Informality and Globalisation

Executive summary

Informality worldwide is a reflection of the social contracts in place

Globally, informal employment remains the norm. Even before the coronavirus disease (COVID-19) crisis, nearly 2 billion workers, representing close to 60% of the world’s employed population, had informal jobs, which typically means they have no social protection, fewer rights at work, and less access to training.

The longstanding structural deficit in formal job creation, coupled with a non-existent or inadequate level of protection for informal workers, remain a major source of vulnerability for those workers and their families, particularly in low- and middle-income countries. Any sustainable development strategy must therefore have formalising the economy and reducing the vulnerability of informal workers at its heart.

But where to start? Informality is highly heterogeneous. Its determinants and manifestations are diverse, complex and context specific. They do not merely result from insufficient growth. They depend on a society’s institutions, norms, culture, and level of economic development, among other factors. Informality is in fact best explained as the reflection of the social contract of any given society.

A social contract is the implicit agreement between citizens, the state, workers, and enterprises on how to distribute power and resources in the pursuit of common goals such as equity, fairness, freedom, security, and eventually social justice. Social contracts differ across countries and change over time. Where legal frameworks, institutions and procedures fail to deliver on that agreement, whether as a result of poor design or implementation, informality levels tend to be high and in turn associated with poor social outcomes (e.g. in terms of access to healthcare and education prospects), which reinforces the vulnerability of informal workers and their family members. In many parts of the world, particularly in low- and middle-income countries, the COVID-19 crisis has considerably eroded the social contracts, which had already been weakened by decades of globalisation and rapid technological change.

Globalisation and the COVID-19 crisis have contributed to eroding social contracts, especially in poorer countries

While greater integration in the global economy can be a powerful determinant of economic growth, productivity and efficiency, its impact on formal job creation in much of the developing world thus far has been ambiguous. Greater integration with the world economy has been associated with lower levels of informal employment in upper-middle-income and high-income countries, but not in lower-middle-income and low-income countries. A comprehensive analysis of recent trends shows the following:

• Trade liberalisation has an asymmetrical impact on informal employment: increased export opportunities tend to boost formal employment opportunities, whereas import liberalisation can lead to formal employment losses in sectors, industries, and regions most exposed, reallocating labour to where informality is prominent, and raising the general level of informal employment.

• The expansion of global value chains (GVCs) has created additional, complex challenges. Informality within GVCs depends on the types of linkages (backward or forward), the way production is organised, governance modes, possibilities of upgrading within and across GVCs, purchasing practices, and activity sectors. GVCs in agriculture and in garment manufacturing have some of the largest informal employment footprints.

• New forms of employment, largely spurred by changes in technology, have created more challenges for social contracts. In particular, although digital labour platforms offer new opportunities for formalisation – by providing better traceability, transparency and accountability in economic activities – they remain largely associated with high shares of informality.

In that context, the COVID-19 crisis’ staggering impact led to a further erosion of social contracts: lockdown measures, curfews, travel restrictions and international trade disruptions resulted in massive job destruction, particularly for women and in sectors with higher-than-average rates of informality. At the height of the crisis, the number of informal jobs plunged by 20%, about twice the impact on formal employment. As the world recovers from the COVID‑19 pandemic, informal employment is reverting to its pre-COVID-19 crisis levels, led by the return of informal workers to their activities; new entrants into the informal sector, including workers previously outside the labour force (casual, own-account or unpaid family workers); and the informalisation of previously formal jobs.

Policy recommendations to reinvigorate social contracts to tackle informality

As the social contract approach reveals, reducing informality and the vulnerability of informal workers and their household members requires more than boosting economic growth or developing one-off policy responses. A comprehensive effort to reinvigorate social contracts is key to addressing the challenges posed by globalisation and rapid technological change, thus rendering societies more resilient to current and future crises. It requires actions on many fronts and from a wide range of stakeholders:

Governments should:

• expand the coverage of formal legal frameworks and social protection; ensure sufficient levels of protection; and improve compliance by making them relevant and fair to informal workers

• improve access to, and quality of the public services most valued by all citizens, including informal workers and their family members, such as healthcare, education, and skill development

• enable the development of formal employment through co-ordinated policies on labour, social protection and skills, but also by supporting innovation, access to credit, and labour mobility

• accompany GVCs development by policies regulating sub-contracting; promote voluntary and create legally binding due diligence standards, such as the ones set in the OECD Guidelines for Multinational Enterprises and OECD Due Diligence Guidance for Responsible Business Conduct

• bring digital labour platform work within the scope of existing regulations; encourage the formalisation of self-employment; ensure that platforms pay their share of taxes and social security contributions; enforce regulations to categorise workers as employees where appropriate; modernise laws to address the platforms’ modes of work; and leverage technologies to formalise.

Multinational enterprises should improve their responsible business conduct in order to promote formal employment in subsidiaries and among suppliers. The lead firms should strive to ensure that the suppliers and sub-contractors disclose the details of sub-contracting arrangements, honour existing contracts, use written contracts, and comply with national labour and social security regulations.

Finally, informal worker associations, civil society organisations, as well as consumers, have an important role to play in helping to ensure that integration into the global economy is beneficial for all. They should be given a voice and included into the development of policies that concern them.