Nordman, Rakotomanana, and Roubaud 2016). As a result, the informal sector consists of both high-productive and low-productive workers and firms. While the latter stay in the informal sector out of necessity, the former join the informal sector to avoid various costs associated with “being formal”. As a result, the definition of informal workers as well as informal firms is largely context and country-specific (see Annex 1 for more details).

9. **Multiple definitions of informal workers exist for cross-country comparison.** According to the International Labour Organization (ILO), informal employment covers all workers of the informal sector and informal workers outside the informal sector (Perry et al. 2007; ILO 2018). The former comprises all persons who were employed in at least one informal firm. The latter group includes self-employed and workers not employed in formal contractual arrangements or not subject to social protection or employment benefits. In practice, the most frequently used informal employment measure is the share of self-employment in total employment (La Porta and Shleifer 2014; ILO 1993).

10. **In the context of Indonesia, labor force surveys also provide several definitions of informal employment.** For instance, the labor force surveys (SAKERNAS surveys) carried out by Badan Pusat Statistik (BPS) report data on self-employment twice a year. BPS provides three definitions of informal employment: simplified, old, and new.<sup>3</sup> The simplified definition mainly reflects job-based informal employment, covering casual workers, (i.e. those without formal labor contracts), part-time workers, and unpaid household workers. Both new and old definitions use information on sectors and types of employment to classify workers, making sectoral estimates hard to interpret. While the simplified definition overlaps with self-employment, it is less linked with sectoral distribution and is preferred for the analyses in this paper (See Annex 2 for details).

11. **From a firm’s perspective, past informality studies tend to use the following three criteria to identify informal firms (ILO 2018).** First, it is not a legal entity separate from its owners, has its own complete set of accounts, and is not owned or controlled by one or a few household members. Second, it is a market enterprise that sells its goods or services. Third, it falls into one of the following categories: it keeps the number of workers employed below a threshold determined by business regulations; it is not registered; or it hired workers informally. Other studies provide an alternative definition of informal firms as a continuum depending on size, registration, accounting standards, tax payments, mobility of workplace, and access to bank credit (Benjamin and Mbaye 2012; Mbaye, Benjamin, and Gueye (2017). In firm surveys such as World Bank Informal Sector Enterprises Surveys, informal firms are typically defined as a business without the possession of a firm registration (or tax) number.

12. **Indonesia follows the global standard in defining formal and informal businesses.** Specifically, a formal enterprise is defined as a business in possession of a firm registration number ( _TDP-Tanda Daftar Perusahaan_ ) or firm unique ID ( _NIB-Nomor Induk Berusaha_ ), whereas an informal enterprise is a business that does not possess either of these.

> 3 The BPS moved from the old to the new definition of informality in 2016.

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