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Revealed Informal Activity

This study explores the difficulties in defining and analyzing the informal sector, proposing a method based on income and expenditure surveys. Using a case study in Bulgaria, the study reveals that the size and nature of the revealed informal sector differ from popular measures like self-employment and labor security.

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Revealed Informal Activity

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  1. Revealed Informal Activity By Ralitza Dimova, Ira N. Gang and John Landon-Lane IARIW Conference, Kathmandu

  2. Motivation: difficulties in defining informality and performing formal analyses • There seems to be little disagreement on the broad idea behind what informality is, e.g. - Economic units with scarce or no capital, using primitive technologies and unskilled labour…. with low productivity (ILO, 1991) - Small-scale, semi-legal, often low productivity, frequently family based, pre-capitalist enterprises (Maloney, 2004) - Not complying with norms in terms of labor contracts, taxes, labor regulations (ILO, 2002) • Problem: How to properly measure these characteristics and perform a sensible empirical analysis on that basis

  3. Motivation: difficulties in defining informality and performing formal analyses • Existing attempts - type of unit of employment, e.g. size (Gasparini and Tornorolli, 2006; Prahan and van Soest, 1995; 1997; Maloney, 1999; Funkhouser, 1996; Marcoullier et al, 1997; Cohen and House, 1996; Livingstone, 1991; Galli and Kucera, 2004; Rauch, 1991) - Type of job, e.g. without labor protection (Gaspirini and Tornarolli, 2006; Merrick, 1976; Portes et al, 1986; Marcouiller et al, 1997; Maloney, 1999; Saavedra and Chong, 1999) - Types of skills - Complying with legal regulations, e.g. business registration, paying taxes, etc.

  4. Motivation: difficulties in defining informality and performing formal analyses • The sector is poorly measured, if measured at all by the National Statistical Offices • Cross-country definitions are not consistent • Many people may participate in both formal and informal activities (e.g. doctors, taxi drivers) • Apparently unemployed people may be participating in the informal sector

  5. Objective • Try to find a method to infer informal activity that is flexible enough and includes all types of informal activity

  6. Definition • Main idea: Base our definition on income and expenditure surveys (e.g. LSMS): households that spend considerably more than their total income must be getting income informally (income= sum of labor income, transfers, changes in asset positions) • Robustness check: base the definition on a “reference household”: married couple, working age individuals having contractual 40-hour jobs and no secondary employment or business: this gives a ratio of median expenditures/median incomes of 1.09.

  7. Definition 1995, whole sample 1995, reference sample 2001, whole sample 2001, reference sample

  8. Case study: Bulgaria • Context (1995, 1997, 2001): - Early 1990s: significant output loss and rising inflation; macro-financial crisis and hyperinflation in 1996-97 - Radical structural reform post 1997: by end of 1990s: private sector accounted for nearly 70% of GDP - As late as 2001, unemployment rate 17.3%, 62% long-term unemployed; average real wage in 1997 61.1% of the 1990 level - High reservation wage, low number of officially registered SME; informal economy at least ¼ of GDP

  9. Case study: Bulgaria

  10. Case study: Bulgaria • Informality=f( age head, age head squared, married head, female head, ethnicity, general secondary, vocational, tertiary education of head; general secondary, vocational, tertiary education of other household members, proportion of household under 6, proportion of household in 7-15; proportion greater than 60, household size, urban)

  11. Results: revealed informal activity

  12. Results: no security

  13. Results: self-employment

  14. Results/comments • The revealed informal sector significantly exceeds the size of the informal sectors as defined by popular measures such as self-employment and labour security • The revealed informal sector is qualitatively different from self-employment and more akin to the concept of household vulnerability

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