Informality is not a new phenomenon, but in face of the multiplication of domestic and global shocks the vulnerabilities associated with informal work and businesses today are an undisputable hurdle to more inclusive and equal societies and economic resilience.
Certain policy measures implemented with the intention of addressing the consequences of crises on vulnerable groups in the society – groups that include informal workers and businesses – can in fact unintentionally induce more informality, in a vicious cycle that makes formalisation and resilience even more difficult to reach. Understanding the expected impact on informality of diverse economic and social policy interventions can help governments to identify measures that support their key objectives (e.g. supporting poverty and firms in financial distress or expanding social protection) without altering motivations and incentives to formalisation.
To that aim, this report outlines a Framework for assessing the impact of economic and social policies on informality. The Framework, designed by ILO, OECD, and UNDP, is a hands-on instrument, allowing policy makers to foresee early on in the policymaking cycles the effects diverse economic and social policies could have on the informal economy. This tool adds to the vast literature on informality, and also complements recent work by the World Bank (June 2023).
The Framework was developed on the basis of desk research and consultations with experts and policy makers from the MENA region. The Framework was tested on a group of three countries, Egypt, Iraq, and Jordan. The analysis focused on policy initiatives adopted since the COVID-19 pandemic in the specific context of the MENA region, characterised by an under-developed private sector, low female labour force participation and a dominance of the public sector as formal employment provider.
The exploratory exercise on Egypt, Iraq, and Jordan pinpointed policy measures with positive impact on increasing formality and facilitating transition to formality for existing informal firms or workers. In this study, these included four types of policy actions: i) making social insurance more affordable and accessible for all workers, both in terms of cost and procedural requirements; ii) applying active labour market policies in the form of training and wage subsidies, even if just temporary, to help create a precedent in favour of hiring particular groups such as women and youth; iii) facilitate business registration and access to inclusive financial services; and iv) ensuring more fair and consistent law enforcement that applies equally. In fact, the most effective policy actions typically involve a combination of incentives and law enforcement, both creating more benefits for formal activities, whilst also stepping up enforcement in a fair and uniform way. This combination is consistent with what is typically recommended in comprehensive conceptual policy frameworks to address informality, a type of frameworks whose scope goes beyond the scope of this Report.
Beyond the main focus of formalisation, the report also highlights the urgent need to improve the working conditions of workers in the informal economy.
The role of policy dialogue. It is important to stress the effective use of the Framework counts on multi stakeholder dialogue being an integral dimension of the policymaking cycle. Policy recommendations should be the result of open and inclusive consultations with policy makers and interested parties from the target countries; and social dialogue should support the implementation of the recommendations, involving the relevant actors within each country, to ensure that all stakeholders are on board while taking local contexts into consideration.
Finally, the report points to the need for more accurate data on the informal economy to improve policy analysis and design.