Informal Sector in GDP: A Panel Estimation Method

Abstract

Estimation of the activities of the informal sector in an economy poses a serious problem for obtaining a correct estimate of GDP. This happens to be so because of the fact that informal sector activities are not registered. The literature has tried to solve the problem of estimation of the informal sector using the method of latent variables. The standard approach is generally aims to estimate for a single point. The present paper aims to model the statistical estimation of informal sector of many countries in a common framework and the evolution of the informal sector over time. Thus the adopted approach in this paper is panel estimation for a group of 22 countries, both from the developed and developing world. The study contributes in the literature by way of developing statistical model ‘Panel Dynamic Multiple Indicators and Multiple Causes’ model to account for the variations in the contribution of informal sector. Using the statistical model the paper presents modified estimates of the informal sector of the group of countries over a period ranging from 1990 through 2018. Our estimates of the informal sector are found to be generally higher, sometimes more than 10% for the developing country group while the estimates for the developed countries show little variability.