Publication: On Defining and Measuring the Informal Sector
Loading...
Published
2006-03
ISSN
Date
2012-06-18
Author(s)
Editor(s)
Abstract
A range of alternative empirical definitions of informal activity have been employed in the literature. Choice of definition is often dictated by data availability. Different definitions may imply very different conceptual understandings of informality. In this paper the authors investigate the degree of congruence between three definitions of informality based on employment contract registration, social security protection, and the characteristics of the employer and employment using Brazilian household survey data for the period 1992 to 2001. The authors present evidence showing that 64 percent of the economically active population are informal according to at least one definition, but only 40 percent are informal according to all three. Steady compositional changes have been taking place among informal workers, conditional on definition. The econometric analysis reveals that the conditional impact of particular factors (demographic, educational attainment, and family circumstances) on the likelihood of informality varies considerably from one definition to another. The results suggest growing heterogeneity within the informal sector. Therefore, the authors argue that informal activity may be as much associated with entrepreneurial dynamism as with any desire to avoid costly contract registration and social protection. However, the authors confirm there is no a priori reason for entrepreneurial activity to be unprotected. Consequently definitions of informality based on occupation and employer size seem the most arbitrary in practice even if conceptually well-founded.
Link to Data Set
Citation
“Henley, Andrew; Arabsheibani, G. Reza; Carneiro, Francisco G.. 2006. On Defining and Measuring the Informal Sector. Policy Research Working Paper; No. 3866. © World Bank. http://hdl.handle.net/10986/8342 License: CC BY 3.0 IGO.”
Digital Object Identifier
Associated URLs
Associated content
Other publications in this report series
Publication Climate and Social Sustainability in Fragility, Conflict, and Violence Contexts(Washington, DC: World Bank, 2026-01-07)Climate change is widely recognized as a driver of violent conflict, but its broader social effects remain less understood. Ignoring these dimensions risks a vicious cycle where climate policies might undermine socially just adaptation. Evidence is still limited on how climate shocks influence political participation, trust, or migration. This paper helps fill that gap by examining links between climate change, conflict, and social sustainability, with a focus on inclusion, resilience, cohesion, and legitimacy. Using secondary data from 2019–24, the study applies simple correlation-based methods to test three hypotheses on the nature, severity, and composition of these associations. The analysis combines multiple climate impact measures, new conflict classifications, recent social sustainability frameworks, and controls for population and geography. The results reveal strong correlations—not causation—between climate events and contexts of fragility, conflict, and violence. Climate impacts are most pronounced in both national and subnational conflict settings. The study also finds robust links between fragility, conflict, and violence and low levels of social sustainability, reflecting its role as both a driver and consequence of conflict. Some dimensions—such as violent events and insecurity—appear weaker in areas most affected by climate shocks. Two of the hypotheses are supported, and one remains inconclusive.Publication The Macroeconomic Implications of Climate Change Impacts and Adaptation Options(Washington, DC: World Bank, 2025-05-29)Estimating the macroeconomic implications of climate change impacts and adaptation options is a topic of intense research. This paper presents a framework in the World Bank's macrostructural model to assess climate-related damages. This approach has been used in many Country Climate and Development Reports, a World Bank diagnostic that identifies priorities to ensure continued development in spite of climate change and climate policy objectives. The methodology captures a set of impact channels through which climate change affects the economy by (1) connecting a set of biophysical models to the macroeconomic model and (2) exploring a set of development and climate scenarios. The paper summarizes the results for five countries, highlighting the sources and magnitudes of their vulnerability --- with estimated gross domestic product losses in 2050 exceeding 10 percent of gross domestic product in some countries and scenarios, although only a small set of impact channels is included. The paper also presents estimates of the macroeconomic gains from sector-level adaptation interventions, considering their upfront costs and avoided climate impacts and finding significant net gross domestic product gains from adaptation opportunities identified in the Country Climate and Development Reports. Finally, the paper discusses the limits of current modeling approaches, and their complementarity with empirical approaches based on historical data series. The integrated modeling approach proposed in this paper can inform policymakers as they make proactive decisions on climate change adaptation and resilience.Publication Institutional Capacity for Policy Implementation: An Analytical Framework(Washington, DC: World Bank, 2026-01-07)State capacity is an important prerequisite for policy implementation, yet at the country level it is difficult to measure, assess, and reform. This paper proposes a focus on institutional capacity: the ability of public institutions to implement the specific policy mandates for which they are responsible. Based on a review of existing literature, the paper defines the different dimensions that compose institutional capacity and groups them into two cross-cutting categories: organizational dimensions (personnel, financial resources, information systems, and management practices) and governance dimensions (transparency, independence, and accountability). The paper proposes measures for organizational and governance dimensions using existing data, shows intra-institutional variation of these measures within countries, and discusses how new data could be collected for better measurement of these concepts. Finally, the paper illustrates how the framework can be used to diagnose the sources of common problems related to weak policy implementation.Publication South Africa’s Fragmented Cities: The Unequal Burden of Labor Market Frictions(Washington, DC: World Bank, 2026-01-08)Using high-resolution administrative, census, and satellite data, this paper shows that South African cities are characterized by spatial mismatches between where people live and where jobs are located, relative to 20 global peers. Areas within 5 kilometers of commercial centers have 9,300 fewer residents per square kilometer than expected, which is 60 percent below the global median. Poor, dense neighborhoods are most affected. In Johannesburg, a 10-percentile increase in distance from the nearest business hub corresponds to a 3.7-percentile drop in asset wealth (a proxy of household wellbeing) and 4.9-percentile drop in employment. In Cape Town, the declines are 4.0 and 3.7 percentiles, respectively. Employment is 87 percent lower in the poorest decile than the richest in Johannesburg and 61 percent lower in Cape Town. These findings suggest that South Africa’s spatial organization of people and economic activity constrains agglomeration and reinforces inequality. This methodology provides a scalable and standardized data-driven framework to analyze spatial accessibility and agglomeration frictions in complex, data-constrained urban systems.Publication Investment in Emerging and Developing Economies(Washington, DC: World Bank, 2026-01-07)The world faces a pressing challenge to meet key development objectives amid slowing growth and rising macroeconomic and geopolitical risks. With the number of job seekers rising rapidly, infrastructure shortfalls continuing to be large, and climate costs mounting, the case for a significant investment push has never been stronger. Yet the capacity to respond in many emerging markets and developing economies has eroded. Since the global financial crisis, investment growth has slowed to about half its pace in the 2000s, with both public and private investment weakening. Foreign direct investment inflows—a critical source of capital, technology, and managerial know-how—have also fallen sharply and become increasingly concentrated, leaving low-income countries with only a marginal share. The risks of further retrenchment are significant, as trade tensions, policy uncertainty, and elevated debt levels continue to weigh on investment. Reigniting momentum will require ambitious domestic reforms to strengthen institutions, rebuild macro-fiscal stability, and deepen trade and investment integration—the foundations of a supportive business climate. At the same time, international cooperation is indispensable. A renewed commitment to a predictable system of cross-border trade and investment flows, combined with scaled-up financial support and sustained technical assistance, is essential to help emerging markets and developing economies—especially low-income countries and economies in fragile and conflict situations—bridge financing gaps and implement the domestic reforms needed to restore investment as an engine of growth, jobs, and development.
Journal
Journal Volume
Journal Issue
Collections
Related items
Showing items related by metadata.
Publication Pakistan Labor Market Study : Regulation, Job Creation, and Skills Formation in the Manufacturing Sector(Washington, DC, 2006-09)In an effort to improve employment outcomes and industrial productivity, the Government of Pakistan (GoP) has launched a dual-track reform process involving broad-based overhaul of labor laws and institutions, and expansion and reform of the Vocational and Technical Training (VTT) system. Labor market regulation and laws are useful economic and social institutions designed to protect workers from undesirable consequences of market failure such as arbitrary or discriminatory actions by employers. They also help stabilize employment and household incomes against aggregate business cycles and shocks. Labor regulation is also an important element of society's instruments for the provision of social security and the maintenance of health, safety, and environmental standards in economic activities. Labor regulation in Pakistan is excessive by international standards, as can be seen from data on a number of indicators of labor market flexibility. All things considered, Pakistani industry and workers will seem to be better off with a more flexible labor market. The report analyzes the existing labor laws and institutions, along with the new draft laws, from this point of view. It also provides a review of the current VTT system and changes for it.Publication Key Characteristics of Employment Regulation in the Middle East and North Africa(World Bank, Washington, DC, 2010-07)This note provides a general background of the main features of labor regulation in the Middle East and North Africa (MENA) and benchmarks them against international best practices. The note compiles information on available labor laws and other legal acts concerning employment protection regulation. Within the broader scope of labor regulation, and in order to assure regional comparability, information collected focuses on key issues in the labor law associated with commencing or terminating employment and during the period of employment (including maternity benefits). The main sources the data are the World Bank doing business 2010 and International Labour Organisation (ILO) databank. This note is a tool to provide policymakers and international organizations with a regional diagnose of how labor regulation affects labor market outcomes in MENA and inform client governments about strategic approaches to employment creation through labor policy and reform. This activity comes as a response to regional priorities in the context of the Arab World Initiative (AWI). One of the six strategic themes of the AWI focuses explicitly on employment creation as a top priority. Part of the World Bank's mandate under the AWI is to inform client governments about strategic approaches to employment creation through labor policy and reform.Publication How Did the Great Recession Affect Different Types of Workers? Evidence from 17 Middle-Income Countries(2011-04-01)This paper examines how different types of workers in 17 middle-income countries were affected by labor market retrenchment during the great recession. Impacts on different types of workers varied by country and were only weakly related to the severity of the shock. Among active workers, youth experienced by far the largest adverse impacts on employment, unemployment, and wage employment, particularly relative to older adults. The percentage employment reductions, for example, were greatest for youth in each sector of the economy, as firms reacted to the shock by substituting away from inexperienced workers. Employment rates, as a share of the population, also plummeted for men. Larger drops in male employment were primarily attributable to men's higher initial rate of employment, although men's concentration in the hard-hit industrial sector also played an important role. Within each sector, percentage employment declines were similar for men and women. Added worker effects among women were mild, even among less-educated workers. Differences in labor market outcomes across education groups and urban or rural residence tended to be smaller. These findings bolster the case for targeted support to displaced youth and wage employees. Programs targeted to female and unskilled workers should be undertaken with appropriate caution or empirical support from timely data, as they may not benefit the majority of affected workers.Publication Informal Workers across Europe : Evidence from 30 European Countries(2011-12-01)The European Social Survey data are used to analyze informal employment in 30 countries, focusing on employees without contracts and on informal self-employed workers (who are distinguished from formal workers). Overall the size of informal employment decreases from South to West to East to North. However, working without a contract is more prevalent in Eastern Europe than in the West, except for Ireland, the United Kingdom, and Austria. Between 2004 and 2009, no cases were found when unemployment and dependent informality rates in a country went up together, suggesting that working without a contract is pro-cyclical in Europe. The dependent informality rate is inversely related to skills (measured by either schooling or occupation). Both in Southern and in Western Europe, the highest dependent informality rate is found among immigrants from Central and Eastern Europe and the Former Soviet Union, while in Eastern Europe this group is second after minorities without immigrant background. In the Southern and part of Western Europe, immigrants not covered by European Union free mobility provisions are much more likely to work without a contract than otherwise similar natives. The paper provides evidence that exclusion and discrimination plays an important role in pushing employees into informality, while this seems not to be the case for informal self-employed workers. Both on average and after controlling for a rich set of individual characteristics, informal employees in all parts of Europe are having the largest financial difficulties among all categories of the employed population (yet they fare much better than the unemployed and discouraged), while informal self-employed workers are at least as well off as formal employees. Finally, there is a negative and significant effect of individual-level satisfaction with the national government on the propensity to work without a contract in Eastern Europe, as well as in Western Europe.Publication Enforcement of Labor Regulation, Informal Labor, and Firm Performance(World Bank, Washington, DC, 2005-10)This paper investigates how enforcement of labor regulation affects the firm's use of informal employment and its impact on firm performance. Using firm level data on informal employment and firm performance, and administrative data on enforcement of regulation at the city level, the authors show that in areas where law enforcement is stricter firms employ a smaller amount of informal employment. Furthermore, by reducing the firm's access to unregulated labor, stricter enforcement also decreases average wages, productivity, and investment. The results are robust to several specification changes, and to instrumenting enforcement with (1) measures of access of labor inspectors to firms, and (2) measures of general law enforcement in the area where the firm is located.
Users also downloaded
Showing related downloaded files
Publication Digital Africa(Washington, DC: World Bank, 2023-03-13)All African countries need better and more jobs for their growing populations. "Digital Africa: Technological Transformation for Jobs" shows that broader use of productivity-enhancing, digital technologies by enterprises and households is imperative to generate such jobs, including for lower-skilled people. At the same time, it can support not only countries’ short-term objective of postpandemic economic recovery but also their vision of economic transformation with more inclusive growth. These outcomes are not automatic, however. Mobile internet availability has increased throughout the continent in recent years, but Africa’s uptake gap is the highest in the world. Areas with at least 3G mobile internet service now cover 84 percent of Africa’s population, but only 22 percent uses such services. And the average African business lags in the use of smartphones and computers as well as more sophisticated digital technologies that catalyze further productivity gains. Two issues explain the usage gap: affordability of these new technologies and willingness to use them. For the 40 percent of Africans below the extreme poverty line, mobile data plans alone would cost one-third of their incomes—in addition to the price of access devices, apps, and electricity. Data plans for small- and medium-size businesses are also more expensive than in other regions. Moreover, shortcomings in the quality of internet services—and in the supply of attractive, skills-appropriate apps that promote entrepreneurship and raise earnings—dampen people’s willingness to use them. For those countries already using these technologies, the development payoffs are significant. New empirical studies for this report add to the rapidly growing evidence that mobile internet availability directly raises enterprise productivity, increases jobs, and reduces poverty throughout Africa. To realize these and other benefits more widely, Africa’s countries must implement complementary and mutually reinforcing policies to strengthen both consumers’ ability to pay and willingness to use digital technologies. These interventions must prioritize productive use to generate large numbers of inclusive jobs in a region poised to benefit from a massive, youthful workforce—one projected to become the world’s largest by the end of this century.Publication Surveying Informal Businesses(World Bank, Washington, DC, 2022-01)Informal business activity is ubiquitous around the world, but it is nearly always uncaptured by administrative data, registries, or commercial sources. For this reason, there are rarely adequate sampling frames available for survey implementers wishing to measure the activity and characteristics of the sector. This paper presents a methodology to generate a representative sample of informal businesses using an adaptive, geographically based method called Adaptive Cluster Sampling. Developed for populations that are clustered and/or rare, this method helps with efficiently sampling Primary Sampling Units—blocks—that are fully enumerated, and from which Secondary Sampling Units—businesses—can be randomly sampled to conduct interviews. The paper shows how this methodology can be applied to surveying informal businesses, often reducing both the average variance of population estimates and fieldwork effort. Practical considerations and guidance for implementation and analysis are also provided.Publication Spain: Development, Democracy and Equity(Washington, DC: World Bank, 2004)Spain stands as one of the few countries in the world which have completed a successful transition from authoritarianism and relative underdevelopment to democracy and economic abundance in the last half century. This paper explores the nature and causes of the economic underdevelopment of Spain since the 19th century and the violent collapse of its brief democratic experiment in the early 1930s. The Franco regime ? particularly its heavily regulated economy in place till the late 1950s, the decision to liberalize it in 1959, and the period of rapid growth that followed -- are discussed. A democratic transition, which occurred following the death of Franco in 1975, was possible due to the economic growth and the formation of a broad middle class in the 1960s. Also discussed is the impact of democratization on the structure of the welfare state in Spain.Publication Outcome-Based Learning Field Guide : Tools to Harvest and Monitor Outcomes and Systematically Learn from Complex Projects(Washington, DC, 2014-06)The outcome harvesting approach is adapted from the outcome mapping community, with an outcome defined as a significant change in the behavior, relationships, activities, or actions of the people, groups, communities, or organizations with whom a program works directly. By identifying and monitoring those changes that fall within the sphere of influence of a program, practitioners can understand the many often non-linear streams of outcomes that characterize that program s contribution toward a development goal. Harvesting program information for outcome-based learning is a stakeholder-centered process that captures qualitative, tacit knowledge. The process includes substantiating and analyzing harvested knowledge collaboratively to communicate progress toward impact to clients, management, and partners. Tools are flexible to adapt to a program s design and can provide useful details to inform the theory of change, implementation lessons, outcomes, and indicators.Publication Informality in Indonesia(World Bank, Washington, DC, 2023-10-09)Informality is a multidimensional development challenge with features that potentially differ across workers, firms, and countries. This paper first briefly summarizes the literature, discusses the multiple existing definitions of informality, and adapts the cross-country analytical framework on informality to the context of Indonesia. It then uses several novel datasets and a range of modeling approaches to capture the levels and trends of both output and employment informality in Indonesia. It further contributes to the existing literature by estimating informality in Indonesia at the regional, provincial, and sectoral levels. Those estimates were then benchmarked to the levels, trends, and features of the informal sector in emerging markets and developing economies to examine whether the major features of the informal sector in Indonesia deviate from those observed in other emerging markets and developing economies. The paper finds that despite the declining trend, both output and employment informality remain elevated and broadly above the comparator countries in the region. Informality in Indonesia is mostly concentrated in agriculture and low-skilled services and is associated with higher poverty at the provincial level. There also appear to be productivity, education, and salary gaps between formal and informal workers. Moreover, markets are not segregated as informal firms compete strongly with formal ones. Finally, informality seems to pose macroeconomic challenges as tax efforts and financial sector depth remain below the averages for emerging markets and developing economies.