Out of the shadows: Classifying economies by the extent and nature of employment in the informal economy

• Author: Colin C. WILLIAMS
• DOI: http://doi.org/10.1111/j.1564-913X.2015.00245.x
• Published date: 01 September 2015
• Date: 01 September 2015

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

Copyright © The author 2015

Journal compilation © International Labour Organization 2015

* Professor, Shefeld University Management School (SUMS), University of Shefeld; email:

C.C.Williams@shefeld.ac.uk.

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

publication does not constitute an endorsement by the ILO.

Out of the shadows:

Classifying economies by the extent

and nature of employment

in the informal economy

Colin C. WILLIAMS*

Abstract. Given the prevalence of informality, this article proposes a typology

for classifying countries by the extent and nature of employment in the informal

economy, rather than by the composition of their formal economies. The author

analyses ILO data on employment in the informal economy in 36 developing

countries, and shows that there is a signicant correlation between cross-national

variations in the degree and intensity of informalization and cross-national vari-

ations in social and economic indicators such as levels of GNP per capita, corrup-

tion, poverty, taxation and social contributions. The article concludes by discussing

implications for theory and policy.

Until now, classications of economies have differentiated countries by

the nature of their formal economic systems – using indicators such as

levels of gross domestic product (GDP) or gross national income (GNI) per

capita (World Bank, 2013) – regardless of whether they are control, market or

mixed economies (Arnold, 1996; Rohlf, 1998), or liberal or coordinated var-

ieties of capitalism (Hall and Soskice, 2001). While this would be appropriate if

the majority of global employment was in the formal economy, this is not the

case (Jütting and de Laiglesia, 20 09; ILO, 2012 and 2013; Williams and Lan-

sky, 2013). Consequently, the aim of this article is to develop a typology for

the classication of economies by the extent and nature of employment in the

informal economy. The importance of doing this is that it not only highlights

the prevalence of such employment across the world but also draws attention

away from the formal labour market – in which only a minority of jobs glo-

bally are located – to employment in the informal economy, in which the ma-

jority of jobs are found.

International Labour Review332

The remainder of this article is organized into ve sections. The rst

briey reviews how employment in the informal economy is dened, provides

a typology that classies economies by the extent and nature of employment in

the informal economy and reviews the competing explanations for the cross-

national variations in the degree and intensity of informalization. The second

section describes the data set and methodology. The third section reports on

the ndings concerning the cross-national variations in the degree and inten-

sity of informalization, while the fourth contains a preliminary evaluation of

the competing explanations for these cross-national variations. The fth and

nal section concludes by summarizing the ndings and discussing their im-

plications for theory and policy.

Employment in the informal economy:

Denition, typology and competing explanations

Definition

Employment in the informal economy is dened in this article using the widely

accepted enterprise-based denition of the “informal sector” and the jobs-

based denition of “informal employment” adopted in 1993 and 2003 by the

15th and 17th International Conference of Labour Statisticians (ICLS), respec-

tively (Hussmanns, 2005; ILO, 2011 and 2012).1 As shown in table 1, if the en-

terprise is taken as the unit of analysis, the informal sector includes both formal

and informal jobs in informal enterprises (A+B); if jobs are taken as the unit

of analysis, informal employment includes informal jobs in both informal and

formal enterprises (A+C). In this article, both units of analysis are used, by

examining “employment in the informal economy” (A+B+C), which covers

all persons who in their main job are employed either in the informal sector

(A+B) or in informal employment (A+C), counting only once those persons

who are classied in both categories.

To dene “employment in the informal economy”, it is necessary to rst

dene “informal enterprises” – i.e. the enterprise-based concept of the “infor-

mal sector” – and “informal jobs” – i.e. the jobs-based concept of “informal

employment”. The 15th International Conference of Labour Statisticians in

1993 dened the “informal sector” – i.e. informal enterprises – as private un-

incorporated enterprises that are unregistered, or small in terms of the num-

ber of employed persons. Unincorporated enterprises are production units not

constituted as separate legal entities independently of their owners, and for

which no complete accounts are available. An enterprise is unregistered when

it is not registered under specic forms of national legislation, e.g. factories acts

or commercial acts, tax or social security laws, professional groups’ regulatory

acts. The issuing of a trade licence or business permit under local regulations

1 The full text of the 199 3 ICLS resolution is available at: http://www.ilo.org/wcmsp5/groups/

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