strongly with formal ones. Finally, informality seems to pose macroeconomic challenges as tax efforts and financial sector depth in Indonesia remain below the EMDE averages.

5. **The paper makes several contributions to the existing literature.** It is the first study on informality in Indonesia that uses a multidimensional approach adapted to the country’s specific conditions. Following Elgin et al. (2021a), the paper looks at output, employment, and firm informality, and utilizes all existing data series that can be used to capture the extent of informality in Indonesia. Second, it is the first to estimate informality for Indonesia at the regional, provincial, and sectoral levels. No existing study has attempted to understand the informal sector in Indonesia at the sub-national level. Third, it is also the first paper that utilizes the various labor force surveys (SAKERNAS surveys) to estimate both output and employment informality. Lastly, it provides a systematic examination of the features of the informal sector in Indonesia, highlighting what is also commonly seen in other EMDEs (or documented in the literature) and what is not.

6. **The paper has limitations as many questions about the informal sector in Indonesia remain unanswered** . Limited studies have looked at the informal sector systematically in Indonesia. The existing ones tend to focus on one or two dimensions of informality. While this paper helps deepen the understanding of the informal sector in Indonesia via a multidimensional approach, it does not provide additional information on the drivers of informality, nor does it try to establish any causality relationships, nor provide policy recommendations.

7. **The paper is divided into five sections** . Section 2 highlights the literature behind the multiple informality analytical frameworks and discusses definitions and data used in this study. Section 3 depicts the levels and trends of informality in EMDEs (as well as the EAP region) and Indonesia. Section 4 summarizes the correlates of informality documented in the literature and other EMDEs and examines whether those correlates of informality also exist in Indonesia. In particular, it highlights the policy challenges associated with informality and examines the role of informality in Indonesia during an external shock like COVID-19. Section 5 concludes.

**2. Adapting the multidimensional approach of informality analysis to Indonesia**

- **2.1 Definitions of informality: Global versus Indonesia**

8. **The nature of informality differs across workers, firms, and countries.** Some workers and firms are “excluded” from the modern economy due to burdensome entry regulations and lack of human capital (de Soto 1989; Loayza, Oviedo, and Servén 2006). This type of informality is frequently associated with underdevelopment, low productivity, and poorly paid employment (La Porta and Shleifer 2014; Loayza 2018).<sup>2</sup> Other informal workers and firms voluntarily “exit” the formal sector and choose the informal sector for its flexibility, independence, and lower compliance burdens (Blanchflower, Oswald, and Stutzer 2001; Maloney 2004; Günther and Launov 2012; Falco and Haywood 2016). Both “excluded” and “exiting” types of informality could coexist in an economy (Bosh and Maloney 2008, 2010; Lehmann and Pignatti 2007;

> 2 This typically occurs in lower-income countries where the informal sector is a major source of income for low‐ skilled workers whose income would otherwise fall below subsistence (Docquier, Müller, and Naval 2017).

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