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Areas of Expertise

Informal Economy

Informal Economy
© ILO/M. Crozet

Informal sector

Employment in the informal sector
The international standards distinguish between employment in the informal sector and informal employment. Employment in the informal sector is an enterprise-based concept and it is defined in terms of the characteristics of the place of work of the worker. By contrast, informal employment is a job-based concept and it is defined in terms of the employment relationship and protections associated to the job of the worker.
According to the international standards adopted by the 15th International Conference of Labour Statisticians, the informal sector is a subset of unincorporated enterprises not constituted as separate legal entities independently of their owners.1 They are owned by individual household members, or several members of the same or different households. Typically, they are operating at a low level of organization, on a small scale and with little or no division between labour and capital as factors of production.
In order to allow international comparisons, the ILO adopted a harmonized operational definition of employment in the informal sector using the following criteria:

  1. Institutional sector (government/ public enterprises/ NGOs; private sector; households). The “institutional sector” is meant to separate persons working in government, public and private corporations, non-governmental and international organizations, and other institutions clearly recognized as belonging to the formal sector. It also serves to identify persons working in private households producing wholly for own final. 
  • Government/ public corporations, NGOs and INGOs => Formal sector
  • Households => Households
  • Private economic units => Next criteria

2. Final destination of production: the purpose of the second criterion “destination” is to exclude from the scope of informal sector persons working in a farm or private business (unincorporated enterprise) where the main intended destination of the production is wholly for own final use.

  • Produce at least partially for sales on the market => Next criteria
  •  If final use only => Households

3. Registration of the economic unit under national legislation (in the process of registration is considered as not registered). This includes registration with social security authorities, sales or income tax authorities and should be at a national level. It identifies enterprises that are similar to corporations (quasi-corporations) and therefore outside the scope of the informal sector. The appropriate forms of registration relevant to the concept of informal sector should be examined in the national context.

  •  If registered to relevant institution(s) => Formal sector
  •  If not registered / missing/ don’t know => Next criteria

4. Bookkeeping: whether the economic unit maintain a set of accounts required by law (e.g., balance sheets) or keeps some official accounts. The information on bookkeeping practices of the farm or private unincorporated enterprise has as objective to identify whether the economic unit is constituted as separate a legal entity independently of their owners.

  • If formal bookkeeping => Formal sector
  • If no formal bookkeeping / missing/ don’t know => Next criteria (alternative approach)

Alternative criteria applied only in case criteria 3 and 4 are missing (no question/ no answer / don’t know)

5. For employees: Contribution of employer (and employee) to social security or alternatively declaration of labour income (ex: does the employer contribute to social security or declare labour income in order to pay income tax?)

  • If contributing to social security (preferably for pensions) => Formal sector
  • No, Other, No answer, Don’t know => Next criteria

6 . Size: differentiate between units 5 or less workers and those with more than 5 workers engaged/employed on a continuous basis.

  • If unit have more than 5 workers and is located in fixed visible premises => Formal sector
  • If below 6 or not in fixed premises => Informal sector

7. Location of workplace: Differentiate among economic units that are located in the owners' dwelling, in the street, in construction sites, in agricultural plots, that are itinerant, etc. and economic units that have fixed visible premises, such as offices, factories, etc.

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