1. Informal Sector Statistics in the National Accounts
Alick Nyasulu/SIAP
Informal Sector Statistics Training
Bangkok, Thailand | November 2017

2. 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

3. 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

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

5. 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

6. 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.

7. 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)

8. 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

9. 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

10. 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.

11. 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.

12. 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.

13. 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.

15. Household Enterprises

16. Measurement methods

17. 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

18. 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

19. Measurement methods (cont)
The choice for a method depend on : - Users needs - Organization of statistical system - Data sources - Resources available

20. 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

21. Estimation methods

22. 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.

23. 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

24. 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.

25. 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.

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

27. 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.

28. 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.

29. 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.

30. 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.

31. 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.

32. 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.

33. 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

34. 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.

35. What next?