12 November 2007Zeynep Orhun, Statistics Division Informal Sector: Statistical Concepts

What are we going to discuss today? Why are we interested in informal sector statistics? What are some related concepts? How do we define informal sector? What are the key criteria to facilitate data collection? What are various tools to collect data on IS? DA Project on Interregional Cooperation on the Measurement of Informal Sector and Informal Employment: Unified Data Collection Strategy Incorporating estimates into national accounts

Problem: Lack of sound data Informal sector not covered in official statistics Inadequate information on contribution of informal sector to GDP and labour market Data collections typically ad hoc studies (i.e. not part of regular national statistical systems) and with limited scope Available data not internationally comparable No time series data Poor analysis and dissemination

Consequences: Statistics to Policy Potentially significant underestimation of the GDP Lack of info on differential characteristics of informal sector enterprises in the use of technology, access to credit, training, markets, etc. Lack of info on input-output relations between formal and informal sector enterprises Lack of info on informal sector’s contribution to employment and employment characteristics

Type of informal sector statistics needed Total # of informal sector units Production and incomes generated through informal sector activities Conditions of creation and operation of informal sector units Total employment in informal sector units

Scope of Non-Observed Economy Illegal Underground/Concealed Household production for own final use Activities missed in data collection Informal sector

NOE Components and Production Units

Illegal Production Goods or services prohibited by law Producer/service provider unlicensed Illegal production is included in SNA 1993 production boundary in order to avoid erroneous attributions in financial accounts/transactions. MonetaryNon-monetary

Underground/concealed activities Not clearly separated from illegal production Mainly unreported income from production of legal goods and services (monetary/non-monetary) Certain activities may be productive and also legal but deliberately concealed from public authorities to: (a) Avoid the payment of income, value added or other taxes; (b) Avoid the payment of social security contributions; (c) Avoid having to meet certain legal standards such as minimum wages, maximum hours, safety or health standards, etc.; (d) Avoid complying with certain administrative procedures, such as completing statistical questionnaires or other administrative forms. E.g. construction, service industries where small enterprises dominate

Household production for own final use (a) Production of agricultural products and their subsequent storage (b) Production of other primary products such as mining salt, cutting peat, the supply of water (c) Processing of agricultural products (d) Other kinds of processing such as weaving cloth; dress making and tailoring; the production of footwear; the production of pottery, utensils or durables; making furniture or furnishings; etc. *Storage of agricultural goods and supplying of water are included in the production boundary as an extension of production activities.

Statistical Underground Activities missed due to data collection deficiencies such as: (a)Undercoverage of enterprises (b) Non-response by enterprises (not imputed) (c) Underreporting by enterprises

Informal Sector No unified definition hampering: –Comparable datasets –Comprehensive guidelines –Promotion of international standards There are international guidelines (15 th ICLS, 17 th ICLS)

Differences in Definitions Across Countries AzerbaijanComplete NOE definition except for illegal activities KazakhstanComplete NOE definition (refers to hidden and informal activities) KyrgyzstanCovers hidden (deliberately concealed or missed in data collection) and informal activities (carried out by individual producers or unincorporated enterprises which belong to individuals or households; based on informal relations and produce goods and services completely or partially for their own consumption). TurkeyUnregistered economy TurkmenistanNOE covers essentially non-government units UzbekistanInformal economic activities (informal sector includes the activities of households and individual entrepreneurs working with or without licenses)

What is a household unincorporated enterprise? (a)Fixed/other K does not belong to production unit but to owner (b) Enterprises cannot engage in transactions or enter into contracts with other units, nor incur liabilities on their own behalf (c) Owners have to raise the necessary finance at their own risk and are personally liable, without limit, for any debts or obligations incurred in the production process (d) Expenditure for production is often indistinguishable from household expenditure (e) Capital equipment may be used indistinguishably for business and household purposes

Informal Sector Criteria, 15 th ICLS (a) Size: The number of employees on a continued basis (in practice can be total # employees or engaged) is under a specified size (depends on national context, not the best criterion as there may be small enterprises which are perfectly formal). (b) Non-registration: The enterprise is not registered under pertaining national legislation (such as factories’ or commercial acts, tax or social security laws, professional groups’ regulatory acts, or similar acts, laws or regulations established by national legislative bodies). *ICLS recommended the exclusion of agriculture from scope of informal sector measurement due to practical reasons (and we abide by this recommendation in our project).

Criteria for Identifying IS Enterprise Essential Legal organization Unincorporated enterprise OwnershipHousehold Type of accountsNo complete set of accounts Product destination At least some market output

Criteria: Additional & Optional Additional Operational #employed/engaged Specific to country Non-registration Specific to country Optional Kind of economic activity Possible exclusion of: –Agriculture and related activities –Paid domestic services Geographic areaPossible exclusion of rural areas

Informal Sector based on Delhi Group Recommendations For international comparability-- narrower definition based on the largest common denominator of currently used national definitions. 3 essential criteria + additional criteria to be applied simultaneously: –Productive units with less than five paid employees, and –Productive units not registered, and –Exclusion of households employing paid domestic employees

Framework of IS Definition Informal own- account enterprises Enterprises of informal employers Other own-account enterprises Other enterprises of employers Household Unincorporated Enterprises Own-account enterprises Enterprises of employers Informal Sector

Informal Own-Account Enterprises Operated by own-account workers, either alone, or in partnership with members of same or other households May employ family workers and occasional employees, but not employees on continuous basis Include all or exclude those registered under certain specified national legislation

Enterprises of Informal Employers Owned and operated by employers, either alone or in partnership with members of same or other households, and employ one or more employees on continuous basis –Employees (hired on continuous basis) below a specified number –Non-registration of the enterprise –Non-registration of employees (labour laws)

Employment and Informality Informality of employment is characterized by absence of contracts, social protection, entitlement to benefits and not being subject to labour legislation and income taxation. Informal employment versus informal sector employment Given a reference period: Employment in informal sector = all jobs in ISEs or all persons who were employed in at least 1 ISE irrespective of status (can be main/2 nd job) Informal employment = total # informal jobs in formal or informal sector enterprises or households

NOE Components and Employment

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12/11/2007Zeynep Orhun, Statistics Division Informal Sector: Measurement Methods

How do we collect data on IS and IE? Household Surveys Informal Sector Surveys Labour Force Surveys Household Income Expenditure Surveys Establishment Surveys Mixed Household Enterprise Surveys

Household Surveys: LFS Measurement Objectives –Monitor evolution of IS employment –# and 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 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

Household Surveys: LFS Limitations/Concerns –Seasonality –# of IS enterprises versus IS entrepreneurs –Disaggregation by economic activity depends on the sample size and design

Household Surveys: HIES Measurement Objectives –HH demand for goods and services produced in the informal sector Methodological considerations –Info on each expenditure item, distribution based on place Limitations/Concerns –Does not provide total demand but household final consumption only

Informal Sector Surveys Measurement objectives –Collect detailed structural information (# and characteristics of businesses, employment, income generation and K equipment of ISEs, conditions/constraints of operation, relations to formal sector/public authorities Tools –Establishment Surveys –Mixed Household and Enterprise Surveys

ISS : Establishment Surveys Methodological considerations –Prerequisite: sampling frame –List frame often not available or do not cover hh enterprises –Establishment or economic censuses can be used as list frame or sampling frame (PSUs) (depending on the time lag of ISS)—USUs would need update Limitations/Concerns –High cost –Omissions –Duplications

ISS : Mixed HH and Entreprise Surveys Methodological Considerations –Based on area sampling and conducted in 2 phases –Phase 1 (HH Survey): Sampling frame through household listing/survey in selected areas or PSUs (all businesses and owners are identified) –Phase 2 (Enterprise Survey): All or a sample of business owners interviewed –Post-sampling identification –Possible to analyze jointly various activities of the same individuals/hh –Possible to link informal sector activities/business owner characteristics with household characteristics  contribution of family members (women and children)

Mixed Surveys: Independent Informal Sector Surveys (1) Methodological Considerations –Multi-stage design Selection of areas as PSUs Household listing or interviewing Selection of sample hh with owners of potential IS businesses as USUs Main interviewing of sample households and business owners –Density of informal sector entrepreneurs and type of activity (stratified sampling) –Info on density of employers/own-account workers in the enumeration areas classified by activity/type of work place/# employees; concentration of small establishments; stratification of enumeration areas by income/socio-economic criteria; other info obtained during listing or data collection for ISS; local expert knowledge.

Mixed Surveys: Independent Informal Sector Surveys (2) Limitations/Concerns –High cost of survey operations, especially Phase 1 –Quality of listing (type of activity, basic characteristics data needed for stratification) Listing of hh and hh-based business operators, establishments (different area sampling frames may be used—different geographical clustering) Listing may be expanded into survey to ensure coverage Different sampling fractions are used for different strata to have adequate sampling units from each stratum –Complex survey operations; sample weighting and estimation procedures

Mixed Surveys: Modular Approach (1) Methodological Considerations –ISS sample is a sub-sample of the base survey (LFS or HIES) –Conducted simultaneously or consecutively –Allows regular/sustainable IS data collection –Complete coverage and accurate identification of IS entrepreneurs in the sample hh –Same sampling weights can be used as the base survey –Information on IS can be related to other info from the base survey

Mixed Surveys: Modular Approach (2) Limitations/Concerns: –Need for a suitable base survey (survey operations and response burden) –Frequency/reference period of base survey –Base survey samples are not selected for IS— areas or hh (disaggregation, distribution, representation)

Mixed Surveys: Integrated Surveys Methodological Considerations –Special modular approach to meet several objectives (IS, labour force, hh income and expenditure data collection) –Incorporate sample design requirements for IS measurement into the survey design (efforts increase # of IS entrepreneurs and have better representation of different activities during sample allocation and selection) Limitations/Concerns –Complex; response burden –Often limited to urban areas

MODULAR APPROACH A Phase 1 Same sample of PSUs as base Sample list of USUs for base/ISS Phase 2 Same sample of USUs for base/ISS Simultaneous conduct for base/ISS MODULAR APPROACH B Phase 1 Same sample of PSUs as base Different list of USUs for ISS Phase 2 Different sample of USUs for ISS Consecutive survey for ISS, e.g INDEPENDENT ISS APPROACH A Phase 1 Specific sample of PSUs Selection of PSU not based on IS Household listing Phase 2 Joint listing/interviewing of all IS hh & activities irrespective of work place No stratification of samples of USUs INDEPENDENT ISS APPROACH B Phase 1 Specific sample of PSUs Selection of PSU based on IS (by industry) Household survey Phase 2 Separate listing/interviewing of all IS establishments & households Stratification of samples of USUs

To have sound data: Avoid replacement Improve response rate Mitigate effects of reference period Consider effects of seasonal variations Allocate adequate resources for data editing

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