3 - Measuring the size of the informal economy

Summary

Introduction

Those hearing figures regarding the size of the informal economy for the first time, akin to more seasoned scholars, are correct to be deeply sceptical about these estimates of its magnitude. Not only is the informal economy by its very nature a hidden phenomenon and therefore difficult to measure but estimates of its size often vary markedly. For example, estimates of the size of the informal economy in Romania range from 9.5 to 37.8 per cent of GDP, and in Germany from 1.0 to 17.1 per cent (GHK & Fondazione Brodolini 2009). To understand such startlingly different measurements of the size of the informal economy, however, it is necessary to comprehend the various methods being used to measure its magnitude.

In this chapter, therefore, the next section briefly introduces the various measurement methods. These range from indirect methods that seek statistical traces of the informal economy in data collected for other purposes to more direct survey methods. Following this, the third section then reports a study of the variations in the size of the informal economy in the European Union using an indirect measurement method, namely the labour input method (LIM), and then uses these estimates to evaluate the theories discussed in the last chapter by comparing whether there is a significant correlation between cross-national variations in the size of the informal economy using this indirect measurement method and cross-national variations in the structural determinants highlighted to be important in each theorization. This is then followed, in the fourth section, by a reporting of the cross-national variations in the size of the informal economy in developing countries using a direct survey approach, along with whether similar correlations are identified between the size of the informal economy and various structural determinants. The fifth and final section then draws some conclusions about the measurement methods and the validity of the different theorizations discussed in the last chapter that seek to explain the country-level variations in the size of the informal economy.

Methods for measuring the size of the informal economy

Two broad types of method exist for measuring the size of the informal economy: indirect and direct.