Embedding Informality into Sustainable Development Indices for Europe

This paper proposes a new sustainable development index incorporating informality measures for 36 European countries from 2010 to 2022. This index is estimated via a combination of national accounting, macroestimates of informality, and survey data through partial least squares (PLS) regression, drawing on Eurostat, MIMIC method, and Eurobarometer data. The index is assessed within three specifications: a baseline using standard sustainable development indicators and two alternative specifications that include the informal economy and informal employment. The findings indicate that countries with larger informal economy tend to perform comparatively weaker in sustainable development metrics than those with smaller informal economy do, underscoring the importance of policies that address informality to achieve inclusive and comprehensive sustainable development.