Informal sector and informal employment: Key concepts and definitions

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Informal sector and informal employmentKey
concepts and definitions

• Ralf Hussmanns
• Head, Methodology and Analysis Unit
• Bureau of Statistics
• International Labour Office

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ILO Bureau of StatisticsActivities

• 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.

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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

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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)

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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.

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Concepts

• Informal sector enterprise-based.
• Informal employment job-based.

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Conceptual frameworkEmployment 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
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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)

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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.

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Institutional units(1993 SNA)

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

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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.

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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.

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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.

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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.

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

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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.

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Informal sectorMotives 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!)

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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)

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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.

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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

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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.

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QLFS South Africa Questions on employment in the
informal sector (1)

• Employees
• Deduction by employer of income tax from the
  employees wage/salary
• Employers, own-account workers contributing
  family workers
• VAT registration of the (household) business
• Income tax registration of the (household)
  business

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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)

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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.

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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.

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Reminder

• Dont blame your dog because it does not
  behave like a cat!

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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.

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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. 

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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.

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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.

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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.
  

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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.

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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.

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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.

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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.

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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.

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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.
  

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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.

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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.

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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.

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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
• Employees place of work is outside the premises
  of the employers enterprise (e.g. outworkers
  without employment contract)
• Jobs, for which labour regulations are not
  applied, not enforced, or not complied with for
  other reasons.

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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.

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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

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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.

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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.

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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).

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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).

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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.

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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.

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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.

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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

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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.

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QLFS South Africa Questions on informal jobs of
employees

• Employers contribution to any pension/
  retirement fund for the employee
• Entitlement to any paid leave
• Employers 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)