Challenges and opportunities in extending social security to workers in the informal economy

Chapter 1

Module content

More than 60 per cent global workforce is in informal employment, and the large majority of these people face serious decent work gaps, including a lack of access to social protection. These workers cannot count on access to health care and at least a basic level of income security, and thus, do not enjoy their human right to social security. 

As a result, many of these workers are locked in a vicious cycle of vulnerability, poverty and social exclusion, which constitutes an enormous challenge not only for their individual welfare and their enjoyment of human rights (in particular the right to social security), but also for their countries’ economic and social development. This module introduces the topic and identifies barriers to the extension of coverage to workers in the informal economy. 


Key questions

  •  What are the barriers that exclude workers in the informal economy from social security coverage?       
  •  How can the extension of social security coverage to uncovered workers improve their situation in the short and medium term?
  •  How can the extension of social protection coverage contribute to facilitating transition from the informal to the formal economy?


Main barriers to the extension of social protection

  •  Legal exclusion: The legal framework may exclude or constrain the participation of certain categories of workers in social protection schemes. In many countries, legislation links social security coverage to an identifiable employment relationship between an employer and a dependent worker.
  •  Complex and burdensome administrative procedures and services: Complex and burdensome procedures may discourage employers and workers from registering for social protection schemes and thus qualify for benefits. Particularly in rural areas, people may face difficulties in accessing social protection schemes due to a low density of administrative structures and services. 
  •  Benefits not aligned with priorities: Workers and employers may be reluctant to contribute if they are not convinced that the benefits provided will meet their priority needs.
  •  Costs and inadequate financing arrangements: Contributions may not be adapted to the level of earned income, and may be perceived as too high both by employers and workers, particularly if they do not value the benefits of social insurance coverage. Aside from the level of contributions, workers and employers may face difficulties in contributing if financing arrangements and in particular contribution collection arrangements are not adapted to their situation.
  •  Lack of enforcement and control and low compliance: The lack of effective enforcement of the applicable labour and social security regulation can contribute to a low level of compliance. Controls are made difficult by the fact that some activities are concealed or not declared by employers.
  •  Lack of information, awareness and trust: A lack of information and awareness on social security is one of the factors that contribute to weak incentives to register for social security. In addition, a lack of trust in the social security institution can also contribute to a certain reluctance to join a social security scheme.
  •  Lack of representation and organization: It is widely acknowledged that there is a direct link between the workers´ organization capacity and the ease of including them in contributory schemes. The lack of organization of some categories of workers makes them more marginalized and reduce their chances of being represented in open debates.
  •  Lack of coordination and integration with other policy areas: In many countries, there is a high degree of fragmentation within the social protection system, and a lack of coordination between the social protection system and other relevant policy areas, such as enterprise formalization policies, labour market and employment policies, enterprise development policies, macro-economic policies, as well as health, education policies and care policies.


How can the extension of coverage be achieved?

Successful examples of the extension of social security coverage to workers in the informal economy have focused on two broad policy approaches:

1. Extension of coverage through contributory mechanisms: In many countries, the extension of social security to larger groups of the population has followed an approach that could be summarized as “extend social protection through formalization”, focusing mainly on extending existing social protection mechanisms (typically social insurance). 

2. Extension of coverage through non-contributory mechanisms: In other countries, the extension of social security to larger groups of the population was pursued through a large-scale extension of non-contributory social protection mechanisms to previously uncovered groups, independently of their employment status, and largely financed through government revenue stemming from taxation, mineral resource revenue or external grants. 

Many of the countries that have successfully extended social protection coverage have combined the two approaches in integrated two-track social protection strategies that pursue the principle of universal protection, while taking into account the contributory capacities of different groups of the population. There is no-one-size-fits-all solution: Rather countries have combined the two approaches to extend social protection to previously uncovered workers, while progressively providing higher levels of protection to as many people as possible.

A number of middle- and low-income countries have significantly extended social protection coverage to those in the informal economy and facilitated their transition to the formal economy through a two-track approach. This includes, for example, the extension of health protection in Thailand (UHC scheme, formerly 30 baht scheme), Argentina (child and maternity benefits) and South Africa (social insurance and large grants programmes). In fact, both approaches, and their combination in an integrated two-track approach, are reflected in both R202 and R204.


Benefits of extending social protection

  •  Workers benefit from effective access to health care and higher levels of income security, which contribute to reducing poverty, enhancing their well-being, realizing their human rights to social security, health, education, as well as reducing decent work deficits.
  •  Employers benefit from higher labour productivity and competitiveness, for example through improved health status, lower absentee rates, higher employee retention and higher motivation, as well as from pooling financial risks associated with employer liability in the case of work injury, sickness, maternity or dismissal in larger risks pools through social insurance
  •   Extending social protection coverage to workers in the informal economy contributes to facilitating transition from the informal to the formal economy in the short or longer run. The expansion of social insurance mechanisms to larger groups of previously uncovered workers can help to achieve a better financing mix for the social protection system, alleviating pressures on tax-financed social assistance benefits, and ensure sustainability and adequacy of the social protection system in the long run.


Key messages

  •  The persistence – or even growth – of the informal economy calls for urgent attention towards the double challenge of extending protection to workers in the informal economy and facilitating their transition to the formal economy. 
  •   Barriers to social protection coverage for workers in the informal economy include the exclusion from legal coverage; costs and inadequate financing arrangements; complex and burdensome administrative procedures; a lack of enforcement and control; a lack of information, awareness and trust; as well a lack of coordination and representation and organisation.
  •   Given that in many parts of the world women are more likely to find themselves in the informal economy than men, particular attention should be paid to ensuring that extension strategies address promote gender equality and women’s empowerment.
  •   To facilitate transition to formality, the ILO has adopted an integrated strategy promoting decent work, aimed at boosting employment, improving social protection coverage, enhancing social dialogue and realizing human rights at work.