Danquah et al (2019) and classify them as formal. Since they employ paid labor, we assume that they organize their enterprises more like a firm and less like an extension of their households.<sup>26</sup> We do not differentiate between high- and low-educated employers due to a small sample size for many of our variables for analysis.<sup>27</sup> Because we use proxies of the formality status of self-employed workers, we propose a lower and an upper bound of urban informal employment. The lower bound includes unpaid workers, informal wage employees and the low-educated self-employed. The upper bound also classifies the high-educated self-employed as informal. While we estimate the size of the informal sector using the upper and lower bound, we limit the rest of our analysis to the lower bound definition.

# **2.2 Defining Firm Types to Classify Informal Entrepreneurs**

The IES is limited to informal firms that are not registered with authorities, so we only consider heterogeneity within the informal sector. Since the sample is only informal firms, we do not need to search for a variable to proxy informality. Instead, to draw a parallel with the worker analysis, we create three sub-groups of informal sector firms using employer status and education of the enterprise owner. We identify the self-employed as those enterprises that employ no paid workers other than the owner. They may employ unpaid workers, who are often family members.<sup>28</sup> To proxy the “upper” and “lower” tier of informal self-employed (Fields 2005), we further divide self-employed businesses owners according to their level of education, similar to the procedure used to define employment types using the GMD. Low-educated self-employed are firms where the owners have up to secondary level of education while high-educated self-employed are owners with vocational training or tertiary education.<sup>29</sup> Finally, the third group is employers, namely firms that employ at least one paid worker other than him or herself.<sup>30</sup> The owner of each firm type is assigned the corresponding employment type, namely low-educated self-employed, high-educated selfemployed, and employer.

> 26 The literature finds that very few self-employed establishments grow into microenterprises (Loening and Imru, 2009; Kinda and Loening, 2010; Grimm et al., 2012; Fajnzylber et al., 2006; Schoar, 2009; La Porta and Schleifer, 2014). Hence this category is mostly comprised of formal firms.

> 27 We find that 41 percent of employers in our sample have at least completed secondary school and 40 percent are in professional occupations, double the rate of HE-SE who are in professional occupations.

> 28 The IES of Zambia and Zimbabwe contain information on the number of workers who are family members. The correlation between the number of unpaid workers and the number of family members who work at the firms is 0.66 and 0.58 respectively.

> 29 We do not use incomplete secondary level as the threshold to define low educational level, as with the workers classification, due to data limitation.

> 30 Employers in the IES are more educated than those in the GMD. About 85 percent of IES employers have up to a secondary education, as compared to 41 percent of GMD employers.

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