Download Estimating informal production, Part 1

Business statistics and registers
Estimating informal production, part 1
Copyright 2010, The World Bank Group. All Rights Reserved.
1
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 selfemployed 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 policymakers with regard to improvement of the working
conditions, social protection, position of women, child
labor etc.
Copyright 2010, The World Bank Group. All Rights Reserved.
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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 selfemployed 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 enterprise
 2. Small size in terms of employment
 3. Non-registration of the employees
of the enterprise
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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
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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 company
2.2. 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 nonexhaustiveness 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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N1
• 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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N2
• 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 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
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N3
• 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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