DEVELOPMENT OF A HOUSEHOLD WELFARE INDEX UNDER THE CONDITIONS OF THE SHADOW ECONOMY

Abstract

This study examines the measurement of household welfare in economies where informal income plays a significant role. Conventional income-based indicators often underestimate actual living standards because income from informal activities and in-kind transactions is rarely captured in official statistics. The study reviews key theoretical approaches to welfare measurement and proposes a composite Household Welfare Index (HWI) that integrates household consumption, housing conditions, ownership of durable assets, and access to basic services, while incorporating an adjustment for informality based on the gap between reported income and actual consumption. Using data from Uzbekistan for 2021–2025, the findings indicate that the adjusted index yields higher estimates of household welfare and lower poverty rates than conventional income-based measures, particularly among low-income households. The results suggest that composite indicators based on consumption and asset ownership provide a more comprehensive and reliable assessment of household welfare in economies with a substantial informal sector.