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On defining and measuring the informal sector

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  • Henley, Andrew
  • Arabsheibani, G. Reza
  • Carneiro, Francisco G.

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. In this paper the authors investigate the degree of congruence between three definitions of informality based on employment contract registration, social security protection, and the characteristics of the employer and employment using Brazilian household survey data for the period 1992 to 2001. The authors present evidence showing that 64 percent of the economically active population are informal according to at least one definition, but only 40 percent are informal according to all three. Steady compositional changes have been taking place among informal workers, conditional on definition. The econometric analysis reveals that the conditional impact of particular factors (demographic, educational attainment, and family circumstances) on the likelihood of informality varies considerably from one definition to another. The results suggest growing heterogeneity within the informal sector. Therefore, the authors argue that informal activity may be as much associated with entrepreneurial dynamism as with any desire to avoid costly contract registration and social protection. However, the authors confirm there is no a priori reason for entrepreneurial activity to be unprotected. Consequently definitions of informality based on occupation and employer size seem the most arbitrary in practice even if conceptually well-founded.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3866.

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Date of creation: 01 Mar 2006
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Handle: RePEc:wbk:wbrwps:3866

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Keywords: Labor Markets; Labor Standards; Work&Working Conditions; Labor Management and Relations; Tertiary Education;

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  1. Livingstone, Ian, 1991. "A reassessment of Kenya's rural and urban informal sector," World Development, Elsevier, Elsevier, vol. 19(6), pages 651-670, June.
  2. Menno Pradhan & Arthur Van Soest, 1997. "Household Labor Supply In Urban Areas Of Bolivia," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 300-310, May.
  3. Douglas Marcouiller, S.J. & Veronica Ruiz de Castilla & Christopher Woodruff, 1995. "Formal Measures of the Informal Sector Wage Gap in Mexico, El Salvador, and Peru," Boston College Working Papers in Economics, Boston College Department of Economics 294., Boston College Department of Economics.
  4. Portes, Alejandro & Blitzer, Silvia & Curtis, John, 1986. "The urban informal sector in Uruguay: Its internal structure, characteristics, and effects," World Development, Elsevier, Elsevier, vol. 14(6), pages 727-741, June.
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  8. Gong, Xiaodong & Van Soest, Arthur & Villagomez, Elizabeth, 2004. "Mobility in the Urban Labor Market: A Panel Data Analysis for Mexico," Economic Development and Cultural Change, University of Chicago Press, University of Chicago Press, vol. 53(1), pages 1-36, October.
  9. Mazumdar, Dipak, 1976. "The urban informal sector," World Development, Elsevier, Elsevier, vol. 4(8), pages 655-679, August.
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  11. Funkhouser, Edward, 1996. "The urban informal sector in Central America: Household survey evidence," World Development, Elsevier, Elsevier, vol. 24(11), pages 1737-1751, November.
  12. Maloney, William F., 2004. "Informality Revisited," World Development, Elsevier, Elsevier, vol. 32(7), pages 1159-1178, July.
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  18. Cunningham, Wendy V & Maloney, William F, 2001. "Heterogeneity among Mexico's Microenterprises: An Application of Factor and Cluster Analysis," Economic Development and Cultural Change, University of Chicago Press, University of Chicago Press, vol. 50(1), pages 131-56, October.
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  21. Michael J. Pisani & José A. Pag�n, 2004. "Self-employment in the era of the new economic model in Latin America: a case study from Nicaragua," Entrepreneurship & Regional Development, Taylor & Francis Journals, Taylor & Francis Journals, vol. 16(4), pages 335-350, July.
  22. Jaime Saavedra & Alberto Chong, 1999. "Structural reform, institutions and earnings: Evidence from the formal and informal sectors in urban Peru," Journal of Development Studies, Taylor & Francis Journals, Taylor & Francis Journals, vol. 35(4), pages 95-116.
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