Social & Legal Protection for the Informal Workforce

In development policy circles, two types of state protection for the informal workforce – especially the working poor – are actively under consideration: social protection and legal rights.

Social Protection

Social protection is high on the development policy agenda, especially in the aftermath of the global economic crisis, which undermined the livelihoods of many working poor in the informal economy. Despite the commonly held notion that the informal economy provides a “cushion” during crises, informal enterprises and workers are affected in many of the same ways as formal firms and workers but have no cushion to fall back on (Horn 2009, 2010).

Compared to the formal workforce, the informal workforce is more exposed to - and less protected against - common core contingencies such as illness, disability, and property loss. As self-employed and non-standard employees, they are also particularly vulnerable to market fluctuations, intensified by market liberalization and globalization. On a daily basis, they struggle with the shocks and stresses of working in hazardous conditions; without secure assets, basic infrastructure, and social services; and without rights and inclusion as workers or citizens. 

“Social protection” is used here in a broad sense to refer to social insurance, social assistance, social safety nets, and various other schemes: see Typology of Social Protection Programmes. In most countries, only a tiny share of the informal workforce is covered by social insurance or social security. What they do receive is typically through piecemeal social assistance schemes and post-crisis safety nets. To address the range of risks, the design of social protection needs to shift away from piecemeal and ex post interventions towards more systemic and ex ante responses (Kabeer and Cook 2010).

Social protection today is at an historical juncture. Should societies turn to the earlier welfare state model, which only covered workers in formal jobs? Or should new models be developed to cover all workers, both formal and informal? What is clear is that state social spending is necessary to reduce poverty and inequality and also as an investment in the future of countries, their workforces, and their economies.

There is a growing consensus in development policy circles on the need to …

  • prioritize extension of social protection coverage to excluded groups
  • adapt both social and private insurance to incorporate informal workers by providing fiscal and other incentives for their affiliation
  • coordinate diverse forms of protection (social and private)

More specifically, there is a growing consensus around the need for universal pensions and health coverage. Some observers make the case for universal pensions and health coverage on economic principles, including the argument that de-linking social protection from the labour market reduces potential distortions in the labour market. Others make the case based on principles of social solidarity and state responsibility and as a right of citizenship.

But the differences between the advocates for universal coverage go beyond the principles evoked. There is little agreement on the appropriate role of government, the degree of government responsibility and public expenditure, the mix of private versus public insurance and provision. Those who argue for universality on social-solidarity principles are concerned that most poor individuals and households cannot afford to subscribe to private insurance or to pay for private care. They are also concerned that the state should raise and redistribute revenue for social policies in a fair and progressive manner; and that employers should contribute directly to at least some forms of social protection for their workers or those who produce goods or perform services for them.

Whether to further reduce or simply eliminate contributions by employers is not just a matter of social solidarity but also has practical implications. To begin with, in the absence of universal pension and health coverage, a decrease or elimination of the employer contribution is usually associated with an increase in the worker contribution, leading to disincentives for compliance, fiscal costs, or both (Mesa-Lago 2008). Also, even if universal pension and health coverage were achieved, there is scope for considering the contributions of employers for targeted protections to cover other contingences. Other forms of targeted social protections that could be regulated by the state and financed by employers on an individual firm or industry-wide basis include:

  • Paid Sick Leave
  • Unemployment Insurance and Disability Insurance
  • Occupational Health and Safety

In India, worker welfare funds have been established as one way to provide a range of social protection benefits – education scholarships; maternity benefits; unemployment, disability, or retirement compensation; pensions; and more. These funds are targeted for informal workers in specific industries and financed through a cess or tax on the output of the industries: see Worker Welfare Schemes in India.

Finally, the global economic crisis made it clear that ex post safety nets are inadequate responses to generalized risks and that broad-based social protection systems that offer ex ante protection against systemic generalized risks – as well as common core contingencies – are called for. To protect the poor, including the working poor in the informal economy, there is a need to reassess social protection as a system – not as individual schemes - looking for gaps in what crises/risks are covered as well as who is covered (Kabeer and Cook 2010; Kanbur 2009).

Legal Protection

There is also a growing commitment in development policy circles to extending legal protection to the working poor in the informal economy. In its final report entitled Making the Law Work for All, the Commission for Legal Empowerment of the Poor prioritized three areas of legal rights and empowerment for the poor in general and the working poor in the informal economy in particular: property rights, labour rights, and business rights. The Commission argued that without property rights, the intrinsic economic power of the property belonging to the poor remains untapped (de Soto 2000). Without labour rights, the working poor lack worker benefits and suffer unsafe working conditions. And, without legally recognized businesses, the working poor cannot access credit or markets, enforce contracts, or insure their businesses against bankruptcy. The Commission also highlighted that the poor need access to justice and, more generally, the rule of law: see Legal Empowerment of the Poor.

To promote and secure the legal rights of the working poor, appropriate legal frameworks are needed. Historically around the world, the “employment relationship” between a recognized employer and employee has represented the cornerstone – the central legal concept – around which labour law has sought to recognize and protect the rights of workers. But this concept excludes the self-employed and the increasing numbers of wage workers whose employment relationship is disguised, ambiguous, or not clearly defined. As a result, large and increasing numbers of workers worldwide (60-90% of all workers in developing countries) are not protected under labour law. Clearly, the existing labour law regime in most countries needs to be reformed to cover the range of employment relationships in today’s global economy: from standard employees to non-standard employees to casual day labourers to various categories of contract workers to sub-contracted workers.

Moreover, most informal enterprises are not covered or protected under existing commercial or business laws. Formal commercial transactions governed by contract law stipulate who controls what and who bears what risks. But the unwritten, often implicit, contracts governing most informal commercial transactions do not make it clear who controls what and who bears what risks. The uncertainty is compounded when an informal operator is not fully independent. Many informal operators depend on others for some of the functions associated with firms: many buy raw materials on credit from a single supplier; other sells goods they produce to an intermediary; and still others sell goods (supplied by others) on commission. To be relevant in today’s economic world, the scope of commercial law needs to be widened to cover the semi-dependent and linked commercial transactions common within the informal economy and between informal and formal firms. Alternatively, some of the highly-dependent commercial relationships – which amount to “disguised wage employment” – might be re-classified as employment relationships and brought under the jurisdiction of labour law: such as sub-contracted production in value chains. For a discussion of commercial laws and informal enterprises in Africa, (see Dickerson). For a discussion of law and own account operators, see Sankaran 2007.

Further, many informal enterprises and activities are governed by sector-specific regulations.

Consider the urban informal workforce. Urban planners and local governments set rules – and, also, determine norms and practices - which govern who can do what, and where, in cities. Often the rules are framed or interpreted in ways that discourage – if not outright ban – informal activities. Zoning laws which do not allow commercial activities, even by residents, in residential areas discourage or ban home-based production: see Nohn 2011 for a case study of mixed-use zoning regulations. Rules, norms, or practices regarding the use of public space impact street vendors (who are often denied the right to vend in central business districts) and waste pickers (who are increasingly denied the right to collect waste from specified locations). Licensing systems for street vendors stipulate whether there should be quotas for street vendors in certain locations and whether there should be single flat fees, progressive fees based on scale of business, or mixed fees based on the site location and the category of product sold. Rules, norms, and practices of solid waste management govern whether and where waste pickers can collect waste for recycling: from the curb side, public spaces, dumpsters, or dump sites. The rules, norms, and practice of government tendering for solid waste management services either ban, restrict, or encourage cooperatives of waste pickers from bidding – and from winning bids.

For more details on how specific laws and regulations affect specific sectors of informal workers – as well as their legal demands and struggles – see the Informal Economy/Occupational Groups pages and the Law & Informality microsite on this website, and the website of the Inclusive Cities for the Working Poor project. And for a global review of the significance and permanence of street vending and the ambivalent attitudes displayed to it by governments, see Street Vending and Public Policy: A Global Review (Bromley 2000).

For a more detailed discussion of why - and how - labour laws and commercial/business regulations might be reformed to better protect informal wage workers and informal enterprises, see Labour Law and Informal Workers and Commercial Law and Informal Enterprises.