Adapting inspection mechanisms and strengthening incentives for formalization

Chapter 7

Module content

Compliance and incentives have an important role to play in promoting the extension of social security to workers in the informal economy. Ensuring the uniform application and enforcement of the law not only guarantees the protection of workers, but also contributes to creating an enabling environment for employers, in particular with regard to creating a level playing field in which all enterprises comply with the applicable rules.

This module discusses the barriers related to weak compliance and incentives and highlights country experiences in adapting inspection mechanisms and strenghtening incentives for formalization.


Key questions

  •  How can labour and social security inspections be better adapted to ensure social security coverage for workers in the informal economy?
  •  What are the challenges regarding labour and social security inspections in the informal economy?
  •  How can labour and social security inspection mechanisms be introduced or enforced to reach workers and employers in the informal economy?


Main barriers

  •  Limited inspection capacities: Most workers in sectors prone to high levels of informality are particularly vulnerable and in need of protection, but labour and social security inspectorates often lack the capacities to effectively intervene and face resource constraints (e.g. for training of sufficient inspectors).
  •  Lack of legal provisions and effective sanctioning mechanisms: Legal provisions and effective warning and sanctioning mechanisms are often lacking or not effective.
  •  Low incentives for enterprises to formalize: Limited ability to intervene and enforce national laws means that the vulnerable situation of informal economy workers cannot be properly addressed which may further encourage businesses to engage in informal employment practices, to the extent that they believe that the probability of being detected and inspected is very low.
  •  Lack of awareness and information: Non-compliance is often associated with a lack of awareness and educational activities regarding existing legislation.


Possible solutions

Better adapting labour and social security inspection mechanisms to effectively reach workers in the informal economy
  •   Ensuring adequate legal frameworks for labour and social security inspection, for example by reducing or removing thresholds regarding the size of the enterprise to allow for the inspection of small and micro-enterprises and adapting regulations with regard to inspection of private households as workplaces of domestic workers and homeworkers.
  •  Ensuring adequate resources for the monitoring of compliance, by increasing the number of labour and social security inspectors and better reaching remote areas.
  •  Improving efficiency of inspections by using integrated solutions, enhancing coordination mechanisms and harnessing digital technology.
  •  Applying meaningful and adequate sanctions: considering financial penalties (fines) in conjunction with information and awareness raising or developing a graduated system of penalties to avoid that the most vulnerable are not adversely affected.
Raising awareness and developing partnerships
  •  Raising awareness and tackling information deficits, by incorporating awareness-raising into TVET training curricula, including vocational training and entrepreneurship programmes.
  •  Ensuring effective grievance mechanisms for both employers and workers.
  •  Developing partnerships with stakeholders with a strong community outreach, including local governments, workers’ or employers organisations.
Strengthening incentives for formalization: harnessing linkages to other policy areas
  •  Building incentives into public procurement policies, by requiring proof of compliance as a condition for public tenders.
  •  Building incentives into government business services and enterprise policies, by requiring compliance with social security regulations as a precondition for access to government credit and business services or support for technology.
  •  Facilitating compliance through simplified contribution and tax payment mechanisms for micro and small enterprises and own-account workers.
  •  Providing incentives for the registration of domestic workers through possibility of tax deduction for employing households.
  •  Strengthening links to active labour market policies, e.g. through temporary wage and contribution subsidies for marginalized groups of workers, ensuring social security coverage for participants in public employment programmes, or additional measures to facilitate the transition from education or public employment programmes into formal employment.




Key messages

  •  Adapting the applicable legal framework, enhancing the human and financial resources available for inspection, and taking account of the specific circumstances and needs of employers and workers, particularly in sectors with high levels of informal employment, can significantly improve labour and social security inspections.
  •  To ensure that all enterprises and workers can be effectively reached, the extension of inspection services requires investments both in the number of staff and their equipment, as well as in their qualifications.
  •  Adequate mechanisms to disseminate information and raise awareness about the importance of social security among workers and employers, and their respective obligations with respect to social security are essential for ensuring compliance.
  •  IT solutions and a good coordination between the different institutions, organizations and agencies (at different levels of government) involved, can support the implementation of effective labour inspection mechanisms.
  •   An adequate balance needs to be found between sanctions and incentives to promote a sustainable and equitable approach to ensuring compliance and the uniform application of the law.
  •   Well-designed linkages to other policy areas should be harnessed to encourage compliance and the extension of social protection coverage.