7th Meeting of the Expert Group on Informal Sector Statistics (Delhi Group) New Delhi, 2 - 4 February 2004
Session N^o1	Defining informal employment and methodologies for its measurement
Defining Informal Employment and Methodologies for its measurement and some results
	By K. P. Shreshtha
Central Bureau of Statistics, Kathmandu, Nepal

INFORMAL SECTOR ACTIVITY

Defining the informal sector

The sector of economy is basically based on the work activities made on the informal industries. It is based on the employment status other than formal sector. In many developing countries, informal economy accounts for a significant proportion of income and expenditure.

The ILO guidelines recommend that enterprises of informal employers may be defined in terms of the size of the unit or non-registration of the enterprise or its employees.

It is often stated that informal sector activities account for a significant proportion of total employment and income generation. However, in trying to produce statistics on the informal sector, it is not easy to put into operation the international standard definition that was adopted in 1993. For operational purposes, employment has been broken down into formal and informal sector. Nepal Labour Force Survey (NLFS) and Nepal Living Standards Survey (NLSS) closely followed International Labour Organization (ILO) international standard definition of the informal sector.[1] Because of the difficulty of defining informal sector activities in the agricultural sector, the informal sector has been defined only in respect of non-agriculture. For operational purposes, we have defined the informal sector as follows. In terms of current economic status, those currently active have been classified into one of three codes: ‘agriculture’, ‘non-agriculture informal’, ‘and non-agriculture other sectors’, based on the responses to each of three questions: employment status, institutional sector of employment and number of employees. A person whose main job is not in agriculture has been counted as working in the informal sector if his / her present job satisfies each of the conditions shown in a single row in Box 1.

Box 1. Basis for classifying non-agricultural sector jobs as informal

Employment status	Institutional sector	Number of employees
Paid employee	Private unregistered company or Other	Less than 10
Operating own business with no employees	-	-
Operating own business with regular paid employees or Contributing family member without pay or Other	-	Less than 10

If a person is not currently employed, the informal sector status is calculated on the basis of the main job in the last year or (if he or she did not work during the last year) the most recent job. Thus we have adopted the definition, which follows the international standard fairly close.

Certain limitations and restrictions in our definition should be noted. Although we have included activities in both the urban and rural sector, the informal sector has been defined only in respect of the non-agricultural sectors, because of the difficulty of defining informal sector activities in the agricultural sector. Paragraph 16 of the ILO guidelines makes provision for this exclusion of agricultural activities. The guidelines also recommend that the population employed in the informal sector should be defined to include everyone who works in the informal sector, whether it is their main or second job. For this present analysis, however, the informal sector has been defined only on the basis of each person’s main job (in respect of those currently in the informal sector) and usual job (in respect of those usually in the informal sector). This was because there was insufficient information available about the characteristics of the second job to establish whether it counted as being in the informal sector.

The ILO guidelines recommend that enterprises of informal employers may be defined in terms of the size of the unit and/or the non-registration of the enterprise or its employees. The NLFS did not collect any information about registration, but information was collected on the number of regular paid employees, and this information has been used in defining the informal sector. Where possible, information has been given separately on the number of informal sector workers working in establishments with no regular paid employees.

2. Population employed in informal sector

This paper is mainly based on the findings from NLFS 1998/99 and some results from Population Census 2001. Table 1 shows that there were in total 7806 thousand population 15 years and above currently employed of which 1657 thousand were in informal sector. This comprises 82.5 % in formal and 17.5 % in informal sector.

Table 1. Distribution of currently employed population aged 15 years and above by Sex and Sector, Nepal 1998/99

Sector	Freq.	Sex
	('000)	Male	Female	Total
Formal	7806	77.79	87.19	82.49
Informal	1657	22.21	12.81	17.51
Total	9463	100.00	100.00	100.00

Source; Central Bureau of Statistics, NLFS 1998/99

Table 2 shows that agriculture alone covered 7203 thousand population which covered 76.1 (67.1 % for males and 85.2 % for females) % of total employment. This compares with total employment of only 600,000 persons in other jobs outside the agricultural sector. Thus the informal sector accounts for 73 % of all employment in main jobs outside the agricultural sector.

Of those working in the informal sector, just over a million were males and about 600,000 were females. If they find employment, the young and the elderly were the age groups most likely to find work in the informal sector. Amongst those currently employed outside the agricultural sector, some 82 (76 % for male and 87 % for female) % of those aged 15 to 19 and as many as 94(92 % for male and 96 % for female) % of those aged 60 and over were employed in the informal sector.

Table 2. Currently employed population aged 15 and over, by sex, age and formal/informal sector of employment of main job, Nepal 1998/99

(in thousand)

		Age group
	Total	15 - 19	20 - 24	25 – 29	30 - 44	45 - 59	60 +
Sex/Sector
Total	9463	1451	1284	1222	2914	1767	826
Agriculture	7203	1158	935	853	2138	1424	696
Non-agriculture, formal sector	603	54	105	122	236	78	8
Non-agriculture, informal sector:	1657	238	244	247	539	265	123
Without regular paid employees	1510	214	218	218	495	249	117
With 1-9 regular paid employees	147	24	27	30	44	16	6
Male	4736	691	593	590	1432	934	495
Agriculture	3176	520	366	328	875	685	401
Non-agriculture, formal sector	509	41	80	103	207	70	7
Non-agriculture, informal sector:	1052	130	148	160	349	179	86
Without regular paid employees	923	112	123	133	310	164	80
With 1-9 regular paid employees	129	18	24	26	40	15	5
Female	4727	759	690	632	1482	832	332
Agriculture	4027	638	568	525	1263	739	294
Non-agriculture, formal sector	94	13	25	19	29	8	0
Non-agriculture, informal sector:	605	108	96	88	190	86	38
Without regular paid employees	587	102	94	84	185	84	37
With 1-9 regular paid employees	18	6	2	3	5	1	1

Source: Central Bureau of Statistics, 1999, Table 11.1 p. 62

Table 3 shows the distribution of informal sector jobs by occupation, as well as the proportion of total jobs outside the agricultural sector that were in the informal sector, separately for males and females. Of those in employment, a much higher proportion of women than men were found working in the informal sector (67.4 % for males and 86.5 % for females). It was also found that two-thirds of main jobs outside the agricultural sector held by males were in the informal sector, as many as 86 % of the equivalent female jobs were in the informal sector. In absolute numbers, women have about 700,000 jobs outside agriculture, but about 600,000 of these were in the informal sector.

Table 3. Persons aged 15 years and over currently employed in non-agricultural sectors, and whether working in the informal sector, by sex, and occupation of main job, Nepal 1998/99

(in thousand)

	Both sexes			Male			Female
	Non- agric sector	Informal sector jobs	% informal	Non- agric sector	Informal sector jobs	% informal	Non- agric sector	Informal sector jobs	% informal
Occupation
Total	2260	1657	73.3	1560	1052	67.4	700	605	86.5
1. Legislators, senior officials	12	5	44.7	11	5	43.3	1	1	62.5
2. Profe-ssionals	37	4	10.8	33	4	11.6	4	0	4.5
3. Technicians	203	40	19.9	162	37	22.6	41	4	9.4
4. Clerks	106	4	3.9	95	4	3.7	11	1	4.9
5. Service workers	487	457	93.7	324	298	91.9	163	159	97.3
6. Agricultural workers	13	11	86.3	8	7	78.0	5	5	99.1
7. Craft & related trade workers	556	497	89.3	395	346	87.7	162	151	93.3
8. Plant & machine operators	102	60	59.5	89	48	54.6	13	12	92.7
9. Elementary occu-pations	739	578	78.2	441	305	69.1	299	273	91.5
10. Armed forces	5	0	0.0	5	0	0.0	0	0	0.0

Source: Central Bureau of Statistics, 1999, Table 11.2 p. 62

The ISCO classification system assigns broad skill levels to the different occupations. Elementary occupations (major group 9) are at the first skill level, since they require no more than primary education. Jobs in major groups 4, 5, 6, 7 and 8 are at the second skill level, usually requiring some amount of secondary education. Technicians and associate professionals (major group 3) are at the third skill level, since their jobs usually require some further education after secondary school, but not to degree level. Finally, professionals (major group 2) are at the fourth skill level, since these jobs usually require training to degree-level. No attempt was made by the ILO to assign skill levels to major groups 1 and 0.

It can be seen from Table 3 that (with the exception of major group 4 – Clerks) the great majority of main jobs at the first and second skill levels were in the informal sector. Women had a disproportionate share of informal sector jobs at the lower skill level (Table 3).

3. Employment in informal sector by ISCO 3-digit code

Table 4 shows a more detailed breakdown of informal sector jobs, showing the numbers in urban and rural areas, and highlighting those specific jobs (identified by the ISCO 3-digit code) that occur most often. Of the 1.7 million informal sector jobs, 1.3 million are in rural areas and almost 400,000 in urban areas. The largest group of informal sector workers was the 330,000 shop salespersons and demonstrators (code 522). Other important groups were the 160,000 mining and construction labourers (code 931), 120,000 bricklayers, carpenters, etc. (code 712) and 100,000 housekeeping and restaurant services workers (code 512). This latter group includes cooks, waiters and bartenders, as well as people providing housekeeping services in private households.

Table 4. Numbers of persons aged 15 years and over currently employed in the informal sector, by sex, locality and occupation of main job, Nepal 1998/99

(in thousand)

	Total			Urban			Rural
	Total	Male	Female	Total	Male	Female	Total	Male	Female
Occupation
Total	1657	1052	605	375	241	134	1282	811	471
Legislators, senior officials	5	5	1	4	3	1	1	1	0
Professionals	4	4	0	3	3	0	1	1	0
Technicians, associates	40	37	4	16	14	2	24	22	2
Clerks	4	4	1	3	2	1	2	2	0
Service workers	457	298	159	160	103	57	297	195	102
Market agriculture	4	3	2	0	0	0	4	2	2
Subsistence agriculture	7	4	3	1	0	0	6	3	3
Craft & related trade workers	497	346	151	103	67	36	394	279	114
Plant & machine operators	60	48	12	14	12	2	46	36	10
Elementary occupations	578	305	273	72	37	35	506	268	238
Armed forces	0	0	0	0	0	0	0	0	0
Most important minor ISCO groups (those with at least 25,000 workers in the informal sector)
512 Housekeeping and restaurant service workers	99	51	49	35	18	17	64	33	31
522 Shop sales persons and demons-trators	332	226	107	117	79	38	215	147	68
712 Building frame and related trades workers	116	113	2	18	17	0	98	96	2
722 Black smiths, toolmakers and related trades workers	33	31	2	3	3	0	30	28	2
733 Handicraft workers in wood, textiles, leather, etc.	86	37	48	10	3	7	76	35	41
742 Wood treaters, cabinet makers and related trades	30	29	0	5	4	0	25	25	0
743 Textile, garment and related trades workers	32	5	26	8	1	7	23	4	19
746 Tailors, dress makers and hatters (special code)	80	46	34	20	8	12	61	38	23
911 Street vendors and related	29	17	13	6	4	2	23	13	10
913 Domestic and related helpers, cleaners, launderers	28	15	12	12	3	8	16	12	4
915 Messen-gers, porters, door-keepers and related workers	26	24	2	2	2	0	23	21	2
922 Fetching water (special code)	57	6	51	11	1	9	47	5	42
931 Mining and constru-ction labourers	162	123	39	15	11	4	147	112	35
932 Manufacturing labourers	36	13	23	4	2	2	32	11	21
933 Transport labourers and freight handlers	62	53	10	10	9	1	52	43	9
934 Collecting firewood (special code)	165	44	120	10	2	8	155	43	112

Source: Central Bureau of Statistics, 1999, Table 11.3 p. 63

As mentioned above in four special ISCO codes were created for this survey. Figures for three of these four codes have also been shown in the table (the fourth special code (745) was used for carpet makers and weavers but it included only 11,000 informal sector workers). There were 80,000 people in the informal sector working as tailors, dressmakers or hatters (746). There were also about 60,000 people (nearly all of them women) who fetched water (code 922) and 160,000 people (mainly women) who collected firewood (code 934).

As it is described earlier, less than 10 regular employees in the establishment has been used as one of the criteria for defining those in the informal sector. From Table 5, it is possible to see how many people would have been affected if a lower criterion of five regular employees had been used as the cut-off point in defining the informal sector.

Table 5. Informal sector workers, by sex, locality, employment status and number of regular paid employees working in establishment where person works, Nepal 1998/99

(in thousand)

	Total	Urban	Rural
Sex/ Employment status and number of regular paid employees
Total	1657	375	1282
Own business with no employees	759	172	587
Other informal sector workers: no regular paid employees	751	144	607
" " " " : 1-4 regular paid employees	121	50	71
" " " " : 5-9 regular paid employees	26	10	17
Male	1052	241	811
Own business with no employees	544	127	418
Other informal sector workers: no regular paid employees	378	66	312
" " " " : 1-4 regular paid employees	106	40	65
" " " " : 5-9 regular paid employees	23	8	15
Female	605	134	471
Own business with no employees	215	45	169
Other informal sector workers: no regular paid employees	372	78	295
" " " " : 1-4 regular paid employees	15	9	6
" " " " : 5-9 regular paid employees	3	2	1

Source: Central Bureau of Statistics, 1999, Table 11.4 p. 63

Of the nearly 1.7 million people working in the informal sector, three-quarters of a million are people running their own business with no employees. A similar number again have some other sort of employment status but work in businesses where there are no regular paid employees. This leaves only 150,000 other informal sector workers working in establishments where there are employees. Of this number, less than 30,000 work in businesses with between 5 and 9 employees.

4. Wage difference in formal and informal sector

Wage differences in formal and informal sectors of employment were also tried to study. On analysing wage differences it was found that there were no marked differences in wages between formal and informal employment in total. But there were some differences by rural/urban areas. The wage rate of informal employment in rural is higher for both sexes compared to that of urban areas. In all areas females get lower wages compared to that of males.

Table 6. Average wage rate of currently employed population aged 15 years and above by sex, sector and urban/rural

Sector	Total			Urban			Rural
	Male	Female	Total	Male	Female	Total	Male	Female	Total
Formal	79.05	45.74	70.03	120.45	87.52	112.94	68.46	37.65	59.80
Informal	76.97	40.70	71.95	90.32	46.31	79.80	74.07	37.70	69.96
Total	78.49	45.05	70.48	113.17	77.09	104.84	69.99	37.66	62.18

Source ; Central Bureau of Statistics, 1999, NLFS Data set

Wage differences by ecological zones and by sex were also tried to analyse. It was seen that wage rate in terai was higher in informal sector both for males and females but not significant as compared to other two zones i.e. mountain and hill (Table 7).

Table 7. Average wage rate of currently employed population aged 15 years and above by sex, sector and belt

Sector	Mountain			Hill			Terai
	Male	Female	Total	Male	Female	Total	Male	Female	Total
Formal	85.86	67.01	83.16	102.29	67.05	94.60	63.73	36.65	55.45
Informal	73.03	38.52	66.45	90.44	40.88	81.69	67.22	40.76	64.48
Total	81.76	55.64	77.61	98.95	60.98	91.09	64.62	36.98	57.33

Source: Central Bureau of Statistics, 1999, NLFS Data set

5. Results from population census 2001

Population Census 2001 included a question related to small-scale economic activities other than agriculture in the household level. It was asked that whether a household is engaged in economic activities other than agriculture or not. If there were such activities, the types of activities were collected. Table 8 presents the % of households having such activities and type of activities for the different regions and national level.

Table 8: % of household operated small-scale non-agricultural activities by type of activities and by regions, Nepal, 2001

	% of households			Type of activities
Area/ Development Region	Total	Having economic activities	Not having economic activities	Total	Manufacturing	Trade/ Business	Transport	Services	Others
Nepal	100	20.1	79.9	100	7.8	30.4	2.7	35.0	24.1
	(4174374)	(840128)	(3334246)	(840128)	(65471)	(255767)	(22432)	(293831)	(202627)
Eastern	100	22.2	77.8	100	6.6	27.8	2.6	34.5	28.5
	(1000358)			(221922)
Central	100	22.0	78.0	100	8.2	32.5	3.1	35.0	21.2
	(1465753)			(323086)
Western	100	18.3	77.7	100	6.7	32.3	2.6	37.4	21.0
	(863045)			(157764)
Mid Western	100	17.4	82.6	100	10.0	27.4	2.1	34.8	25.7
	(479817)			(83257)
Far Western	100	14.8	85.2	100	9.6	28.5	1.9	30.2	29.8
	(365401)			(54099)

Source: CBS 2002, Population Census 2001, National Report Volume I, Table 7, pp. 18‑19

Note: Figures in parentheses denotes the number of households

It was found that 20.1% of the households throughout the country were involved in economic activities other than agriculture. Among the development regions, Eastern had the highest (22.2%) and lowest was for Far Western Region (14.8%). On analysing the type of activities it was found that Services occupied 35% followed by Trade/ business (30.4%), others (24.1%), manufacturing (7.8%) and transport (2.7%) in national level. Such activities are presented up to the level of development regions. This information in household level can be used as sample frame for survey of small-scale industries and informal sector economic activities, etc.

6. Summary and conclusion

Informal sector of economy contributes a lot in national income especially in developing countries where market economy is not flourished. Proper methodology should be developed to capture the maximum contribution through informal sector activities to national account system as well as for national and international comparability. If proper and practical definition of informal activities are adopted, its share becomes much more larger than the current one and convenient for comparability. Therefore more and more emphasis should be given to develop its proper definition to cover wide range of activities, which are still lacking to cover at present. There is also a possibility to reprocessing of collected information for national and regional comparability.

Selected References:

His Majesty's Government of Nepal (HMG/N), National Planning Commission Secretariat (NPCS), Central Bureau of Statistics, (CBS): Kathmandu, Nepal; 1999; Report on the Nepal Labour Force Survey; 1998/99

CBS 1997; Nepal Living Standards Survey, Main Findings, Vol. II, 1995/96

CBS 2002; Population Census 2001, National Report.

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[1] International Labour Organization (Bureau of Statistics), Resolution concerning statistics of employment in the informal sector, adopted at the Fifteenth Conference of Labour Statisticians, Geneva, 1993