1. Copyright 2010, The World Bank Group. All Rights Reserved. Estimating informal production, part 1 1 Business statistics and registers

2. Copyright 2010, The World Bank Group. All Rights Reserved. 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. 2

3. Copyright 2010, The World Bank Group. All Rights Reserved. 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. 3

4. Copyright 2010, The World Bank Group. All Rights Reserved. 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 4

5. Copyright 2010, The World Bank Group. All Rights Reserved. Demarcation criteria The following criteria to demarcate the informal sector are recommended:  1. Non registration of the enterprise  2. Small size in terms of employment  3. Non-registration of the employees of the enterprise 5

6. Copyright 2010, The World Bank Group. All Rights Reserved. Scope of surveys The 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 6

7. Copyright 2010, The World Bank Group. All Rights Reserved. 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 company 2.2. Underground activities: crime, corruption 7

8. Copyright 2010, The World Bank Group. All Rights Reserved. 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 8

9. Copyright 2010, The World Bank Group. All Rights Reserved. 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 9

10. Copyright 2010, The World Bank Group. All Rights Reserved. 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 10

11. Copyright 2010, The World Bank Group. All Rights Reserved. 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 11

12. Copyright 2010, The World Bank Group. All Rights Reserved. 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 type 2. Compile an estimate of the illegal activities of that type that are likely to be have reported under the guise of legal activities 3. Subtract the second estimate from the first and record the result under type N2 12

13. Copyright 2010, The World Bank Group. All Rights Reserved. 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 13

14. Copyright 2010, The World Bank Group. All Rights Reserved. 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 14