13. **A multidimensional approach to informality should be taken to have a deeper understanding of informality in Indonesia.** As summarized by Elgin et al. (2021a), there are three dimensions of informality, with most of the available data capturing the following three dimensions: output informality, employment informality, and firm/perceived level of informality.

# **2.2 Informality data  and estimation methods description: Cross-country and Indonesiaspecific databases**

14. **The paper carries out two sets of analyses.** The first set of analyses (section 3) compares the levels and trends of informality in EMDEs with those in Indonesia. The EMDE estimates are taken from a comprehensive informality database provided by Elgin et al. (2021a) and updated to 2021. The estimates for Indonesia mainly use data from the labor force surveys, referred to as SAKERNAS, which is provided by the official statistics agency BPS over the period 2000-22. In particular, estimates on output and employment informality at the regional and sectoral levels are also estimated using SAKERNAS surveys. The second set of analyses (section 4) explores policy and development challenges associated with informality across EMDEs. The findings from crosscountry analyses will be compared with specific features of informality in Indonesia.

15. **The cross-country analyses rely on one of the most comprehensive cross-country databases of informal economic activity.** The updated database (from Elgin et al 2021a) covers more than 160 economies for the period 1990-2021. The database includes model-based and survey-based measures of informality, which capture the three dimensions of informality: output informality, employment informality, and perceived level of informality. The model-based measures cover output informality (often expressed in percent of official GDP), while surveybased estimates capture employment informality (in percent of total employment) and the perceived level of informality (especially by firms and by households). Annex 3 provides a detailed description of the three dimensions of informality and their construction. In this paper, when conducting cross-country analyses, preference is given to measures that are constructed using the same statistical standard (and definition) and have better country-and-year coverage.<sup>4</sup> 16. **The paper considered two model-based estimates to compute output informality and three survey-based estimates for employment informality.** First, two model-based estimates are considered for the cross-country comparisons. One is the multiple indicators multiple causes model (MIMIC), which is a type of structural equation model that takes into account both the multiple possible causes of informal activity and the outcome indicators of it. The other one is a dynamic general equilibrium model (DGE) created by Elgin and Oztunali (2012) where production in the informal sector is determined by how households optimize their labor allocation between formal and informal economies in each period and how the allocation changes over time. Both models provide estimates of informal output in percent of official GDP. Second, three surveybased informal employment measures are considered here to capture employment informality:

> 4 For instance, self-employment shares are often used as a proxy for informal employment here, given its wide country-and-year coverage and consistency across countries.

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