- A) remain in the sphere of regulation and conform to it

- B) remain in the sphere of regulation without conforming to it

- C) adjust their activity with the intention of remaining in the sphere of regulation

- D) remain outside the sphere of regulation

According to him, only category A represents the formal sector while B, C, and D, are informal. Thus the state’s capacity to carry out the enacted rules determines a large degree of the economic agents’ decision of whether to remain in the informal sector.

# **B. Informality as a continuum of characteristics**

Whatever the criteria used, it is difficult to define the informal sector in a dichotomized manner (Benjamin and Mbaye, 2014). The criteria of size, registration, payment of taxes, etc. do not sufficiently discriminate between formal and informal sector firms. So, the informal sector phenomenon appears to be a continuum of situations defined by a set of factors that we combine to determine the place of each firm in the formality scale. Steel and Snodgrass (2008) note this as well: “There is a continuum of different degrees of formality in terms of different characteristics such as nature of registration, payment of taxes, management structure, contractual arrangements with employees, market orientation, etc.” It is this continuous approach to the informal sector that is held by Mbaye and Benjamin, who establish six different levels of informality according to the number of criteria that a given firm has.

This is usually accomplished by defining a list of characteristics relevant to country conditions and analyzing from the survey data how many of these characteristics are true of each firm. Firms signaling similar numbers (though possibly varying lists) of characteristics can be usefully grouped together to indicate a degree of informality (Benjamin and Mbaye (2012), Mourji (2010)). While this type of definition may seem more complicated, in fact, in forming policy recommendations it can be useful to exploit the heterogeneity among informal firms. Perhaps the most informal need more business support services while the most sophisticated are the best targets for programs aimed at increasing registration or formal taxation.

# **C. Distinctions: Informal firms, informal activity, and informal employment**

In the ILO’s approach to informality, the distinction has been made between the informal sector and informal employment since the 17th International Conference of Labour Statisticians (ICLS) in 2003. The informal sector refers to all the firms described in section A above, notably by the criteria of size and business records, while informal employment includes the employees of the informal sector, unpaid family workers, workers with precarious status in formal firms, and unpaid domestic workers.

It is also useful to distinguish between informal firms and informal economic activity, since workers can be employed informally or ‘off the books’ by formal firms. As noted above, La Porta and Shleifer (2008) distinguish between informal firms that fail to register with authorities, and those that are registered but understate revenues. Gatti et al. (2011) note that in the Middle East/North Africa, approximately one-fifth of the sales and workers of registered firms are not reported.

The Organisation for Economic Co-Operation and Development (OECD) similarly makes the distinction between the informal economy and the hidden economy, where the latter concerns firms that hide a proportion of their production and that could be either formal or informal.

10