Informality

Indicator description

Introduction

The informal sector represents an important part of the economy, and certainly of the labour market, in many countries. It also plays a major role in employment creation, production and income generation. In lower-income countries with high rates of population growth or urbanization, the informal sector tends to absorb most of the expanding labour force in the urban areas. Informal employment offers a necessary survival strategy in countries that lack social safety nets, such as unemployment insurance. In these situations, indicators such as the unemployment rate and time-related underemployment are not sufficient to describe the labour market completely. Statistics on informality are key to assess the quality of employment in an economy, and are relevant to both developing and developed countries.

ILOSTAT presents information from national sources on various indicators pertaining to informality. It features statistics on the share of informal employment in total employment and the share of employment outside the formal sector, disaggregated by sex and presented separately for the total economy and for non-agricultural activities. For users interested in more detailed statistics, ILOSTAT also includes the absolute values used to calculate these shares.

Featured publication

Measuring informality: A statistical manual on the informal sector and informal employment (2013)​

This manual provides practical guidance on the technical issues involved in the development and administration of the surveys used to collect statistics on informality.

Concepts and definitions

Informal employment comprises persons who in their main or secondary jobs were:

  • Own-account workers, employers and members of producers’ cooperatives employed in their own informal sector enterprises. The informal nature of their jobs follows directly from the characteristics of the enterprise.
  • Own-account workers engaged in the production of goods exclusively for own final use by their household (e.g. subsistence farming or do-it-yourself construction of own dwellings), if covered.
  • Contributing family workers, irrespective of whether they work in formal or informal sector enterprises. The informal nature of their jobs is due to the fact that contributing family workers usually do not have explicit, written contracts of employment, and that usually their employment is not subject to labour legislation, social security regulations or collective agreements.
  • Employees holding informal jobs, whether employed by formal sector enterprises, informal sector enterprises, or as paid domestic workers by households. 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 (paid annual or sick leave, etc.) for reasons such as: 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 contributions); employment by unincorporated enterprises or by persons in households; jobs where the employee’s place of work is outside the premises of the employer’s enterprise (e.g. outworkers without an employment contract); or jobs for which labour regulations are not applied, not enforced, or not complied with for any other reason. Operational criteria used by countries to define informal jobs of employees include:
    • Lack of coverage by social security system;
    • Lack of entitlement to paid annual or sick leave;
    • Lack of written employment contract.

Employment outside the formal sector includes persons who are employed in the informal sector and in households, the latter of which is mainly comprised of persons employed by households as paid domestic workers. Employment in the informal sector refers 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. An informal sector enterprise satisfies the following criteria:

  • It is an unincorporated enterprise, which means that:
    • It is not constituted as a legal entity separate from its owners, and
    • It is owned and controlled by one or more members of one or more households, and
    • It is not a quasi-corporation (it does not have a complete set of accounts, including balance sheets);
  • It is a market enterprise: this means that it sells at least some of the goods or services it produces. It therefore excludes households employing paid domestic workers;
  • And at least one of the following criteria:
    • The number of persons engaged / employees / employees employed on a continuous basis, is below a threshold determined by the country
    • The enterprise is not registered
    • The employees of the enterprise are not registered.

Statistics presented in ILOSTAT usually refer to the main job of employed persons.

The harmonized series on informality are derived by the Department of Statistics from processing national household survey microdata files using a consistent navigational path. The process involves identifying the production unit (formal sector, informal sector or household) and the nature of the job (formal job or informal job) of each employed person in their main job in order to derive the final indicators.

First, the unit of production is identified as either formal sector, informal sector or household. The operational definitions used are:

  • Informal sector: All workers in unincorporated enterprises that produce at least partly for the market and are not registered. It excludes households that produce exclusively for own final use, subsistence agriculture, construction of own dwellings, etc.
  • Formal sector: all workers in incorporated enterprises.
  • Household: All workers in unincorporated enterprises that produce goods and services exclusively for own final use. It includes paid domestic employees, subsistence agriculture, construction of own dwellings, manufacture of own wearing apparel, own furniture, water and fuel collection for own use, among others. 

If households cannot be identified, only the formal and informal sectors are tabulated. This occurs in many cases and as such, it is the rationale for deriving the final indicator on employment outside the formal sector, i.e., with the informal sector and households combined, since these often cannot be differentiated.

The definitions are derived from the following criteria:

In any of the scenarios, if one of the questions is not asked, the step is skipped to move on to the next step in the flow diagram. The variables in the flow diagram are defined as follows:

  • Institutional sector refers to the legal organization and ownership. Government, all corporations and non-profit institutions are considered in the formal sector while owners who are persons or households, not legal persons, are categorized as households.
  • Destination of production captures whether the economic unit produces at least some goods or services for sale (identified as those that sell at least partly for the market, if relevant in the country context).
  • Bookkeeping refers to whether the economic unit maintains a set of accounts required by law (e.g., balance sheets); it is enough that the economic unit keeps some official accounts to be considered as formal (excludes quasi-corporations).
  • Registration refers to whether the economic unit is registered under national legislation, such as registration with social security authorities, sales or income tax authorities (which should be at a national level). Being in the process of registration is considered as not registered.

If questions on bookkeeping or registration are asked to all the persons in employment, the following criteria are not necessary.

  • Social security coverage refers to whether an employee is affiliated to a social security schemes related to that job. If the social security coverage cannot be established through a direct question, it may be defined using a proxy question on entitlement to a pension fund such as: “Does your employer pay contributions to a pension fund for you?”
  • Place of work differentiates among economic units that are located in the owners’ dwelling, in the street, in construction sites, and in agricultural plots, from economic units that have fixed visible premises, such as offices and factories.
  • Size refers to the number of workers engaged/employed on a continuous basis. If the number is above 5 (or according to national circumstances), it is considered formal sector.

The second step is to identify the nature of the job, i.e., whether the person is in formal or informal employment. The operational definitions are:

  • Informal employment includes persons who are:
    • Employees (or persons not classified by status in employment) not protected by national labour legislation in that job, which includes:
      • Employees not affiliated to a social security schemes related to the job (or as a proxy pension funds), and
      • Employees not entitled to certain employment benefits, such as paid annual vacation and paid sick leave
      • (NOTE: If none of these questions are asked, the variable based on nature of job is not produced);
    • Entrepreneurs in a unit of production that is considered informal, where entrepreneurs refer to employers, members of producers’ cooperatives and own account workers (only if what is produced is for sale); and
    • Contributing family workers.
  • Formal employment refers to persons who are employed and are not in informal employment according to the above criteria.

The definitions are derived from the following criteria:

Method of computation

From the process described above, the level figures are obtained for four variables – formal sector; outside the formal sector, which includes the informal sector and households; formal employment; and informal employment – from which the shares in total employment are calculated, as follows:

Share of informal employment in total employment (%) = Informal employment / Total employment  x 100

Share of employment outside the formal sector (%) =  Informal sector and households / Total employment  x 100

Recommended sources

Labour force surveys are typically the preferred source of information on the informal economy, but to serve this purpose, these surveys should include questions specifically designed to capture information on informal employment. Such surveys can be designed to cover virtually the entire non-institutional population of a given country, all branches of economic activity, all sectors of the economy and all categories of workers, including the self-employed, contributing family workers, casual workers and multiple jobholders. In addition, such surveys generally provide an opportunity for the simultaneous measurement of the employed, the unemployed and persons outside the labour force (and thus, the working-age population) in a coherent framework.

Other types of household surveys with an appropriate module on informal employment could also be used as sources of data on the informal economy.

Interpretation and use of the indicator

The informal economy represents a challenge to policy-makers that pursue the following goals: improving the working conditions and legal and social protection of persons in informal sector employment and for employees in informal jobs; increasing the productivity of informal economic activities; developing training and skills; organizing informal sector producers and workers; and implementing appropriate regulatory frameworks, governmental reforms, and urban development. Poverty, too, as a policy issue, overlaps with the informal economy. There is a link – although not a perfect correlation – between informal employment and being poor. This stems from the lack of labour legislation and social protection covering workers in informal employment, and from the fact that persons in informal employment earn, on average, less than workers in formal employment.

Statistics on informal employment are essential for a full assessment of the contributions of all workers, women in particular, to the economy. Indeed, the informal economy has been considered as “the fallback position for women who are excluded from paid employment. […] The dominant aspect of the informal economy is self-employment. It is an important source of livelihood for women in the developing world, especially in those areas where cultural norms bar them from work outside the home or where, because of conflict with household responsibilities, they cannot undertake regular employee working hours”.1United Nations: Handbook for Producing National Statistical Reports on Women and Men, Social Statistics and Indicators, Series K, No. 14 (New York, 1997), p. 232.

Limitations

The concept of informal sector was consciously kept flexible in order to accommodate differing country situations and specific country needs. In practice, this has led to a collection of national statistics on employment in the informal sector, with countries reporting on their preferred variation of the criteria laid out in the international resolution. Some countries apply the criterion of non-registered enterprises but registration requirements can vary from country to country. Others apply the employment size criterion only (which also may vary from country to country) and other countries apply a combination of the two. As a result of the national differences in definitions and coverage, the international comparability of the nationally-reported informal sector data is limited.

Problems with data comparability for the measure of the informal sector result especially from the following factors: differences in data sources; differences in geographic coverage; differences in the branches of economic activity covered; differences in the criteria used to define the informal sector, for example, size of the enterprise or establishment versus non-registration of the enterprise or the worker; different cut-offs used for enterprise size; inclusion or exclusion of paid domestic workers; and inclusion or exclusion of persons who have a secondary job in the informal sector but whose main job is outside the informal sector.

As  with  the  concept  of  the  informal sector,  the  concept  of  informal  employment was designed in such a way as to allow countries to accommodate their own situations and needs, which hinders comparability across countries.

Given the lack of international comparability that arises from the flexibility of the concepts, the ILO developed a harmonized series on informal sector and informal employment. This was achieved by applying a consistent navigational path in processing household microdata files to define the production unit and nature of the job, thereby greatly reducing the variability of definitions used across countries. However, this does not imply that all criteria can be applied equally since each country’s questionnaire will contain different sets of questions. As such, comparability issues remain even in the harmonized series. As expected, there can be significant differences between the nationally-reported figures and those of the harmonized series, despite being based on the same household surveys.