Size and Causes of the Informal Sector of the Nigerian Economy: Evidence From Error Correction Mimic Model

Abstract

This work was motivated mainly by the need to empirically examine the magnitude of economic loss attributed to informality in Nigeria. Specifically, the objective of the study is to examine the size, development, and causes of the informal sector of the Nigerian economy. In recent times, multiple indicators multiple causes (MIMIC) models are applied to time series estimating the size and development of the informal economy for a particular country. However, in order to obtain more accurate estimates about the size, development and causes of the informal economy in Nigeria, this work applied an error correction MIMIC (EMIMIC) model which estimates the cointegration equilibrium relationship and the error correction short run dynamics. The results show that since 1970, the size of the informal economy has hovered between 53.6 – 77.2% of GDP, and that the average size of the informal economy was about 64.6% of GDP. Specifically, the results indicate that informal sector was about three-quarters of GDP in 2010. Furthermore, the results show that unemployment, tax burden, government regulation, and inflation are the most important drivers of informality in Nigeria.

Key words: Informal Sector, Nigerian Economy, Cointegration, Error Correction, MIMIC Model