New standards, increased visibility: improving measurement of the informal economy

By International Labour Organization

New standards, increased visibility: improving measurement of the informal economy

New statistical standards will improve the measurement of the informal economy, providing more useful and complete data to address informality through targeted policies. The world of work is continuously evolving, perhaps never more quickly than in recent years. This means that measurement standards need to evolve as well. By accurately measuring the world of work, ILO can improve it, which is why the International Conference of Labour Statisticians (ICLS) has meeting every five years since 1923 to discuss key labor-related issues and adopt international standards on labor statistics.

The 21st ICLS closed after expert statisticians from around the world unanimously adopted a new resolution improving the measurement of the informal economy.

Informality remains a key concern of the Decent Work Agenda and the 2030 Agenda for Sustainable Development (the informality rate is part of the indicators selected to measure progress towards the Sustainable Development Goals, as SDG indicator 8.3.1). Addressing informality is also critical for women’s economic empowerment and gender equality.

The new standards are expected to improve the coverage, usefulness, and comparability of informality statistics and shed light on working conditions in the informal economy, which employs two billion people, or about 60 percent of the world’s employed population.

Incremental approach to standard setting

The first international standard addressing the measurement of informality was adopted in 1993 and focussed on employment in the informal sector. In 2003, recognizing that informality also existed outside the informal sector, guidelines on the measurement of informal employment were introduced.

Due to the evolving nature of the world of work, in 2013, the 19th ICLS adopted a resolution that laid the foundation for improved statistical labor standards. The resolution established the first international statistical definition of work and a forms-of-work framework distinguishing five forms of work (based on the intended destination of the work and the nature of the transaction): own-use production work, employment, unpaid trainee work, volunteer work, and other work activities.

The standards adopted by subsequent ICLS are expected to build on this core resolution to tackle specific priorities. Indeed, the 20th ICLS focussed on updating the classification of status in employment to align with the 19th ICLS standards and better capture diverse and changing work relationships (including the blurring boundary between paid employment and self-employment).

There was, therefore, a strong need to update measurement standards on the informal economy, not only to reflect the latest world of work developments but also to align them to recent standards on the measurement of all forms of work (not only employment) and work relationships.

Defining the informal economy

The new standards on the informal economy recognize that informality is widespread and pervasive: there is informality in all countries (regardless of their level of income and development), in economic units of the informal sector as well as the formal sector, and in households. In this sense, the new standards provide operational definitions of the formal sector, the informal sector, and the household own-use and community sector based on the formal status of the economic unit and the intended destination of the production.

The new standards introduce the concept of “informal productive activities” designating all productive activities carried out by persons or economic units that are – in law or in practice – not covered by formal arrangements. Thus, informal productive activities can take place within the formal sector, the informal sector, and the household own-use and community sector.

Within formal economic units, informal productive activities relate to employees and contributing family workers with informal jobs, workers doing unpaid work informally, and persons with formal jobs with some of their income, hours worked, or activities not formally declared. Indeed, recognizing that productive activities can be “partly” informal (when done by persons with formal jobs) is a novelty in statistical standards. In short, the informal economy includes all informal productive activities of persons and economic units.

Impact of the narrower employment definition on informality

When the resolution adopted by the 19th ICLS in 2013 introduced five forms of work, it also revised the definition of employment (a specific form of work done for pay or profit), giving it a narrower delineation directly linked to remuneration. Some workers, such as subsistence farmers and other own-use goods producers who were previously considered employed, are no longer covered by the 2013 employment definition and are now in a separate form of work to be measured and reported on.

This narrowing of the employment definition has had an impact on key labor indicators such as the employment-to-population ratio and the unemployment rate as well as the informality rate. In fact, data available in ILOSTAT for 79 countries show that persons considered employed under the previous standards who are no longer deemed employed under the 19th ICLS standards tended to be in informal employment. Hence, restricting the employment definition resulted in a smaller informal employment share.

The extent of this impact depends on national contexts, but for 41 countries with available data, the informality rate was higher under previous employment measurement standards than under the 19th ICLS employment definition. For the remaining 38 countries with available data, the narrowing of the employment definition had no impact on employment statistics or informal employment statistics (since those countries are thought to have no workers in the situations previously considered employment and no longer so).

Informality in employment and other forms of work

The introduction of the concept of work and the five forms of work (own-use production work, employment, unpaid trainee work, volunteer work, and other work activities) in 2013 broadened the scope of labor statistics. The new informality standards adopted by the 21st ICLS align with this forms-of-work framework by defining informality not only within employment but also within other forms of work.

Informal work covers all productive activities carried out by persons that are – in law or in practice – not covered by formal arrangements, including productive activities defined as employment not covered by formal arrangements and productive activities carried out with a different intention than to generate pay or profit (own-use production work, volunteer work, unpaid trainee work, and other work activities) that are not covered by formal arrangements. The concept of informal work is meant to serve as an overarching reference concept not intended to be measured in its totality (since it would be too laborious and of little practical use).

Informal employment is defined as any activity of persons to produce goods or provide services for pay or profit that is not effectively covered by formal arrangements such as commercial laws, procedures to report economic activities, income taxation, labor legislation, and social security laws and regulations providing protection against economic and personal risks associated with carrying out the activities.

The resolution encourages countries to regularly collect and disseminate data on essential categories of informal unpaid work as a complement to informal employment. Although informal work is not intended to be measured in its entirety, there are some groups carrying out informal work in relation to forms of work other than employment that are of particular interest to policymakers, including subsistence food-stuff producers and unpaid trainees.

These two essential categories of informal unpaid work were previously comprised in informal employment, so statistics on them would complement the revised informal employment statistics to provide a more complete picture of the structure of informality.

Informality and status in employment

Due to the 2013 redefinition of employment and the introduction of the statistical concept of work, it became necessary to update the 1993 International Classification of Status in Employment (ICSE-93), resulting in the adoption in 2018 of the ICSE-18. This update was also a response to the labor market and the world of work developments, with new working relationships emerging and growing over time, and existing relationships evolving in significant ways.

One key change of this classification was the introduction of dependent contractors, a new category of status in employment reflecting the blurring boundary between employees and self-employed. The recently adopted informal economy standards are aligned with the ICSE-18, enabling the measurement of informality in all currently used statuses in employment.

For independent workers, the informal and formal nature of their jobs depends on the characteristics of the economic unit they own and operate. Independent workers have a formal job if their enterprise is a formal economic unit, that is, registered or with bookkeeping.

Dependent workers (employees, dependent contractors, and contributing family workers) have informal jobs when the economic unit they work for is in the informal sector but may have informal or formal jobs in the formal sector based on their access to formal arrangements such as social insurance, paid annual leave, and paid sick leave. In addition, employees can also have informal or formal jobs working for a household. For dependent contractors, the categorization of the sector does not pertain to the economic unit on which they depend, but on their own.

Dependent contractors who own and operate a formal enterprise, or are registered for tax on profits, are part of the formal sector. Contributing family workers generally hold informal jobs, but a new aspect of the standards is to recognize that they can have formal jobs in countries with formal arrangements in place. In such countries, contributing family workers employed by a formal family business, who are registered and covered by social insurance, could be considered as having formal jobs. In countries where no such arrangements are in place (seemingly, the majority), jobs held by contributing family workers can be considered informal by default.

For the six countries that have implemented the ICSE-18 with data available in ILOSTAT, we notice a very high exposure of dependent contractors to informality. In all of these cases, the vast majority of dependent contractors are in informal employment, and their informality rate is much higher than that of permanent employees.