Informal economy

The informal economy refers to all economic activities by workers and economic units that are – in law or in practice – not covered or insufficiently covered by formal arrangements. It thrives mostly in a context of high unemployment, underemployment, poverty, gender inequality and precarious work. The situation is aggravated in conflict-affected and fragile situations where there is no other alternative than operating in the informal economy for securing livelihoods. In PROSPECTS’ areas of interventions, the effects of refugee inflows are largely concentrated in the informal economy.

Beyond a high incidence of poverty, informal economies are also characterized by severe decent work deficits. Low quality employment, inadequate social protection, poor governance and low productivity are some of the obstacles that workers and enterprises face when caught in the informality trap. Without formalization, decent work for all and equity in society will remain an illusion.

The transition to formality is an important component PROSPECTS’ decent work strategy to improve working and living conditions, to strengthen the recovery process and to consolidate peace and social cohesion. For the ILO, fundamental rights at work are as relevant in the informal as they are in the formal economy: hence the concern to create quality jobs and not just any job. Addressing informality is both part of the ILO’s DNA and a key objective of the PROSPECTS partnership.

Formalization of the economy is a complex and long-term process that requires a combination of interventions on laws and regulations with those aiming to foster productivity and the ability to generate wealth. PROSPECTS aims to support refugee, IDP and host community workers and their employers on the path to achieving improved working and living conditions. The reduction of decent work deficits is the first step towards progressive formalisation. Foundations will be laid to support more sustainable outcomes.

PROSPECTS will work on
  • the improvement of labour market governance supporting transition to and entry into employment and formalization (labour market governance);
  • the greater capacity to protect labour rights and promote safe and secure working environments for all workers (working conditions);
  • the strengthening of the legal, policy and regulatory environment for protection, social protection, and inclusion (Legal position and protection);
  • the capacities and the conditions for workers and economic units to transition gradually to formality.

How exactly is PROSPECTS going to support activities in the informal sector?

Improving labour legislation

Informal work can be treated as a legal problem. It can be work performed outside the law by workers who should be protected but are not. It could also be that informal workers are not covered by existing labour and social protection legislation in a country where the law excludes some particular groups of workers and enterprises based on criteria such as the existence of an employment relationship, the size of enterprise or the sector in which they operate.

Clarification of the existing labour legislation may also be necessary in situations where part of the workforce is intentionally unregistered in order to avoid payment of benefits. This may be particularly true of employers – whether formal or informal – who hire undocumented workers or refugees.

Measures are needed to ensure that all those whom labour and social security legislation is meant to protect are able to make use of the law, including refugees.

Assessments of policy, legislative and regulatory environments will be made to identify the gaps and deficits to be addressed.

Focusing on legal literacy

It is crucial that informal workers and entrepreneurs know what their rights are and how to claim these rights and seek recourse in case of violations.

It includes information and advocacy tools to enhance the legal literacy of informal workers and entrepreneurs and to strengthen the institutions and processes for social dialogue involving workers in the informal economy.

Social partners (workers’ and employers’ organizations) can play a key in this context, which could be further supported through capacity-building and collaboration with institutions that may organise workers and/or entrepreneurs in the informal economy.

Making informal workers’ voices heard

An important measure to help informal workers improve their legal literacy is the organization of informal workers and entrepreneurs to strengthen their “voice”, for example, in collaboration with trade unions, employers’ organizations and cooperatives.

Workers 'and employers' organizations can play an important role. They allow workers to raise their concerns, express their claims and extend their outreach, beyond the informal sector.

Unions may develop different strategy to organize workers in the informal economy. They include promoting the participation and representation of women in trade unions (as they represent a majority of workers in the informal economy) through structures that accommodate their dual responsibilities of work and family. Unions can also run awareness raising campaigns to inform informal workers about their rights. They sometimes develop services ranging from legal assistance to microcredit and health care.

Strengthening labour administration and enforcing labour rights

A major factor behind labour rights deficits in the informal economy is the constraints of labour administration, including labour inspection services.
However, there are innovative ways of involving labour inspection “auxiliaries”, trade unions, cooperatives, civil society organizations, agricultural extension officers, municipal licensing inspectors and even more aware informal workers themselves.

  • Because of the precarious nature of their employment, informal workers may be too frightened to seek justice when their rights are violated.
  • They may also not be able to enforce their employment rights because of lack of access to justice.
  • They may not be able to afford legal services – in which case the provision of free or heavily subsidized legal aid services by the State would be very important.
  • The system of labour courts and industrial tribunals, especially in PROSPECTS countries, may be very weak, may lack resources and may be corrupt.
Strengthening the labour administration and justice systems and promoting good governance would go a long way to achieving decent work.
Protecting workers by improving commercial and business regulation

Whether labour and social security legislation is implemented and the rights of workers observed will depend also on whether the enterprises they work in are registered and observe the regulations governing business activities.

When enterprises are not legally registered and regulated, neither are their workers, who then do not have access to labour labour and social security benefits (such as sick pay, annual and maternity leave, workers’ compensation for accidents or death, pension and health insurance). Therefore, PROSPECTS’ recognize the critical need to consider informal enterprises and their transition to formality as a key element of the overall strategy to address informality.

Most of the enterprises are and remain informal not by choice or not simply to avoid observing labour legislation or paying taxes. In order to raise the quality of employment in these enterprises, the first essential action to take is to:

  • Reduce the costs, provide incentives and remove barriers involved in being regulated;
  • Reduce the transaction costs;
  • Enhance the benefits of registration and legalization and of remaining formal. 
Strengthening labour market access mechanisms

In some countries, refugees are obliged to apply for work permits in the same way as foreign/migrant workers to be able to work in the formal economy.

  • The application processes are either poorly communicated to refugee populations who therefore lack knowledge and awareness to be able to complete these,
  • or the bureaucracy can be cumbersome or complicated to the extent that refugees might become discouraged to pursue applications.
  • In other contexts, there might be extensive limitations on the occupations, professions or sectors which might be open to refugees, for example, prohibiting them in applying for jobs in the health or scientific sectors or for management positions, which may create further barriers or disincentives.
These sometimes-difficult access mechanisms are often the reason why many refugee workers end up in the informal economy. Evidence from other countries indicates that being in possession of a work permit is not necessarily an indicator of decent work conditions. Refugees remain vulnerable to exploitation even in possession of a work permit. Hence the importance of a multi-dimensional approach to addressing informality, including:
  • raising awareness around fundamental rights at work;
  • strengthening the voice of vulnerable workers through representation;
  • advocacy to support access to a wider set of occupations and sectors that recognize the qualifications and competences of refugee workers;
  • reducing the administrative and bureaucratic burden of work permit systems. 
Tackling the social protection deficit

Unfortunately, the lack of social protection is a key defining characteristic of the informal economy, which is also a critical aspect of social exclusion. However, actors of the informal economy are also the most in need of social protection, not only because of job and income insecurity but also because of the greater likelihood of being exposed to serious OSH hazards.

Exclusion from social protection also has important gender dimensions. The majority of women workers are in the informal economy and their lack of social protection is another indication of their social exclusion. Furthermore, as caregivers, more and more women have heavier burdens and fewer means to care for themselves and their families.

There is growing recognition of the need to broaden the concept of social security to take account of the realities of the informal economy. Strengthening and adapting social insurance schemes will be key to protecting workers in new forms of employment in order to offer broader scope and higher levels of protection.
A broader concept of social protection is needed: one that covers not only social security but also non-statutory schemes (including various types of new contributory schemes, mutual benefit societies and grassroots and community schemes) for workers in the informal economy.

The two-track approach to extending social protection, as outlined in the ILO Social Protection Floors Recommendation, 2012 (No. 202), underlines the importance of effectively coordinated schemes that combine contributory and non-contributory mechanisms in order to close coverage gaps, thereby ensuring a social protection floor and more adequate and comprehensive social protection.

Specific mechanisms will be developed to progressively extend social security coverage to the informal workers. A universal, national, government led approach to delivering social security to informal economy workers is needed.

Promoting decent job creation through Employment Intensive Investment Programmes (EIIP)

Targeted employment-intensive investments can also facilitate the transition to formality. These programmes promote decent work standards, including appropriate employment contracts, social protection, OSH standards and protective equipment and clothing, appropriate wage levels, gender equality, non-discrimination, decent working hours, between other decent work elements.

This approach also links to local economic development policies and programmes, mainstreaming employment objectives in public investment policy in infrastructure and construction, and has shown that it is possible to simultaneously create jobs and introduce decent working conditions, importantly through substituting labour-intensive, locally produced techniques and technologies for imported capital-intensive machinery.
Focusing on construction and maintenance of rural roads, the approach can also be applied to urban informal settlement upgrading. Conditions of success include :

  • a training process covering management and technical qualifications, choice of technology, labour issues and working conditions;
  • adaptation of the contract system so as to allow access of labour-based contractors to public tender, and also to ensure social protection of the workers; and
  • action at the policy level to shift an increasing share of public investment resources towards employment-generating and poverty-reducing programmes.


Promoting access to social finance

An innovative means of promoting formalisation is through microfinance institutions. Microfinance loans, deposits and other service contracts contain elements of the formal economy, without being as sophisticated as mainstream banking services.

Together with microfinance institutions (MFIs) in various countries, the ILO has piloted initiatives to test the impact of formalisation and can draw upon these in the context of PROSPECTS.

Designing local economic policies for better quality job creation

In order to create sustainable quality jobs, it is necessary but not sufficient to provide training, develop entrepreneurial capacities and expand the reach of social finance institutions. Economic development policies are essential, including local and sub-regional economic development policies that explicitly address the issues and constraints of the informal economy.

Local economic development (LED) policies are especially relevant for the informal economy since they are based on a bottom-up participatory process of dialogue and public-private partnerships. They usually focus on employment creation through MSME development and can thus help workers in the informal economy to organise themselves, facilitate their access to skills training, business services and finance and improve their living and working environment. LED policies can also be linked to area-based schemes of micro-insurance for those in the informal economy. Workers in the informal economy can also benefit from employment-intensive infrastructure works which use the well-tested ILO approach to infrastructure development, EIIP.