copyright 2010, the world bank group. all rights reserved. estimating informal production, part 1 1...

Copyright 2010, The World Bank Group. All Rights Reserved.

Estimating informal production, part 1

1

Business statistics and registers


Informal production

• As defined by the ILO the informal sector consists of units producing goods and services with the primary objective of generating employment and incomes to the persons concerned.• For statistical purposes the informal sector is defined as the group of production units which form part of the household sector.• In everyday practice the informal sector includes the self-employed plus production units below a specified level of employment.

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Developing countries

• The informal sector is an important part of the economy and labor market in many countries, especially developing countries

• Informal sector employment is a necessary survival strategy

• The informal sector represents a challenge to policy-makers with regard to improvement of the working conditions, social protection, position of women, child labor etc.

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Definition of informal sector• Production units of the informal sector are a subset of

unincorporated enterprises owned by households• Units are not constituted as separate legal entities

independently of the households or household members who own them

• No accounts are available• It covers units that employ hired labor, but also

production units that are owned and operated by single individuals working on own-account as self-employed persons either alone or with the help of unpaid family members

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Demarcation criteria• The following criteria to demarcate

the informal sector are recommended:1. Non registration of the enterprise2. Small size in terms of employment3. Non-registration of the employees

of the enterprise

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Scope of surveysThe following scope of informal sector surveys is recommended:

1. Exclude units which are exclusively engaged in the production of goods or services for own final consumption or own fixed capital formation (e.g. construction of own houses)

2. Exclude agricultural activities from the scope of the informal sector, for practical reasons

3. Include or exclude enterprises engaged in the production of professional or technical services rendered by self-employed persons

4. Include or exclude paid domestic workers engaged by households in/from the informal sector

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Two groups of activities

• The informal sector covers a wide range of labor market activities that combine two groups of different nature

• The two types of informal sector activities can be described as follows: 1. Coping strategies (survival activities): casual jobs, temporary

jobs, unpaid jobs, subsistence agriculture, multiple job holding 2. Unofficial earning strategies (illegality in business)

2.1. Unofficial business activities: tax evasion, avoidance of labor regulation and other government or institutional regulations, no registration of the company2.2. Underground activities: crime, corruption

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Non-exhaustiveness of GDP• Apart from other forms of interest, one main reason why

countries want to measure informal production is that they want their estimates of GDP to be exhaustive

• When the main goal is exhaustiveness of GDP, the problems faced in achieving exhaustiveness may be broken down into types of potential non-exhaustiveness

• There is often an important practical distinction between: (i) those enterprises that are legal persons(ii) those that are operating without separate legal personality under the ownership and control of one

or more entrepreneurs(iii) those that have essentially no market output

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Non-exhaustiveness types• At the core of comprehensive and systematic assessment

of exhaustiveness is the division of all productive activities according to their potential for non-exhaustiveness

• The division is based on a standard set of non-exhaustiveness types

• The types are labeled N1-N7• The starting point is to look at non-exhaustiveness from an

output approach• The logic underlying the different types is to divide

productive activities according to their potential for being non-observed

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N 1• Type N1 are producers who should have

registered but are not registered (underground producer)

• Characteristics are: – Producers fail to register in order to avoid tax & social

security obligations– Often small producers with turnovers which exceed

the thresholds above which they should register their income

– Type N1 does not include producers that fail to register because they are engaged in illegal activities

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N 2

• Type N2 are illegal producers that fails to register• Characteristics are:

– N2 covers activities of producers that avoid registration entirely– N2 excludes illegal activities by registered legal entities or

entrepreneurs that report (or misreport) their activities under legal activity codes

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Illegal activities• Producers engaged in illegal activities may avoid registration

entirely, or they may register as legal entities or entrepreneurs and report their activities under different (legal) activity codes

• N2 refers to the activities of those producers that avoid registration entirely

• Illegal activities should be treated by type• Some may already be partly included in GDP• General approach:

1. Compile an estimate of all illegal activities of that particular type2. Compile an estimate of the illegal activities of that type that are likely to be have reported under the guise of legal activities3. Subtract the second estimate from the first and record the result under type N2

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N 3

• Type N3 are producers not obliged to register• There are two categories:

1. Producers are not required to register because they have no market output

2. Producers have some market output but below the level at which they are expected to register as an entrepreneur

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Producers not required to register

• Non-market household producers may be involved in:– Production of goods for own final consumption and

for own fixed capital formation– Construction of dwellings, extensions to dwellings,

and capital repairs of dwellings• N3 also includes unincorporated household

enterprises that have very small-scale market output

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copyright 2010, the world bank group. all rights reserved. estimating informal production, part 1 1...

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