On Defining and Measuring the Informal Sector: Evidence from Brazil

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. This paper investigates the degree of congruence between three definitions of informality based on employment contract registration, on social security protection and the characteristics of the employer and employment using Brazilian household survey data for the period 1992 to 2004. 64% of the economically active are informal according to at least one definition, but only 40% are informal according to all three. Steady compositional changes have been taking place amongst informal workers, conditional on definition. Multivariate analysis reveals that the conditional impact of particular factors (demographic, educational attainment, family circumstances) on the likelihood of informality varies considerably from one definition to another. Results suggest growing heterogeneity within the informal sector. Informal activity may be as much associated with entrepreneurial dynamism as with any desire to avoid costly contract registration and social protection. However there is no a priori reason for entrepreneurial activity to be unprotected. Results in the paper confirm this. Consequently definitions of informality based on occupation and employer size seem the most arbitrary in practice even if conceptually well-founded.

The Informal Sector Wage Gap: New Evidence Using Quantile Estimations on Panel Data

“…For Brazil, only secondary schooling or higher (i.e., more than 11 years of schooling) guarantees a signi…cantly smaller probability of being informal. A weaker link between informality and lower educational attainment in this country is also reported in Henley et al (2007). Figure A1 in the Appendix reports the results of our tax calculations in the form of average tax rates faced by workers at di¤erent points of the gross wage distribution.…”

“…Similar choices are made by Amuedo-Dorantes (2004) and Tannuri-Pianto and Pianto (2002) using the 1999 Brazilian household survey. The latter study and Henley et al (2007) show that this simple de…nition seems to capture some of the other features commonly used when de…ning informality (including …rm size and job types). For South Africa, the LFS contains several questions regarding fringe bene…ts and other aspects of the job that can be used to identify the sector, in particular questions regarding whether the …rm provides medical aid and deducts unemployment insurance contributions.…”

Cyclical Movements In Unemployment And Informality In Developing Countries

“…Though there is substantial overlap in these definitions (see Henley et al, 2006 andPerry et al, 2007), conceptually the distinction can be important for our analysis. For instance, a transition from informal to informal under the "labor protections" definition might reflect purely a worker being granted benefits after a period of time but without a corresponding change in position and accompanying job search.…”

Labour Force Participation of Cameroonians in Informal Sector

“…Under the guidelines of the statistical definition of informal employment established by the ICLS in 2003, informal employment covers casual jobs or jobs with limited short duration; jobs with hours of work or wages below a specified threshold; employment of persons in households; jobs where the employee's place of work is outside the premises of the employer's enterprise; or jobs for which labour regulations are not applied (Daza, 2005). Finally, Henley et al (2009) indicate three definitions of informality: first, to the employment contract status; second, to the social security protection, and third to the nature of the employment and the characteristics of the employer. More specifically, the way of defining informality in developing countries does matters and the conditional outcome of particular factors on the likelihood of informality varies greatly from one definition to another.…”

“…At the same time, because wages of the "unofficially employed" are not subject to taxation, salaries in the informal sector may be significantly higher compared to post-tax salaries in the formal sector. This view suggests that workers may face an improved wage present in the informal sector compared to the formal sector (Henley et al, 2009). …”