Chapter 6: How to enforce minimum wages

6.8 Formalization

A new ILO Recommendation

A high incidence of informality is a major challenge for the rights of workers and has a negative impact on the development of sustainable enterprises. It also poses a major challenge for the enforcement of minimum wages.

A new ILO Recommendation 204 concerning the Transition from the Informal to the Formal Economy has been adopted in 2015, and provides guidance to facilitate the transition of workers and economic units to the formal economy, while ensuring the preservation and improvement of existing livelihoods during the transition.

Article 18 considers that:

“Through the transition to the formal economy, Members should progressively extend, in law and practice, to all workers in the informal economy, social security, maternity protection, decent working conditions and a minimum wage”

The Recommendation also calls for a combination of incentives, compliance and enforcement measures, including for example improving access to business services or finance as a result of transition, reducing compliance costs for micro- and small economic units through simplified tax and contribution regimes, as well as more extensive coverage of labour inspection in the informal economy.            

An example in Peru

In Peru, formalization of employment has provided an entry point for extending the reach of the government authorities responsible for compliance. Under an electronic worker registration system (planilla electronica) introduced in 2007, enterprises with three or more workers are required to make monthly social security declarations online. As workers have to register in the system, there is more visibility and enterprises became more aware that they could be subject to inspections. As a result, minimum wage compliance is higher among enterprises that have made online declarations compared to others.

The current focus of the labour inspectorate on enterprises that have not made the declarations can  be expected to have a positive effect on compliance. This system provides the labour inspectorate with better data on workplaces and on the workers they employ, while enterprises are apparently more aware that they could be subject to inspections. Labour inspection action has resulted in some 10,000 workers annually being newly registered over recent years, which is substantial considering the human resource constraints facing the inspectorate.

More work on this topic is currently under way at the ILO.