The informal sector remains one of the most persistent—and elusive—features of many economies. Policymakers and analysts routinely debate its size, its contribution to livelihoods, and the best path to formalization. Yet the tools for measurement are often limited, particularly in contexts where economic activity escapes official registration. The International Standard Industrial Classification (ISIC) framework, typically used to organize the formal economy, can nonetheless play a crucial role in bringing greater precision and comparability to the analysis of informal sector transitions.
At the heart of the challenge is the absence of administrative records for unregistered enterprises. These microenterprises—street vendors, home-based manufacturers, informal transport operators—operate largely outside the reach of business registries and tax authorities. Still, their activities often mirror those of registered firms in both function and output. This parallel makes it possible to approximate the size and evolution of the informal sector through indirect means, using ISIC codes as reference points.
The process begins with household survey data. Many national statistical offices and international organizations conduct regular surveys that capture information on work status, enterprise activity, income sources, and sectoral affiliation—even among those not formally registered. By asking respondents to describe the nature of their business or economic activity, and then mapping these responses to the closest ISIC code, analysts can assemble a proxy distribution of informal economic activity by sector.
Street vending, for example, though rarely licensed, can often be mapped to ISIC 4791—retail sale via stalls and markets. Cottage manufacturing, including home-based production of jewelry, textiles, or handicrafts, aligns with ISIC 3210. The resulting sectoral breakdown creates a framework for comparison: the structure of informal activity, by ISIC proxy, can be set alongside the structure of the formal sector as captured in business registers.
Estimating the size of the unregistered microenterprise population involves several steps. First, compare the total number of enterprises or workers reported in the household survey under each ISIC proxy with the count of registered firms in the same sector. The difference provides an estimate of the “missing middle”—economic activity present in practice but not on the books. In some settings, the informal share may exceed the formal by several times, especially in labor-intensive or low-barrier sectors.
Next, use supplemental information from surveys—such as turnover, employment, or investment—to model the scale and dynamics of informal activity. Average revenues, inputs purchased, or workers engaged can be combined with enterprise counts to estimate the informal sector’s contribution to output and jobs. Where possible, stratify results by gender, location, or age to highlight patterns of inclusion or exclusion.
Tracking transitions is more difficult but not impossible. Panel surveys, where available, allow analysts to follow individual enterprises or households over time, observing shifts from informality to formality (or vice versa). Reasons for transition—access to credit, regulatory changes, enforcement campaigns, or changes in demand—can be inferred from survey responses, providing context for policy design.
The ISIC framework also aids in international comparison. By standardizing the classification of both formal and informal activity, analysts can benchmark the extent and composition of informality across countries or regions. This comparability is particularly valuable for development agencies, regional organizations, and governments seeking to learn from successful formalization strategies elsewhere.
Limitations are inevitable. Survey responses may be imprecise, and not all informal activity maps neatly onto existing ISIC codes. Some sectors, especially those defined by hybrid or gig models, may fall between categories. Moreover, the incentives to misreport or conceal informal activity remain high in many contexts, potentially skewing results. Still, the discipline of linking household and enterprise data through the ISIC structure brings greater transparency and rigor to an area that often resists quantification.
Ultimately, the value of this approach lies in its ability to clarify rather than oversimplify. By anchoring informal sector analysis in the same language used for the formal economy, policymakers can better understand transitions, target interventions, and evaluate outcomes. As economies evolve and the boundaries between formality and informality shift, the need for such clarity will only become more acute.