributions for the employee by the employer Q14: Possibility to benefit from paid annual leave or compensation for it Q15: Possibility to benefit from paid sick leave Employees are considered to have informal jobs if the answer to any of the questions Q13, Q14 or Q15 is ‘ no ’. Principle: ‘No work, no pay’.

QLFS South Africa: Questions on informal jobs of employees Employer’s contribution to any pension/ retirement fund for the employee Entitlement to any paid leave Employer’s payment of UIF contributions for the employee Entitlement to medical aid benefits from the employer Employment through written contract vs. verbal agreement Duration of the contract/agreement (limited, permanent, unspecified)