Formalising the Informal Economy (Part 2)

The International Labour Organisation (ILO)’s Report on Comprehensive Employment in India (1972) was the first time the term ‘informal sector’ was used. Initially migrant rural workers in urban areas who were the poor urban workers were referred to as those in the informal sector. In India, they have also been termed ‘unregistered’, ‘unorganised’ and ‘unrecorded’. Informality is an important line of enquiry because it is closely related to concerns about quality of work and adequate functioning of labour markets and also to poverty, inequality and vulnerability.


Source: ILO

As the figure shows, informal employment as a percentage of non-agricultural employment is the highest in South Asia among all other regions of the world.

ILO - Informal Sector.png

Source: ILO Country Data

Informal workers are those who are excluded from transaction that takes place in formal/recognised system. They are not captured by national accounts/official statistics and often remain invisible in policy formulation. They often lack social protection, rights, representation and voice, and are often in lowly productive work with poor working conditions.

The 17th International Conference of Labour Statisticians (ICLS) in 2003 spelled out specific categories in the informal economy:

Own-account workers (self-employed with no employees) in their own informal sector enterprises;

Employers (self-employed with employees) in their own informal sector enterprises;

Contributing family workers, irrespective of type of enterprise;

Employees holding informal jobs as defined according to the employment relationship (in law or in practice, jobs not subject to national labour legislation, income taxation, social protection or entitlement to certain employment benefits (paid annual or sick leave, etc.);

Own-account workers engaged in production of goods exclusively for own final use by their household.

Thus, the ‘informal sector’ includes those in formal, informal and household employment. It does not include those in stable, secure and protected employment through legally protected institutions, criminal economy, and those in unpaid domestic work.

But What Drives Informality?

  • Poverty and social exclusion
  • Poor labour market absorption in the industrial sector
  • Global competitive pressures
  • Changing production structures & economic restructuring
  • Lack of regulation, skills, finance and technology and social protection

The share of women in informal employment outside of agriculture outnumber that of men. Women are mostly concentrated in the least visible home-based works like garment makers; embroiderers; incense–stick rollers; cigarette–rollers; paper bag makers; kite makers; hair band makers; food processors; and others. These women are underpaid, overworked and most often don’t have any form of legal or social protection.

According to a report by the National Commission of Enterprises in the Unorganised Sector (NCEUS), as of 2004-05, there were around 457 million workers. 422.6 million (92.4%)  of those were informal workers. There is a decrease in formal employment since 1999-2000.

Sector 2009-10 2011-12
Unorganized 382.1 (82.1%) 375.4 (79.2%)
Organized 83.5 (17.9%) 98.7 (20.8%)
Total 465.6 (100%) 474.1 (100%)

Source: NSSO Employment Unemployment Surveys, various rounds

More recent data shows a trend towards formalization. While organized sector jobs increased by 15.2 million, unorganized sector jobs declined by 6.7 million.


Share of Workers in the Organized and Unorganized Sectors by Employment Status

Employment Status NSS 2009-10     NSS 2011-12    
  Unorganized Organized Total Unorganized Organized Total
Self-Employed 59.5 12.1 51 62.7 12.2 52.2
Regular Salaried 6.7 56.4 15.6 7.6 57 17.9
Casual Wage labourer 33.9 31.5 33.5 29.7 30.8 29.9
All 382.1m 83.5m 465.6m 375.4m 98.7m 474.1m

Source: NSSO Employment Unemployment Surveys, various rounds

Self-employment continues to be the predominant form of employment in the unorganized sector and wage work in organised sector. However, share of regular jobs increased both in unorganised and organised sector and that of casual jobs shows consistent decline.

Organized-Unorganized Employment by Sector (NSSO 2011-12)

  Unorganized Organized Total
Agriculture and Allied Activities 57 18.1 48.9
Non-Agricultural Sector 43 81.9 51.1
Mining and Quarrying 0.2 1.8 0.5
Manufacturing 10.6 21 12.8
Electricity, Gas & Water Supply 0 1.5 0.3
Construction 8.7 17.6 10.6
Wholesale, Retail Trade, Repair 11.6 3.1 9.8
Hotels and Restaurants 1.8 1.2 1.6
Transport, Storage and Communication 4.2 5.1 4.4
Financial Intermediation & Real Estate 1.4 7.3 2.6
Public Administration and Defence 0 8 1.7
Education 0.8 11.1 3
Health and Social Work 0.5 2.8 1
Other Services 3.1 1.4 2.8

In the 15th and 17th International Conference of Labour Statisticians (ICLS) of the ILO, IT came out with a resolution defining the informal sector and informal employment, respectively. The Delhi Group was organized from experts in the development community to tackle issues in the measurement of the informal sector; document the data collection practices, including definitions and survey methodologies as implemented in various countries; and recommend measures for improving the quality and comparability of informal sector statistics.

Broadly, data on the informal sector is collected through two methods:

(a) Direct

For the direct method, the collection of data on the informal sector can take many approaches: (i) special surveys on the informal sector; (ii) regular surveys with expanded coverage, such as the labor force or other household surveys; (iii) establishment/enterprise surveys and censuses; and (iv) mixed household–enterprise surveys.

(b) Indirect

Indirect measurement makes use of other data sources and statistical models. Usually, it is from the Labour Force Surveys.

Ideally, A separate survey for the informal sector would have been the most appropriate, but that would require sizeable resources in terms of a budget and skilled people and as ADB (2011) prescribes, “a separate listing operation would have to be conducted to form the sampling frame of the survey since the list or census of establishments does not usually contain informal sector units.”

Many countries have already made positive experiences in the use of labour force surveys as a source of data on employment in the informal sector. Measuring the informal sector can be done by periodically including additional questions to the regular labour force surveys. The additional questions should be asked of all persons employed during the reference period of the survey, irrespective of their status in employment. In this way, it is possible to collect comprehensive data on the volume and characteristics of informal sector employment/informal employment and to obtain information on employment and working conditions from all categories of informal workers, including employees and contributing family workers.

The above post is Part 2 of a series on the summary of a two week workshop on ‘Sociology of Labour and Globalisation’ at the V.V. Giri National Labour Institute (VVGNLI), NOIDA. This covers Session 4 by Dr. Anoop K. Satpathy.

Click for Part 1.



2 thoughts on “Formalising the Informal Economy (Part 2)

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s