Estimating informal employment: a synthetic indicator

Informal employment is widespread in developing countries but increasingly so also in advanced economies. Many of those counted as being employed are so either without a proper labour contract or social security, or are being self-employed in precarious conditions. Often informal employment is done out of bare necessity for those not able to find formal jobs and in the absence of other, stable means of privately or publicly provided social protection. Sometimes, informal employment responds to economic incentives to avoid taxation and regulation. But in most cases, informal employment procures lower, more volatile pay and worse working conditions than the employment in formal arrangements.
The phenomenon has been recognised since long but was originally thought of being related to the existence of a traditional sector that would gradually be absorbed in the modern sector as economic development proceeds. However, by the early 1970s, several ILO employment missions discovered that instead of shrinking, the traditional sector and the related informal employment had been growing. In order to be able to describe and measure the phenomenon properly, statistical tools and definitions needed to be developed that would allow a proper assessment of the dynamics of informal employment and their driving factors.
Over the years, this has led to an avalanche of different indicators following different statistical definitions and standards and drawing from various sources. The most recent attempt – the 2003 ICLS resolution on measuring the informal economy – has led to the collection of measures of informal employment in 47 countries from different regions for years between 2007 and 2010. To date, this is the most encompassing measure of informal activities as it distinguishes along different dimensions including between informal employment and the informal sector. However, due to the fact that it relies on a relatively new statistical convention, comparison with earlier data points is difficult or outright impossible.