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THE WORLD BANK GROUP A World Free of Poverty

- Overview
- Concept of Informal Sector
- Measuring the size of Informal Sector
- Self-Employment and Business Development
- Labor Market and Tax Regulations
- Coping Strategies and Exclusion
- Corruption and Governance
- Country Specific Information
Measuring the Size of the Informal Sector

    The size of the informal sector can be estimated differently depending on how the concept of informality is operationalized and what empirical information is relevant and available for the particular purpose. The information below presents general guidelines on informal sector measurement as well as examples of empirical work where the estimates of the size of the unofficial economy and informal sector were used.

    International Labor Organization's (ILO) Guidelines on Measuring the Informal Sector
    ILO informal sector web site presents ILO operational and statistical definitions of the informal sector as well as analytical materials and description of ILO programs.

    The following ILO documents provide guidelines for statistical classification of particular types of informal sector employment:
    • ILO International Classification of Status in Employment with the revisions made by the 15th International Conference of Labor Statisticians (1993) clarifies the distinction between wage employment and self-employment. Applying the 1993 revision, some people who would previously have been classified as "contributing family workers" should now be classified as "own-account workers".
    • ILO/ICFTU guidelines on defining and measuring underemployment are presented in the proposals of the 16th International Conference of Labor Statisticians (1998). Underemployment reflects underutilization of the productive capacity of the employed population, including cases when it is a consequence of deficiencies of national or local economic systems. Various forms of underemployment may be distinguished, reflecting inadequate duration of work, or inadequate labor productivity, or inadequate complexity of work compared to acquired skills:
      (a)Visible (or time-related) underemployment , characterized by insufficient hours of work, reflecting an inadequate duration of work. Underemployed are defined as those “involuntary working less than the normal duration of work determined for the activity, who are seeking or available for additional work during the reference period”.
      (b)Other forms of underemployment, characterized by insufficient hourly income, a misuse of occupational skills, etc., reflecting inadequate productivity of work due to a misallocation of labor resources or a fundamental imbalance between labor and other factors of production.

    Table 1.

    Table 2.

Infor_sector&Underempl_ILO_men_ women.pdf

Measuring Underemployment Using Household Surveys, the Case of the Slovak Republic (Slovak Labor Force Survey, World Bank)

The files below present the methodology and the results obtained when measuring underemployment rates using the Slovak labor force survey (World Bank, 1996, calculations by World Bank staff):


Stata log file with the program that was used to construct variables:

List of variables and corresponding codes:

Measuring Unofficial Economy in Transition Countries Using Electricity Consumption Data

In their paper The Unofficial Economy in Transition” (Brookings Papers on Economics Activity 2:1997) Simon Johnson, Daniel Kaufmann and Andrei Shleifer estimate the size of the unofficial – non-recorded in official statistics - sector in 17 transition countries. They find that the size of the unofficial sector ranges from 6 % in the Slovak Republic to 63% in Georgia (see Table 3) . The same approach is used for a bigger sample of 69 countries by E.Friedman, S.Johnson, D.Kaufmann and P.Zoido-Lobaton (Dodging the Grabbing Hand: The Determinants of Unofficial Activity in 69 Countries. Journal of Public Economics, June 2000) (PDF). In both papers, the size of the unofficial sector is evaluated using electricity consumption, which offers a rough measure of the overall economic activity. Since electricity-to-GDP elasticity is usually close to one, the difference between the overall and measured GDP gives the estimate of the size of the informal sector.

Source: E. Friedman, S. Johnson, D. Kaufmann, P. Zoido-Lobatón. Dodging the Grabbing Hand: The Determinants of Unofficial Activity in 69 Countries. Journal of Public Economics. June 2000

Measuring the Informal Sector Using Household Survey Data (Case of Georgia)

Empirical evidence from different sources (including that reflected in Table 1above) indicate that Georgia has one of the largest if not the largest informal sector among transition economies. In Georgia Poverty and Income Distribution (vol.1(PDF)and vol.2 (PDF))prepared at the World Bank, this conclusion is reached based on household survey data. Calculations used to measure Georgia's informal sector are presented below.

Analysis of household surveys for several countries in the region shows that in many of the Former Soviet Union countries households report higher annual cash outflows than total cash resources that they received during the year. The magnitude of this gap in the case of Georgia, its persistence and distribution are especially striking - the gap is equal to one-quarter/one-third of total households' cash resources. In "Georgia Poverty and Income Distribution", most of this discrepancy is attributed to unrecorded income and finds that it is largely linked to households’ privileged position in the labor market (the gap is larger in buoyant local economies and in more educated households). Unreported income does not necessarily come from informal activities - it might also include income from remittances and private transfers, – however, it is likely that a large part of this amount can be attributed to household involvement in informal activities.

Table 4 and Table 5 reflect the average gap between households' reported income and expenditures by sectors of activity of household’s head over the period 1996 – 2000. Sectors are ranked in the table: in part one of the table they are ranked according to the absolute level of gap (measured in lari) and in part two of the table they are ranked according to the level of gap measured as share of household total expenditure.

Table 4.

Table 5.

The sectors with a larger gap in both rankings are largely dominated by government employees - education, health and administration - or are related to the finance - real estate and finance - suggesting large out-of-pocket informal payments and corruption.

More results are reported in

Stata log file with the program that was used for calculations:

More information on the size of the informal sector can be found in Country Specific Information section on this webpage.