Informality in a micro economy: Measurement, composition and consequences

• Date: 01 September 2015
• Author: Mustafa BESIM,Tufan EKICI,Glenn P. JENKINS
• DOI: http://doi.org/10.1111/j.1564-913X.2015.00246.x
• Published date: 01 September 2015

Copyright © The authors 2015

Journal compilation © International Labour Organization 2015

International Labour Review, Vol. 154 (2015), No. 3

Informality in a micro economy:

Measurement, composition

and consequences

Mustafa BESIM,* Tufan EKICI** and Glenn P. JENKINS***

Abstract. This article measures the extent of – and unrecorded income generated

by – informal employment in a micro economy characterized by poor governance.

Household survey and census data are used to estimate the number of informal

workers in Northern Cyprus and analyse the characteristics of informal employ-

ment, for the period 2004 –11. Informal workers are mostly comprised of citizens

with no social security registration, illegally employed immigrants or second-job

holders who have not registered their second jobs. In terms of value added, the

estimated size of the informal economy is 9.1 per cent and 12.2 per cent of GNP

in 200 6 and 2011, respectively.

I

n this article, employment in the informal economy is understood to include

both “employment in the informal sector” and “informal employment”, as

dened in the Resolution concerning statistics of employment in the informal

sector adopted by the 15th International Conference of Labour Statisticians

(ICLS) in 1993,1 and the Guidelines concerning a statistical denition of in-

formal employment adopted by the 17th ICLS in 2003,2 respectively (see also

ILO, 2013). The informal sector comprises private unincorporated enterprises,

i.e. enterprises owned by individuals or households that are not constituted as

* Associate Professor, Eastern Mediterranean University, Northern Cyprus, email:

mustafa.besim@emu.edu.tr. ** Assistant Professor, Middle East Technical University, Northern

Cyprus Campus, email: ekici@metu.edu.tr. *** Professor at Eastern Mediterranean University,

Northern Cyprus, email: Jenkins.glenn@usa.net. The authors wish to thank the Turkish Cypriot

Chamber of Commerce for sharing the State Planning Organization (SPO) survey and census re-

sults. We are also grateful to the anonymous referee for the helpful comments and suggestions re-

ceived. All remaining errors are our own.

Responsibility for opinions expressed in signed articles rests solely with their authors, and

publication does not constitute an endorsement by the ILO.

1

The full text of the 1993 ICLS resolution is available at: www.ilo.org/wcmsp5/groups/public/

---dgreports/---stat/documents/normativeinstrument/wcms_087484.pdf.

2 The full text of the 20 03 Guidelines concerning a statistical denition of informal em-

ployment is available at: http://www.ilo.org/wcmsp5/groups/public/---dgreports/---stat/documents/

normativeinstrument/wcms_087622.pdf.

International Labour Review354

separate legal entities independently of their owners, and for which no com-

plete accounts are available that would permit a nancial separation of the

production activities of the enterprise from the other activities of its owner(s)

(Hussmanns, 2005). “Informal employment” is dened by the International

Labour Organization (ILO) as the total number of informal jobs, whether

carried out in formal-sector enterprises, informal-sector enterprises, or house-

holds, during a given reference period (ILO, 2013). Informal employment is not

subject to labour legislation, social protection, taxes or employment benets.

There are several reasons why the informal economy should be studied

in greater detail. First, since informal workers are not declared, they can avoid

paying tax and social security contributions, thereby increasing the decit in

scal and social funds. A frequent consequence of this is the imposition of new

or increased taxes for declared workers. Second, statistics such as those on the

labour force, economic growth, national income and aggregate consumption

will be misleading if informal labour markets are not measured correctly.3

Many studies have attempted to measure the informal economy. The

two methods that have been used in the literature are the direct (micro) and

indirect (macro) methods. The direct approach mostly involves using surveys

to monitor the number and characteristics of those in informal employment.

The indirect approach is based on estimation methods, using statistics from

related sources (ibid.).

This article analyses the informal economy in Northern Cyprus4 as com-

prehensively as possible. First, the extent of informal employment is measured

using an indirect approach – namely, the residual balance technique – based

on 2006 and 2011 census and migration data. Then, using the direct approach,

an in-depth analysis is made of the characteristics of informal employment,

based on 2004 –11 household labour force surveys. Lastly, the size of the in-

formal economy is measured, using the value added approach.

The term “informal employment” used here in the context of Northern

Cyprus refers in particular to those employees working in the formal or infor-

mal sector that are not registered with, or covered by, the social security system.

Northern Cyprus provides a unique case for the study of the informal

economy. A lack of migration control in this small island market economy,

combined with poor enforcement of labour regulations, have resulted in a sig-

nicant number of informal workers, resulting in lost tax revenue and social

security contributions. The results of this study could potentially be extended

to other countries that have similar problems with government enforcement.

The literature relating to Northern Cyprus on this topic is very limited.

This article updates previous ndings on the extent of informal employment,

3 For more information on the challenges of dening and measuring informal employment,

and the various ways in which informal employment can be and is being tackled, see Williams and

Lansky (2013).

4

The designations used in ILO publications do not imply the expression of any opinion what-

soever on the part of the International Labour Ofce concerning the legal status of any country,

area or territory or of its authorities, or concerning the delimitation of its frontiers.