Informal Labor Markets: Extending the Reach of Social Protection

1. The Problem

Informal work is the default for the majority of workers in low- and middle-income countries (LMICs). Globally, more than 2 billion people (60% of the workforce) are in informal employment, with rates as high as 90% in Sub-Saharan Africa and South Asia. In Vietnam, over 56% of workers are informal, with limited or no access to pensions, unemployment insurance, or health protection.

This exclusion undermines both equity and efficiency. Informal workers are often the poorest and most vulnerable, yet social protection systems — designed around formal wage labor — systematically leave them behind.

2. Evidence and Critical Insights

• Coverage gaps are structural. Traditional contributory schemes depend on payroll taxes, automatically excluding informal workers.

• Fragmented interventions fail. Short-lived pilot programs without portability or scalability create patchy coverage.

• Equity paradox. Those who need protection most (informal workers) are least likely to be covered.

Critical insight: Extending social protection to informal workers requires rethinking financing and delivery models — not simply “formalizing” them overnight, but designing mechanisms that match their income patterns, risks, and realities.

3. Case Studies

• India’s e-Shram Portal (2021): National database registering 250M informal workers; allows access to targeted benefits. Challenge: linking registration to sustained contributions and service delivery.

• Kenya’s Mbao Pension Plan: Workers contribute via mobile money (as little as $0.20/day). Uptake is promising, though scaling requires trust and incentives.

• Uruguay: Extended social insurance by subsidizing employer contributions for domestic workers, reducing informality by 20%.

4. Policy Options

1. Micro-Contribution Models

   • Flexible payment schedules (daily, weekly via mobile money).

   • Matched government co-contributions for low-income groups.

2. Hybrid Financing

   • Subsidize part of contributions from general revenue while encouraging self-contributions.

   • Cross-subsidization: formal sector levies funding minimum protections for informal.

3. Digital IDs & Registries

   • Build robust registries (like e-Shram) linked to mobile payments, enabling verification, portability, and benefits delivery.

4. Sector-Specific Pathways

   • Tailor interventions for domestic workers, street vendors, gig workers.

   • Work with unions/associations for outreach and compliance.

5. Risks & Trade-offs

• Low trust in government schemes: Mitigate via transparent governance, rapid benefit delivery, and user-friendly digital interfaces.

• Fiscal sustainability: Subsidies can strain budgets; phased rollouts and blended financing (donor + state) mitigate risks.

• Inclusion vs complexity: Too many schemes confuse workers; simplify design into universal floors + contributory add-ons.

6. Conclusion

Expanding social protection to informal workers is not optional; it is the only way to achieve universal coverage. With smart financing, digital tools, and political will, governments can finally close the protection gap that defines labor markets in the Global South.

References

• ILO (2018). Women and Men in the Informal Economy: A Statistical Picture.

• World Bank (2021). Social Protection and Jobs Global Report.

• Robalino & Weber (2013). Designing Social Protection for Informal Workers.

• India Ministry of Labour (2022). e-Shram Data Insights.