Facilitating transition from the informal to the formal economy

Concepts, challenges and on-going ILO’s standard setting process

Philippe Marcadent, ChiefInclusive Labour Markets, Labour Relations and Working Conditions Branch - ILO

Structure of the presentation

I. The informal economy: concepts, heterogeneity and diversity of profiles across countries

II. Drivers of informality and processes of formalization

III. The ILO and the informal economy: Some key conclusions from the ILC 2002 General

Discussion on Decent Work and the Informal Economy

The Standard Setting Discussions on Formalization of the informal economy – ILC 2014 & 2015

Some definitions

• Employment in the informal sector – All jobs in informal sector enterprises - “ENTERPRISE-BASED DEFINITION”– 15th ICLS 1993

• Informal economy - All economic activities by workers and economic units that are – in law or in practice – not covered or insufficiently covered by formal arrangements - 90th ILC 2002

• Informal employment – “All informal jobs, whether carried out in formal sector enterprises, informal sector enterprises, or households - “JOB-BASED DEFINITION”– 17th ICLS 2003

Components & heterogeneity of informal employment

Diversity of profiles of the informal economy across countries

In Low-Income Countries (relatively homogeneous profiles)• High preponderance of informal employment (IE): 70% - 95% of total employment

(including agriculture); low share of formal employment in the private sector < 5-10%; • Informal employment mainly in the informal sector;• Preponderance of informal employment in agriculture (rural) and petty trade (urban) -

two areas with very low productivity - high incidence of poverty -> Profile of “survival activities”

• High prevalence of self-employment: 81% of informal employment in sub-Saharan Africa

In Middle-Income Countries (significant variations among countries)• Share of informal employment in total employment, between 30% and 60%;• Share of informal employment outside the informal sector relatively high between 10

and 35% in Latin America (urban), 10 and 25% in Asia.• Share of self-employment in total informal employment – between 50 and 70%

Diversity of profiles of the informal economy across countries (2)

In High-Income Countries• Undeclared employees, employees who lack access to labour benefits and/or

social security (e.g. some atypical forms of work) represent an important manifestation of informal employment.

High prevalence of informal employment in developing countries:

• Estimates of informal employment as a share of non-agricultural employment: 82% South Asia, 66% in sub-Saharan Africa, 65% in East & Southeast Asia (excluding China), 51 % in Latin America, 45 % Middle East & North Africa.

• Share of informal employment even higher if agriculture is included.

Dynamic of informal employment over time

Dynamics of informal employment in the formal and informal sectors of the economy in Argentina

Links between informality and income level per capita

Source: Statistical update on employment in the informal economy, ILO; 2012

Multiple drivers of informality

Broad range of factors - embrace but transcend the world of work, including • Inability of the economy to create enough formal jobs (e.g. low growth, job less growth) • Regulatory framework inadequate or lacking (e.g. exclusion from the legal coverage of groups of

workers, difficulty to comply because of excessive costs and/or complexity); • Weak enforcement systems (e.g. low capacity/coverage of labour/social security inspectorate);• Lack of transparency and accountability of public institutions/lack of trust in public institutions

(e.g. ineffective social security system); • Lack of adequate social benefits to secure income (e.g. survival activities);• Low productivity (e.g. inability to overcome costs of formalization);• Low educated and qualified workforce (e.g. low mobility from informal to formal jobs);• Discrimination (e.g. exclusion of workers from categories of jobs based on race, gender, age);• Attractiveness of informal activities (e.g. evasion of tax/contributions, work family balance); • Lack of voice and representation of workers (e.g domestic workers, home-based workers);• ….

Transversal drivers: influence almost all forms of informality (e.g. inefficient public institutions, inappropriate macroeconomic frameworks)

Specific drivers: specific to a particular type of economic unit (e.g. micro and small enterprises), group of workers (e.g. domestic workers).

Why the formalization of the economy is a desirable goal ?

• For individuals (workers and/or employers)– Improved access to rights at work, social security and decent working conditions;– Better access to representation and national policy dialogue;

• For enterprises– Better access to credit and other productive factors, including through public programmes;– Expended access to markets: participation in public procurements, access to imports and

exports through formal channels;– Reduction of the influence of corruption, greater respect for commercial contracts, etc.

• For society at large – Broadening the tax base (increasing the scope of public action, reducing tax rates, etc.);– Increased equity with regard to the contribution to public budget and to benefits of

redistributive policies;– Increased efficiency and sustainability of preventive & compensative measures to address

risks;– Fairer competition in national and international markets – Greater social cohesion

….But in practice, perceptions might diverge from the above…

Multiple forms of formalization processes

• Formalization processes can take different forms:

– Existing economic units moving towards full formality or becoming fully formal:• e.g. extending the scope of the laws, registration/increased compliance

under commercial acts, with tax, labour and social security authorities).

– Existing jobs moving towards full formality or becoming fully formal. • e.g. extending coverage of labour regulation; extending coverage of

social security; establishment of a contract to reflect an existing employment relationship; registration of unregistered employment relations

– Transitions that result in jobs and economic units being destroyed in the informal economy and others created in the formal economy.

+ Prevention of informalization of formal employment

Broad range of policies formalization/informalization

• Policy that explicitly aim to tackle informality vs. others policies that influence formalization without having formalization as an explicit aim (e.g. growth strategies, education policies);

• Policies that affect transversal drivers of formalization (e.g. strengthening governance of social security system);

• Policies that target specifics categories of economic units (e.g. special multidimensional schemes for MSE), groups of workers (e.g. bringing domestic work under the scope of labour law), type of informality (e.g. undeclared work in formal enterprises);

• Heterogeneity of informal economy & multiple drivers broad range of policies influence formalization/informalization.

ILO’s position on the informal economy (ILC 2002)

• Decent work deficits are the most pronounced in the informal economy; -> Make decent work a reality for all workers, women and men, regardless of the nature of their job;

• Facilitate transition of workers and economic units from the informal economy to the formal economy Priority objective when addressing the informal economy

• Adopt a holistic approach to formalization that encompasses the four pillars of decent work: promotion of rights, employment, social protection and social dialogue

• Eliminate the negative aspects of informality while ensuring that livelihoods and entrepreneurship are not destroyed

• When promoting formalization, necessity to take into account the specificities of each context and the enormous heterogeneity of the informal economy

• Going beyond a dual vision formal - informal sector: interpenetration of formal/informal; grey areas between formal and informal, etc.

Standard Setting on Formalization of the IE (SSFI) – Background

ILC 2014: •Outputs of the Commission:

– Report on the discussions in Committee plenary– The Proposed Conclusions

After ILC 2014 and before ILC 2015:•Report (1) (Brown Report) that includes the first Draft Recommendation – communicated for observations to Member States (available);•Report (2) (“Blue Report”) that provides an overview of replies received, an office commentary and, eventually, a revised draft Recommendation;

ILC 2015:•Second discussion by the Commission;•(Possible) Submission of the proposed instrument to the ILC for adoption

Structure of the Proposed Recommendation as included in the latest ILO’s report (“Brown Report”)

Only a draft at that stage !! •PreambleI.Objective and scope II.Guiding principlesIII.Legal and policy frameworksIV.Employment policies V.Rights and social protectionVI.Incentives, compliance and enforcementVII.Freedom of association, social dialogue and role of employers’ and workers’ organizationsVIII.Data collection and monitoringIX.Implementation and follow-up

Thank You