An Original Contribution to the Welfare Measurement Theory for Economies with Large Informal Sectors

Standard welfare measurement frameworks based on consumption expenditure surveys inadequately capture economic wellbeing in economies where a large share of consumption comes from home production, barter, and informal economy activities, and developing an original welfare measurement theory adapted for such economies constitutes a significant contribution to applied welfare economics and development measurement. This study developed an original Welfare Measurement Theory for Economies with Large Informal Sectors, with primary theoretical development and empirical application in Nigeria. A theory-building methodology combining systematic review of 76 welfare measurement publications from 2018 to 2024, original theoretical analysis of measurement error sources in informal economy contexts, and empirical validation using experimental data from 600 households across Lagos, Kano, and Benue States was employed. Theoretical analysis identified five measurement gaps in standard approaches: non-monetised home production exclusion (estimated at 18 to 24 percent of total household economic activity in surveyed households), informal credit access (not captured as consumption capacity), community insurance value (not reflected in expenditure), seasonal consumption smoothing (obscured by single-visit survey designs), and joint production externalities (generating shared welfare not attributable to individual households). The original Comprehensive Welfare Measure for Informal Economy Contexts integrates these five dimensions into an extended welfare accounting framework, with survey instrument design specifications and price imputation methods for non-monetary flows. Empirical validation confirmed that the extended measure reduced poverty rate estimates by an average of 8.4 percentage points compared to standard consumption-only estimates, with the largest corrections in rural northern states.