Informal Sector Statistics in the National Accounts Alick Nyasulu/SIAP Informal Sector Statistics Training Bangkok, Thailand | 14-15 November 2017

Outline of Presentation Core Set of Economic Statistics Informal Sector and Non-Observed economy Conceptual/framework definitions Identification of units National Accounts and the Informal Sector Measurement Methods Estimation Methods Data Issues

Core Set of Economic Statistics Prices and costs Consumer, producer, product price indices, labour cost, wages, exchange rates, PPPs, terms of trade Demand & output GDP (p/e), external trade, industrial structure statistics; short-term indicators (industry output/demand) and productivity NA for economy/by sector to measure income, savings, investment, wealth; BoP to measure international income and capital flows, IIP and external debt Income & wealth Money & banking Assets and liabilities of banking sector, monetary measures and interest rates Government Public revenue, expenditure, borrowing and lending, government accounts TAG included IMF, ADB, Eurostat and other international organizations. Among the countries from this group Kazakhstan and Mongolia were represented. Core Set indicative not prescriptive judged to be the minimum set for effective economic analysis and monitoring should be tailored to individual country needs needs are determined by information requirements of Government and Non-Government decision makers Description of the Core Set: Domains Key statistics within domains Each key statistic is “core” Flexibility for specific country needs Characteristics Frequency – SDDS,GDDS, ECB Timeliness - SDDS can be used as a guide but this and other quality aspects covered in metadata that will accompany country specific series. International standards / guidelines for each key statistic SNA is an integrating framework for all these statistics. Policy relevance of the Core Set components: The conduct of monetary policy. Establishing and monitoring the government's fiscal position. Assessing the long-term capability of the economy, with a focus on sustainable growth. Developing policies designed to achieve generally agreed economic goals, such as increased economic welfare and greater equity. Measuring the economic, social and environmental impact of internal and external shocks. Providing the information necessary for the efficient functioning of markets. General monitoring and forecasting of the economy. Informing economic, social and environmental analyses. Meeting international obligations to provide information about the performance of the economy and the well-being of the nation. Labour market Labour supply and demand, LF characteristics, employment/unemployment, underemployment, hours worked, employment in informal/formal sector, job creation and vacancies Natural resources & the environment Measures of sustainable economic growth, discovery/depletion and degradation of natural assets

Not observed & not informal NOE & informal sector Not observed & not informal Observed & informal Illegality?? Not observed & informal

Why Informal Sector Survival strategies undertaken by individuals facing a lack of (adequate) jobs Unemployment insurance or other forms of income maintenance Need for independence and flexible work arrangements Prospect of quite profitable income-earning opportunities The continuation of traditional activities

SNA & ICLS: Differences in terminology Sector Unincorporated enterprise Production Enterprises Households SNA Complete institutional units, no formal sector Total unincorporated activity Market (most production bartered/sold), own-use and non-market (not by hh) With full set of accounts, divided into establishments All unincorporated households and institutional ICLS Only productive activities, informal/formal dichotomy Each activity tackled separately Exclusive own-use & where some production bartered/sold Closer to establishment for SNA Households producing exclusively for own final use Complete institutional units covering accumulation, consumption and production activities—in the ILO definition, households not engaged in productive activities are not considered.

Bringing ICLS & SNA together General government and NPISH “formal sector” Non-financial and financial corporations (formal; can be non-registered /below threshold) Household sector (formal or informal based on non-registration/threshold criteria) Institutional households are by definition considered formal Those that are classified as informal are divided into: Market producers (SNA market producers) Producers for own final use (including ICLS market producers)

2008 SNA & Informality Units engaged in the production of goods or services with the primary objective of generating employment and incomes for the persons concerned Units typically operate at a low level of organization

2008 SNA & Informality Low level of organisation Registration status No distinction between labour and capital Labour relations based on kinship, casual employment, social relations, contractual arrangements without formal guarantees Registration status Mostly unregistered though some might not Not incorporated Household activities Size-persons engaged, turnover, coverage in statistical surveys Localised-operating in certain areas, shanty etc

SNA Household sector Informal sector Not informal Demarcation of production boundary of each subsector is necessary for surveying purpose in order to avoid double counting or incomplete coverage: Production, income or labor covered by establishment survey should not be covered by the survey on informal sector that rely on household surveys. Production, income or labor surveyed through agriculture statistics based on land use and other techniques should also not be covered by establishment survey or household surveys.

Household sector Data are collected by household sampling or some proxies Data are collected through agricultural surveys Data are collected by area sampling or household surveys.

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.

Household Enterprises

Measurement methods

Objectives of the measurement 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 methods ( financial and human resources). Depends 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 the informal 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 – model based estimation

Estimation methods

Methods of measuring Informal Sector Two broad groups of methods: Macro-model methods National accounts methods to achieve exhaustiveness Both these groups of methods attempt to measure NOE (also referred to as ‘shadow economy’, ‘hidden economy’, ‘underground economy’), in general, - of which informal sector is but a component – albeit the major component.

Macro-model Methods Macro-model methods – as termed in the Handbook - produce an estimate of the entire Informal Sector or NOE by means of a single model. The Handbook – “…not considered useful in obtaining exhaustive estimates of GDP …” “… and tend to tend to produce spectacularly high measures …” Three broad types: Monetary methods Global indicator method Latent variable methods

Monetary Methods These rely on the assumption: “unexplained” (by the model) monetary developments owes to incomplete coverage of official GDP estimate. Start with Fisher’s quantity theory equation Obtain an estimate of GDP Difference between the model-based estimate and official estimate is considered a measure of informal sector/non-observed economy.

Global Indicator Method This method uses a single variable like electricity/water consumption as the indicator of entire economic activity. The difference between the estimate of GDP obtained under the model and the official GDP is claimed to represent a measure of Informal economy.

Latent Variable Methods These are multiple regression models with a non-observed dependent variable and a number of observed explanatory variables.

GDP compilation in production approach – Indirect Methods Indirect methods of covering Informal sector in the GDP estimate: Supply based approaches, including labour input method; Demand based approaches; Income based approaches; Commodity flow approaches. Labour Input Method (LIM) is the most important procedure that has been in use since 1950s to measure contribution of unorganised sector to GDP. 5.16. Supply based methods rely on data about the supply of inputs that are used in producing goods and services. Inputs may include a number of primary raw materials, just one major raw material, labour, land, fixed capital stock, etc. If data on the supply of one or several inputs used in a given production activity are available, the total production of the activity that uses these inputs can be estimated. 5.33. Demand based methods aim at determining production by using indicator data on specific uses of goods and services. These indicators can be any use of goods and services that sufficiently describe their production. They could be household final consumption expenditures of a certain commodity (e.g. health and personal services), uses of major products as raw materials (e.g. processing of agricultural products), exports (e.g. major export commodities), or administrative data indicating demand for a product (e.g. motor vehicle registrations and building permits). After a measure of output has been obtained, value added estimates can be derived using output/value added ratios, as for supply-based methods. 5.34. Demand indicators are usually incomplete. In most cases, only data on one or a limited number of major uses are available. Income Based Methods 5.36. Data on some categories of income are available from administrative sources and can be used to obtain an indication of production covered by the administrative system. Information on income taxes or social security contributions paid by self-employed persons (or private entrepreneurs) are often readily available. However, adjustments are usually necessary to account for activities not covered by tax laws and for underreporting of incomes for tax purposes. Commodity Flow Method 5.39. The commodity flow method involves balancing total supplies and uses of individual products. It is used to estimate the output of a commodity by balancing the supply and use of that commodity, using the following equation: output = the sum of all intermediate consumption, final consumption, changes (positive or negative) in inventories, gross fixed capital formation, acquisition less disposals of valuables, and exports minus imports.

Labour Input Method (1) The labour input method (LIM) of estimating value added / output for the informal segment (for an economic activity or a group of economic activities) consists of: obtaining an estimate of labour input from Population Census and / or Labour Force Survey (LFS) using other sources for the informal segment obtaining estimates of output or value added per unit of labour input for the informal segment from Establishment Survey; and multiplying the estimate of labour input by the estimate of per unit value added / output to arrive at an aggregate estimate of value added / output. Labour Input Method At the core of the method are three basic steps: • obtain estimates of the supply of labour input to GDP, for selected economic activity and size of enterprise, from a household labour force survey and/or other demographic sources; • obtain estimates of output per unit of labour input and value added per unit of labour input for the same activity and size breakdown from regular or special purpose enterprise survey; and • multiply the labour input estimates by the per unit ratios to get output and value added for the activity and size categories.

Labour Input Method (2) One of the most effective methods of measuring gross value added (GVA) of informal sector – usually by economic activity. Since most often, the enterprise surveys fail to cover all enterprises. again, costs actually incurred for hiring (casual) labourers are often shown as services charges rather than compensation of employees and hired labour not included in labour input. In such cases, this procedure can be give a more exhaustive coverage, since LFS data give more complete coverage of labour input. This procedure can be expected to give a more exhaustive coverage of production if the household survey data give more complete coverage of labour input to GDP than do the enterprise survey data. There are two reasons to suppose that this is likely. • Household based surveys pick up labour inputs to enterprises that are not included in enterprise surveys, for example because these enterprises are too small to be registered in the files from which the survey frames are constructed or because they are too small to be included within the survey. • Individuals may report their labour inputs to household surveys whereas enterprises may conceal those same inputs in order to evade taxes or administrative regulations.

Labour Input Method (3) Measuring the value of production of goods and services by LIM, therefore, demand a fair degree of precision in the estimates of: labour input (number of workers adjusted for multiple employment) based on data from households (LFS) and Gross value added per worker (GVAPW) from enterprises obtained from enterprise survey (ES), separately for activity groups.

Data Needs The requirements of estimates on informal economy can be summarised as follows: For Informal Employment: parameters defining informal employment (LFS) terms & conditions of employment (LFS) structural information (ES) productivity (ES) For Informal Sector: parameters defining informal sector enterprise (ES) production related parameters (ES), including labour input, output, intermediate consumption and GVA.

Data Collection Strategies (1) For measurement of informal employment and informal sector employment the LFS is the best instrument. Informal sector production can be measured through enterprises surveys covering the informal sector i.e Mixed household enterprise survey, Integrated 1-2 Surveys ILO Compendium of official statistics on employment in the informal sector (2002) recorded successful experiences of many countries in using labour force surveys as a source of data on employment in the informal sector. For measurement of informal employment the labour force survey is the best instrument. If the measurement objectives are 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, it is sufficient to include periodically, in an existing labour force survey, some additional questions pertaining to the informal sector or informal employment definitions and to the characteristics of informal sector employment or informal employment.

One method of data collection tested in A-P ESCAP/ADB experience with 1-2 Surveys (e.g. Mongolia and Armenia) Mixed household-enterprise survey Phase I Labour force survey Informal employment module Household unincorporated enterprise (ICLS) module Informal sector module Phase II Enterprise Survey Informal employment Informal sector value added

2008 SNA recommendations for data on IS & IE Production Intermediate consumption Value added Compensation of employees Gross mixed income Consumption of fixed capital Net mixed income Employment in the informal sector Informal employment outside the informal sector Informal sector is not an institutional sector in the SNA sense and we cannot provide a full sequence of accounts for it.

What next?