This chapter offers a comprehensive examination of the socio-economic context and human development challenges in Jordan, with a specific focus on the issue of informality. Through an analysis of micro and macro data, the chapter derives stylized facts regarding the prevalence of informality among both businesses and workers. Emphasizing the scale and evolution of informality over time, the chapter also explores the impact of the COVID-19 pandemic on informal workers and businesses. Finally, an assessment of the institutional framework is presented, evaluating its capacity to integrate informal workers and businesses while addressing the principal challenges impeding the formalization of the economy.
Informality and Structural Transformation in Egypt, Iraq and Jordan
A Framework for Assessing Policy Responses in the MENA Region
5. Informality in Jordan
Abstract
Key messages
Jordan exhibits relatively positive indications on relevant human development and macroeconomic aggregates. However, the Jordanian labour market, faces multiple challenges in terms of job creation and informal employment. The unemployment rate reached 23.1% in the third quarter of 2022 rising from 19.1% pre-pandemic (in 2019), for all Jordanians, and as high as 46.9% for youth (15-24 years old).
The informal economy accounted for between 16% and 18% of Jordan’s GDP in the last decade on average, while informal employment has steadily increased in Jordan over the last several years. The share of informal workers rose from 44.7% in 2017 to 53.5% in 2020, and then fell slightly to 51.6% in 2021.
Female labour force participation rates are extremely low in Jordan (13.5% in 2021, third lowest in the Arab region) and typically women will tend to remain in the labour force after marriage if they have a formal job offering good working conditions, stability, safety, and paid sick or maternity leaves.
The COVID 19 pandemic hit informal workers and youth men harder, and hit informal workers who worked outside establishments (e.g. street vendors) hardest.
While the legal coverage of the social insurance system in Jordan does not include all categories of workers, the effective coverage of private sector employees, who are legally covered, does not exceed 39% (this percentage is 75% in the public sector).
Assessing informality among firms in Jordan is not straightforward due to the absence of data. Most firms in Jordan are registered with their local municipalities. However, far fewer register with the tax authorities (i.e. the Income and Sales Tax Directorate).
The outbreak of COVID-19 has deeply affected businesses. A survey during the pandemic revealed that 7% of the surveyed enterprises were operating as before the pandemic, 39% were operating with reduced staff and/or reduced hours, while 51% of the enterprises had closed their operations temporarily.
While the government's endeavours to enhance institutional and legal frameworks are acknowledged, there remains a critical need to cultivate and bolster public trust in governmental bodies and institutions.
Jordan is an upper middle-income country with an estimated population of 11.06 million in 2021 (Department of Statistics, 2021[1]). Jordan has a Human Development Index (HDI) of 0.729, which reflects relatively high (according to UNDP classification) human development, ranking 102nd relative to the rest of the world, and ranking 10th relative to other Arab States (UNDP, 2022[2]). Jordan is better ranked by its HDI value compared to its Gross National Income (GNI) value, reflecting relatively good performance on nonmonetary indicators of wellbeing (health and education). Jordan has one of the highest mean years of schooling in the region (10.5 years), second only to the UAE which ranks first on the HDI index in the region. Jordan has also achieved gender parity in terms of expected years of schooling and almost achieved it in terms of mean years of schooling.
Despite these positive indicators, Jordan has a high poverty level of 24.1% in 20221 (at the national poverty line), rising sharply compared to the previous estimate of 15.7% based on 2017-18 data2. Jordan’s economy has been growing slowly over the last several decades with GDP growth averaging just 2% per year between 2010 and 2021, while GDP per capita growth has declined by an average of 2% per year over the same period (Figure 5.1).3 Part of this GDP per capita decline is explained by the sharp increase in population between 2013 and 2016 as Jordan witnessed a sharp influx of Syrian refugees, while overall GDP growth remained relatively s. The COVID-19 pandemic and the Ukraine war have had major effects on the Jordanian economy. Jordanian GDP declined by 1.6% in 2020, while GDP per capita declined by 3.6%, over three times as much as other Upper Middle-Income Countries (UMICs) (World Bank, n.d.[3]). According to the IMF’s latest World Economic Outlook estimates, Jordan’s economy is expected to rebound somewhat to grow at 2.7% in 20234 (above its annual average growth rate over the last decade) but below the average for the Middle East (3.2%) and North Africa regions (4.4%) (IMF, 2023[4]).
Figure 5.1. Key indicators of Jordan’s growth performance 2010-2021
Source: World Development Indicators, https://databank.worldbank.org/
One of the major challenges facing the Jordanian economy is that it has not been able to create enough jobs. The unemployment rate reached 23.1% in the third quarter of 2022 rising from 19.1% pre-pandemic (in 2019), for all Jordanians, and as high as 46.9% for youth (15-24 years old); moreover, Jordan’s unemployment rate, while declining slowly since their peak in late 2020 and early 2021, have declined less than similar countries such as Egypt, Morocco and Tunisia (Department of Statistics, 2023[5]; Youssef, Janzer-Araji and Mazahreh, 2023[6]). Indeed, Jordan’s economy suffers from high unemployment, high levels of informality (Figure 5.2) and very low levels of labour force participation rates among Jordanians, at under 35%.5 Women’s labour force participation rates in Jordan are among the lowest in world averaging about 14% over the last several years (Department of Statistics, 2023[5]). The private sector was weakened by the pandemic as expected, and micro and small enterprises were more than twice as likely to face temporary closures as medium enterprises. 6
The Jordanian economy exhibits relatively positive indications on relevant macroeconomic aggregates. Inflation,7 for example, has so far remained relatively low compared to other countries in the region even in the aftermath of the international food and energy price hikes that started with the recovery from the pandemic and accelerated with the Ukraine crisis.
However, the Jordanian labour market, faces multiple challenges primarily due to a weak private sector that has not been able to create enough good jobs.8 For example, Jordan was one of only a few countries9 in the region to have exhibited negative private sector employment growth over the latest two rounds of the World Bank Enterprise surveys, between 2013 and 2019, even before the pandemic, while countries such as Egypt, Tunisia and Morocco all registered positive private sector employment growth over similar time periods (Islam, Moosa and Saliola, 2022[7]).
Public opinion surveys provide additional insight into the general sentiment of the population with regard to key challenges and concerns and show that 64% of the sample in Jordan ranked concerns over the economic situation, including poverty, unemployment and inflation, as the most important challenge facing the country today.10
An influx of migrant workers and refugees over the past decade has contributed to Jordan’s economic challenges. While estimates vary, Jordan is estimated to host over 1.5 million migrant workers, 11 12 mostly unskilled workers from Egypt, Syria, the Philippines and Bangladesh, although only about 330 thousand of them are formally registered with the Ministry of Labour (Ministry of Labour, 2022[8]). Jordan is also a host to over 2.2 million Palestinian refugees13 and based on the Jordanian Ministry of Interior an estimated 1.4 million Syrian refugees (Stave, Kebede and Kattaa, 2021[9]) of which only about 660 000 are registered with UNHCR. Jordan is the second largest refugee host in the world in per-capita terms. Unlike other refugees, Syrians are allowed to work in Jordan, but only in specific industries.14 The Syrian crisis continues to have a major impact on the Jordanian economy and labour market, although studies have found that Syrian refugees tend to compete more with other migrant workers rather than Jordanians.15
In addition, the Ukraine crisis and the related food and energy price crises in 2022 have also raised concerns about the prospects of sustained recovery. Jordan imports almost 80% of its domestic consumption of several major commodities such as sunflower oil, barley, maize and wheat, all of which witnessed rapid price inflation due to the crisis (UNDP, forthcoming). Central banks’ reaction to the rampant inflation have led to a series of interest rate hikes that is expected to continue into the near future. This will likely put strain on highly indebted nations like Jordan 16 in terms of loan repayment and consequently is expected to have crowding out effects on development expenditures. Jordan’s fixed exchange rate relative to the dollar may put it in a relatively better position than many other countries currently also grappling with rampant devaluation of their currencies, at least temporarily. It may however come at the long run cost of depleting foreign exchange reserves and lead to devaluation in the future.
5.1. Stylized facts about informality
The size of the informal economy and its contribution to GDP can vary depending on the methodology used to estimate it. A recent set of estimates by Elgin et.al. (2021[10]) suggests that the informal economy accounted for between 16% and 18% of Jordan’s GDP in the last decade on average.17 The study also suggests that the share of GDP from informal activities has been declining slowly in Jordan, from an average of about 19% of GDP in the 1990s, to 17% of GDP in the last decade (see Figure 1.2 in Chapter 2 and Figure 5.A.7 in the appendix to this chapter).
5.1.1. Informality of employment and impact of COVID-19
Informal employment has steadily increased in Jordan over the last several years. The share of workers who were classified as informal18 rose from 44.7% in 2017 to 53.5% in 2020, and then fell slightly to 51.6% in 2021 (Figure 5.2). These shares are lower than for other Arab countries for which we have data, for whom informal employment ranges between 51% and 87% of overall employment.19 This average masks wide variance between groups, however. Young men (15-24 years old) tend to have higher shares of informality than other groups, although in 2020 youth women and adult men surpassed them for the first time. Adult women tend to have the lowest shares of informality. This however does not necessarily reflect better working conditions for older women. Female labour force participation rates are extremely low in Jordan (13.5% in 2021, third lowest in the Arab region) and typically women will tend to remain in the labour force after marriage if they have a formal job offering good working conditions, stability, safety, and paid sick or maternity leaves.20
Figure 5.2. Share of informal employment in total employment by sex and age group, Jordan, 2017-21
Notes: Based on ILO’s definition of informal workers. Youth are those aged 15-24, adults are 25 years and older.
Source: ILOSTAT (2023) based on Jordan’s Employment and Unemployment Surveys.
The COVID-19 pandemic created a strong negative shock to both aggregate supply and aggregate demand. It had a devastating impact on labour markets everywhere. Lockdowns and mobility restrictions severely limited the demand for goods and services around the world, especially in industries such as restaurants, hotels, travel and tourism, wholesale and retail trade (UNDP, 2021[11]), where informal or irregular workers tend to be concentrated. At the same time the supply of labour was restricted due to health fears, and mobility restrictions, combined with the fact that many workers were unable to perform their jobs remotely. These shocks hit informal workers harder throughout the course of the pandemic, and hit informal workers who worked outside establishments (e.g. street vendors) hardest.
Figure 5.3 shows the experiences of those who were wage workers at the onset of the pandemic in February 2020, based on rapid phone surveys conducted at two points in time during 2021 in Jordan: January–February, August–September. The survey asked these workers whether they had experienced temporary or permanent layoffs, decreased hours or were no longer wage workers either becoming self-employed, unemployed, or exiting the labour market all together, over the previous 60 days, and followed the same respondents over time. It also asked these workers about their employment status in February 2020, thus allowing us to track how different types of workers at the onset of the pandemic were affected by it.
Figure 5.3 confirms that, as expected, those who were public sector workers at the onset of the pandemic were least likely to be affected, and if they faced any impact it was mainly in the form of reduced hours. Private formal workers were affected slightly more, with many no longer being wage workers by the time of the survey (Figure 5.4). By far, informal workers, and especially those working outside establishments, were the most likely to face layoffs, decreased hours or to transition out of wage work, even a year and a half after the pandemic started.
Figure 5.3. Experience of those who were wage workers in February 2020 in the 60 days prior to February and August 2021, Jordan
Notes: Informal workers are defined as those who do not have a contract or do not have social security. The y-axis presents the workers’ status in February 2020, and the x-axis presents the share of workers who were temporarily laid off, permanently laid off, faced decreased working hours or were no longer wage workers in the 60 days prior to February 2021(left hand panel) and August 2021 (right hand panel).
Source: Authors’ calculations based on ERF COVID 19 MENA Monitor Household Surveys 2020-2021.
Figure 5.4 depicts the labour market transitions for workers in February 2021 (Panel A) and August 2021 (Panel B), relative to their employment status in February 2020. A year after the onset of the pandemic (February 2021), among those who had formal public or private jobs, youth women were the most adversely affected, either being more likely to become unemployed (18% for those who were employed in the public sector initially, and 20% for those who were in private formal jobs) or to exit the labour force altogether (29% and 8% respectively). Informal workers outside establishments were also more likely to become unemployed or to exit the labour force, regardless of age and sex, and youth and adult women were hardest hit in that category. By June (not shown to save on space) and August 2021 somewhat of a recovery occurred, with fewer women going out of the labour force (OLF) and to a lesser extent becoming unemployed, but for youth men who had been informally employed in February 2020, larger shares had become unemployed than earlier in the pandemic.
Figure 5.4. Labour market, by employment status in February 2020 and by age and sex, Jordan
Transitions between February 2020 and February 2021
Notes: Informal workers are defined as those who do not have a contract or do not have social security. The y-axis presents the workers’ status in February 2020, and the x-axis presents the share of workers who were employed, unemployed or out of the labour force in the 60 days prior to February 2021 (Panel A) and August 2021 (Panel B).
Source: Authors’ calculations based on ERF COVID 19 MENA Monitor Household Surveys 2020-2021.
Furthermore, based on the 2016 Labour force survey, Razzaz and Selwaness (2022[12]) estimate that the legal coverage of wage workers in the private sector is 65%, while 22% are excluded because they work in agriculture of domestic sectors and 13% because they work fewer than 16 days per month. This means that the legal coverage of social insurance system in Jordan does not include all categories of workers. The effective coverage of private sector employees, who are legally covered, does not exceed 39% (this percentage is 75% in the public sector). They also highlighted the existence of both regulatory gap and compliance gap in the social security system in Jordan. Those gaps have been analysed and confirmed by an ILO report (2021) using the more recent data of LFS 2018. The report has suggested some policies helping to expand coverage and approaches to address legislative gaps, compliance and enforcement, and introduces new methods for expanded coverage.
5.1.2. Informality among firms and impact of COVID-19
Jordan relies almost entirely on micro, small and medium enterprises (MSMEs) to drive its economy. MSMEs are estimated to represent more than 99% of the total number of private formal firms in Jordan and play an essential role in contributing to production as well as employment. 87.7% are micro enterprises, 10.2% are small, 1.6% are medium-sized, and 0.5% are large enterprises.21 Private firms employing between 1 and 19 people account for over half of private sector employment and between 70% and 80% of formal jobs in sectors such as professional services, real estate, and wholesale and retail.
Assessing informality among firms in Jordan is not straightforward due to the absence of data.22 Most firms in Jordan are registered with their local municipalities.23 However, far fewer register with the tax authorities (i.e. the Income and Sales Tax Directorate).24 Moreover, employing the definition of employment formality as workers who are either covered by social security or who have a contract, as of 2016, there is a strong positive correlation between firm size and formality, suggesting that smaller firms are more likely to employ informal workers regardless of firm registration status (Figure 5.5). These trends are similar for both men and women, although women are more likely to be formally employed even in micro and small enterprises.
Figure 5.5. Share of Jordanian workers who were formal workers, by firm size and sex
Source: Authors’ calculations based on JLMPS 2010 and 2016. A formal worker is defined as one who has social security or a contract.
The outbreak of COVID-19 has deeply affected businesses. An important measure of the pandemic’s effect on the private sector is the share of firms that had temporarily closed.
In April 2020, ILO and UNDP in collaboration with the Fafo Institute for Labour and Social Research conducted a sample survey of 1 190 enterprises (home-based businesses, micro and small businesses, as well as larger enterprises) in Jordan (Kebede et al., 2021[13]).25 The data were collected through a phone interview complemented by individual interviews and focus group discussions with representatives from various industrial sectors, including business organizations, trade unions, enterprise owners, and workers. At the time of the interview, only 7% of the surveyed enterprises were operating as before the pandemic, 39% were operating with reduced staff and/or reduced hours, while 51% of the enterprises had closed their operations temporarily. A larger share of micro (62%) and small enterprises (58%) had temporary closed down their operations compared to medium and larger enterprises (less than 31%) (Kebede et al., 2021[13]).26
As reported by national sources, there is a lack of official information on the business informality rate. However, the surveys conducted by UNDP and ILO in Jordan to measure the impact of the COVID–19 on enterprises confirmed that the highest level of informality was among micro and small businesses. These surveys found that micro and small enterprises have largely not been able to take advantage of support packages provided to Jordanian enterprises by the government during the pandemic. Only 7% of the micro enterprises surveyed received any form of support from the government, compared to about 50% of the large – and more formal – enterprises.
Informal debt from family and friends was an important source of credit for micro and small enterprises in Jordan. While 44% of all debt to micro enterprises consisted of informal debt, this type of debt accounted for only 8% of large enterprises’ total debt (Kebede et al., 2021[13]).27 This may be related to the high level of informality among micro and small businesses and the consequent inability to access formal credit.
Regarding the time in which, on average, a firm operated without being formal and comparing 2013 with 2019, in the service sector the duration has decreased (0.4 and 0.2 of a year respectively), while in the manufacturing sector it has increased substantially, from 0.2 to one year (Figure 5.6). According to the World Bank Enterprise Survey, in 2019 96.9% cent of the surveyed firms declared to have started their activities in the country as formal business, while in 2013 they were 94.9%.
Figure 5.6. Number of years firm operated without formal registration
Source: World Bank Enterprise Surveys 2013 and 2019.
5.2. Overview of the national institutional and regulatory frameworks and key challenges towards formalisation
5.2.1. Business Environment and Access to Finance
The Government of Jordan has put a lot of efforts into creating a more effective and enabling environment for business. In this regard, in February 2019 the Government launched Jordan’s Reform Matrix (2018 – 2024) which comprises of a set of policy and structural reforms that aim to improve the efficiency of the business and investment environment; reduce the cost of doing business; boost exports and investments; and enhance macroeconomic stability in order to improve the overall competitiveness of the economy, stimulate growth and create employment opportunities (Ministry of Planning and International Cooperation, 2021[14]). Within the Reform Matrix in 2018, Jordan enacted three reforms for strengthening access to credit. In particular, the first transactions law was aimed at broadening the description of debts and obligations and the scope of assets usable as collateral, the second one amended insolvency law wanted to guarantee creditors absolute priority and provide a time limit and clear grounds for relief from automatic stays during reorganization procedures, while the third one introduced a new electronic, unified, modern and notice-based collateral registry (World Bank, 2020[15]).
In 2021 the Government launched the “Investor Journey Reform Program” which aims to improve Government to Business (G2B) service delivery and increase efficiency of businesses and government, reduce compliance costs and time, as well as improve the predictability of the business environment. In this framework, the ISIC4 classification framework was adopted for newly registered businesses, as an effort to improve the coordination between government agencies involved across the business lifecycle which in turn should help simplifying, unifying and expediting the registration and licensing procedures for businesses. In 2022, the country started to work on the Integrated Business Registry System which will unify the registration process through a single window at the Companies Control Department (Government of Jordan, 2022[16]).
According to the World Bank Enterprise Survey, in 2013, 31.2% of the surveyed businesses pointed out that “access to finance” was the main business environment obstacle, while in 2019 only 2.2% perceived it as the most important one. At the same time, as shown in Figure 5.7, both in 2013 and 2019 a high percentage of businesses considered tax rates as the major obstacle.
Figure 5.7. Firms that consider a specific business environment obstacle as the most important
Note: The Enterprise Surveys cover small (number of employees: 5 to 19), medium (20 to 99), and large firms (100 or more). Firms with less than five employees and those that are 100% state-owned are ineligible for the survey. The sectors included are the non-agricultural, formal, private economy. Public utilities, government services, health care, and financial services sectors are not included in the sample.
For more details about the 2013 and 2019 survey data, see: https://microdata.worldbank.org/index.php/catalog/2065 and https://microdata.worldbank.org/index.php/catalog/3734.
Source: World Bank Enterprise Surveys 2013 and 2019.
In terms of national institutions, the Jordan Enterprise Development Corporation (JEDCO) was established in 1972 as the government arm to support the private sector in Jordan. It is a government independent corporation whose board is made up of both public and private sector representatives and chaired by the Minister of Industry, Trade and Supply. JEDCO offers a range of programmes and services to start ups and MSMEs across all sectors to become more competitive in the global market by providing technical and financial support (https://jedco.gov.jo/EN/Pages/About_JEDCO).
5.2.2. Social protection
Social protection is a key concern related to the functioning of labour markets, as it can impact the conditions and incentive mechanisms that underpin the informal economy. In Jordan, as in many Arab countries, social protection is mainly made up of four components: social insurance, social assistance, employment policies/Active Labour Market Policies (ALMPs), and humanitarian/ informal social protection.28
The social security corporation (SSC) is the main institution of social insurance in Jordan. The corporation covers workers against all work-related social risks. Contributions for workers covered by the SSC stand at 21.75% of their wage, with employers contributing 14.25% and the worker covering the remaining 7.5%. (These rates are fairly middle-of-the-road for the Middle East).29 The number of active insured persons increased from 1.16 million in 2015 to 1.3 million in 2019. Despite some progress, the coverage rate for workers remains low. For example, the estimated percentage of workers who have coverage in the event of a work injury is only 57% in 2020, which, although higher than that of some other Arab countries like Tunisia (28%) and Egypt (36%), is still lower than the average for Arab States (63%). Moreover, the estimated share of unemployed individuals receiving unemployment benefits is remarkably low at 5.3% (see coverage by branch of social insurance are displayed in Figure 4.A.1 in the appendix).
National Aid Fund (NAF) is the main institution of social assistance in Jordan. It runs several social assistance programmes, providing vulnerable and poor households in-kind and cash transfer benefits, as well as training and employment support benefits. The Zakat fund is another programme that provides in kind and in cash benefits.
The ALMPs/employment policies in Jordan are made of four main categories: skills training, employment services, entrepreneurship promotion and subsidized employment. An inventory of the different programmes has been done in 2017 and it identified 84 interventions (ILO, 2017[17]). Most of those interventions were made up of skills training (technical and vocational skills) and employment services, whereas entrepreneurship promotion and subsidized employment programmes were less frequently offered. The interventions were mainly funded by government and foreign donors, with little involvement of private sector and local agencies.
The humanitarian/informal component of social protection in Jordan is led by NGOs and UN organizations who cover mainly refugees through several programmes (cash assistance, vouchers, and winterization schemes:30 education; employment and empowerment, and protection).
Further, Jordan has developed a national social protection strategy 2019-2025. This strategy focuses on three pillars, namely: Opportunity, Dignity, and Tamkeen. The “Opportunity” pillar focuses on improving social insurance and employment opportunities. The “Dignity” pillar focuses on improving social assistance programmes, and finally the “Tamkeen” pillars focuses on providing quality education for the population.31
During the COVID-19 pandemic, many social policy measures have been implemented. The IPC-IG policy tracker identified 25 policies targeting different categories of population providing them with different type of services. Figures 4.A.2-A.6 in the appendix summarize the type of policies and the targeted population.
The Social protection programmes above may have different effect on informality in a way or another; indeed, the presence of parallel components of social protection could lead to substitution effect and may have an impact on occupational choices. Relying on the view of different schools of thought on the informal economy (Sobh, 2019[18]; Merouani, El Moudden and Hammouda, 2021[19]), this chapter assumes informal labour markets comprise workers with marginal and self-subsistence activities (Dualist and Structuralist schools), but also workers who deliberately seek to avoid regulations and taxation (Legalist and Voluntarist schools). Hence, we believe that while some workers in Jordan would prefer working formally, other workers could substitute a formal employment opportunity (with contribution to social insurance) by informal employment, with potential non-contributory benefits. For example, Sobh (2019[18]) showed, through field work and focus group discussions, that individuals who work in the informal sector in Jordan prefer to remain informal due to their perception of inadequate and insufficient benefits and services obtained from being in the formal sector, compared to the associated costs, both monetary and non-monetary. These issues and other challenges related to formalization will be discussed further in the policy analysis section.
5.3. The Fiscal System
The Ministry of Finance is responsible for managing the government's finances and implementing fiscal policy. The government's budget is divided into two main categories: the recurrent budget, which covers the day-to-day expenses of the government, and the development budget, which is used to fund capital projects and investments. Jordan's public finances have been under pressure in recent years due to a combination of factors, including high levels of debt, slow economic growth, and a large public sector. In order to address these challenges, the government has implemented a number of fiscal consolidation measures, such as reducing subsidies, raising taxes, and increasing efficiency in the public sector. In terms of revenue, the government mainly relies on taxes, which include income taxes, sales taxes, and customs duties. The government also receives revenue from natural resources, such as phosphates and oil shale, as well as foreign aid.
There is no small business tax regime in Jordan. MSMEs are required to pay the same types of taxes as individuals with income or larger firms, depending on their business structure. Self-employed, micro and small firms are subject to Personal Income Taxes (PIT), not Corporate Income Taxes (CIT). The exemption on income for households with dependents are up to 23 000 JDs (about USD 32 400), and for individuals, it is 9 000 JDs (roughly USD 12 600). If business revenues are less than 23 000 JDs (USD 32 400 or almost eight times Jordan’s per capita income) for a given year, MSMEs registered as self-employed would not be subject to any income taxes.32 For revenues above this threshold the following PIT rates apply: 5% for the first 5 000 JDs of revenue, with rates increasing incrementally to 25% for 20 000 JDs of income above the exemption level). All other businesses have to pay CIT for which the standard rate is 20%, however, there are more than seven different CITs depending on the year and sector. In addition, a national contribution tax has been imposed on business profits (since January 2019), ranging from 1-7% depending on the industry. In sum, tax rates on corporate revenues range from 21% to 38% (with discounted rates applicable in 2019 by year and industry, converging with standard rates by 2024).
In addition, small businesses are required to file payroll taxes and social security contributions for their employees. As mentioned in the previous section, the employer is required to contribute 14.25% of the employee’s salary (in addition to the full salary payment) and the employee’s contribution is 7.5%. No reductions or exemptions apply for MSMEs. Reforms in social security reforms in the past decade, which include contribution requirements for MSMEs and the self-employed, together with higher rates, likely contributed to the increase in some categories of informal employment since 2010 (Assaad, Krafft and Keo, 2018[20]; Brodmann, Jillson and Hassan, 2014[21]; ESC, 2014[22]; Sobh, 2019[18]).
There are indirect taxes that are also applicable, and they are complex. General Sales Tax (GST) is applicable to firms, there is a registration limit (currently 10 000 JDs for manufactured goods and 75 000 JDs for all other commerce). Therefore, many MSMEs would not be required to pay GST but for cottage manufacturing firms, or those with sales surpassing 75 000 JDs (approximately USD 105 600), there are seven standard GST rates (16% standard, 10%, 5%, 4%, 2%, 0%, and tax-exempt goods) each applicable to very specific types of products. Complicated schedules for special sales taxes also apply for many different products.
The perceived (combined) high rates of taxes,33 cumbersome and ambiguous regulatory and legal tax systems result in widespread tax evasion, and high costs of compliance may all be contributing to discouraging formalization.
5.4. Trust in institutions
Public trust could be a determinant of many individual behaviours and choices, including the choice of participation in social security and the formal sphere. Indeed, empirical evidence indicates that public trust may account for the presence as well as persistence of informality (Elgin and Tosun, 2017[23]).
In Jordan, as in many Arab countries, trust in institutions is low. The Arab Barometer Survey (ABS) 2021-2022 shows that 68% of respondents do not trust the government (71% for male and 65% for female), which is comparable to the sample average 69%. Surprisingly, the survey shows that young people (18-29) are more likely to trust government (34%), while this proportion is slightly lower (31%) for older adults (30 years old and more). Further, the data shows that there is a negative relationship between level of education and trust in government. While 37% of respondents with low level of education level report that they trust government, this percentage was equal to 32% for people with medium level and 26% for respondents with high level.
Trust in the Parliament seems to be even lower according to the ABS as only 16% of respondents reported they trust it (13% for male and 19% for female respondents), which is lower than the sample average estimated at 21.4%. Young respondents (18-29) are more likely to trust the Parliament (19%) than adult (15%). The negative relationship between education and trust is confirmed also in this case as 18% of respondents with low education trust the Parliament, against 17% for respondents with medium level of education, and 12% for those with high level.
Trust in Head of Government/Prime Minister is also low in Jordan: only 29% of respondents report trusting the Head of Government (26% for male and 33% for female respondents), which is lower than the sample34 average estimated at 36%. 32% of youth (18-29) and 29% of adult (30 years old and more) report they trust it. The negative relationship between public trust and education is also confirmed here. The ABS data show the share of respondents who report that they trust the Head of Government varies from 32% for respondents with low level of education to 30% for respondents with medium level, and 26% for respondents with high level.
The level of trust in court and legal system was also collected in the ABS, showing that 62% of respondents report trusting them (60% for male and 64% for female respondents). This is higher than the sample average of 44%.35 The data also shows that 66% of young respondents (18-29) and 61% of adults report they trust court and legal system. However, the data indicates that there is no significant difference in trust towards the court and legal system between respondents with low (62%), medium (61%), and high (63%) levels of education.
While ABS 2021-2022 does not contain a variable measuring informality, we have utilized two proxy variables that could inform about the nature of jobs, namely: place of work and the type/regularity of income to examine the relationship between formality and trust in government. The data show that these informality proxies are associated with low trust in various types of institutions (Figure 5.8).
Respondents who work in shops, market and factories (who are more likely to work informally) have the lowest propensity to trust governments and other institutions compared to respondents who work in offices (Figure 5.8). Although people who work from home are more likely to work informally, their overall trust in institutions is not significantly lower than that of people working in offices. However, it should be noted that they exhibit a notably lower level of trust in the court and legal system compared to those who work in offices. Further, the figure shows that respondents for whom variable-profits from sales is the main source of income (who are more likely to occupy an informal job) have a lower propensity to trust institutions. While we argue that more reliable data on informality are needed to confirm the aforementioned relationship, we believe that those figures support the hypothesis of a negative relationship between trust in government and informality of labour.
Figure 5.8. Trust in institutions by workplace and source of monthly income, Jordan
Source: Arab barometer survey 2021-2022. Wave VII (accessed on 10 January 2023).
References
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Notes
← 1. Based on Jordanian officials’ announcements as quoted in Weldali (2022[25]).
← 2. The latest Poverty and Equity brief from the World Bank (2021[34]) states that in 2019 the Government of Jordan had announced a poverty rate of 15.7% based on the 2017-2018 HIES, that had been completely revamped in terms of design with World Bank support.
← 3. Authors’ calculations based on World Development Indicators World Bank (2022[33]). Jordanian GDP declined by 1.6% in 2020, while GDP per capita declined by 3.6%, over twice as much as other Upper Middle-Income Countries (UMICs) that witnessed an average GDP per capita decline of 1.03% in 2020.
← 4. GDP growth reached 2.2% in 2021 and 2.1% in 2022 according to the latest IMF World Economic Outlook estimates.
← 5. Based on statistics for quarter 3 of 2022 (Department of Statistics, 2023[5]), the labour force participation rate for those 15+ years of age was 33.0% (52.5% for males compared to 13.7% for females) falling from 34.4% (54.4% for males and 14.5% for females) in same period of 2021.
← 6. FAFO, ILO, UNDP (2020 & 2021), Impact of COVID-19 on enterprises in Jordan.
← 7. Inflation was projected to moderately accelerate in 2022, the CPI inflation is projected to reach 3.3% in 2022 and 3% in 2023 compared to 1.3% in 2021, which is low compared to other Arab countries.
← 8. See for example Krafft and Assaad (2019[28]) and Youssef, Janzer-Araji, and Mazahreh (2023[6]).
← 9. For instance, Lebanon for which Enterprise surveys exist, had negative private sector job growth.
← 10. Based on the Arab Barometer survey conducted between 2021-2022.
← 11. Estimates vary by source. The figure of 1.5 million migrant workers was quoted in several sources including (DTDA/DI/Danish Ministry of Foreign Affairs, 2022[35]), (Mohanna and Haddad, 2021[27]).
← 12. As per a statement from a policymaker: A substantial portion of informal workers in the agricultural sector is comprised of migrant workers.
← 13. Many of whom have become Jordanian citizens. 370 000 Palestinian refugees still live in camps with uncertain legal status (DTDA/DI/Danish Ministry of Foreign Affairs, 2022[35]).
← 14. Jordan has a dual minimum wage system based on nationality: the minimum wage for Jordanians was 260JD as of January 2023, and 230 JD for non-Jordanians (slated to be indexed to inflation during the current year although as February 2023 the decision was taken to postpone this increase once again due to the multiple shocks facing the Jordanian economy. Several industries are also exempt from the minimum wage legislation such as textiles and clothing and domestic work (Krafft and Hannafi, 2022[29]). This complex system may push low-skilled Jordanian workers to informal work, especially if they are less skilled than their migrant counterparts (Winkler and Gonzalez, 2019[24]).
← 15. See for example El-Mallakh and Wahba (2018[31]); Fallah, Krafft, and Wahba (2019[30]). Assaad and Salemi (2019[32]), however argue that the influx of Syrian workers has led to an increase in irregular employment especially among men from lower wealth quintiles.
← 16. Jordan’s government and guaranteed gross debt in 2021 was 113.8% of GDP, although generally under favourable conditions (Refaqat et al., 2022[26]).
← 17. The first estimate is based on a Dynamic General Equilibrium Model (DGE), while the second one is based on a Multiple indicators multiple causes model (MIMIC). For more information on the two methods see Elgin et. al. (2021[10]).
← 18. The government of Jordan classifies informal workers as employees whose employer does not pay social security contributions on their behalf; employers and own-account workers whose enterprise is informal/ not registered; and contributing family workers (ILO, 2021[39]).
← 19. ILOSTAT (ILO, 2022[40]), SDG Indicator 8.3.1 Proportion of informal employment in total employment by sex and sector (%), Annual.
← 20. This finding has been corroborated in several studies about the region. See for example Assaad et. al. (2017) where they conclude that “marriage by the median age reduces the probability of working for women by 47% in Jordan, 33% in Tunisia and 16% in Egypt. Much of the effect is due to a reduction in the probability of private wage work, which is reduced by 76% in Jordan, 57% in Tunisia and 40% in Egypt”. See also AlAzzawi and Hlasny (2022[42]), Lasassi and Tansel (2020), “Female Labor Force Participation in Five Selected Mena Countries: An Age-Period-Cohort Analysis” and Assaad et. al. (2020) “Explaining the MENA Paradox: Rising Educational Attainment, Yet Stagnant Female Labor Force Participation” and references therein.
← 21. The MSME Economic Indicators Database 2019 records the number of formally registered MSMEs across 176 economies (SME Finance Forum, 2023[37]). In Jordan, the Ministry of Industry and Trade classifies MSMEs based on the number of employees and the paid capital investment, so micro: less than JD 30 000 and 1- 9 employees; small: more than JD 30 000 and 10 - 49 employees; medium: more than JD 30 000 and 50 - 249 employees; large: more than JD 30 000 and 250 and above employees.
← 22. See IMF, 2018 for a discussion of approaches to determining the size of the informal economy. The challenge of determining the extent of informality among Jordanian firms was corroborated in discussions with the Ministry of Planning and International Cooperation (MoPIC) and the Social Security Corporation, November 9, 2022.
← 23. As reported by national sources, there is a lack of official information on the business informality rate. However, based on interviews with the Jordanian Ministry of Labor, with the exception of home-based enterprises, over 90% of all MSMEs in Jordan are registered. This figure is also very similar to data from the World Bank Enterprise Survey (2019) for Jordan where 97% of enterprises surveyed reported that they were registered when they first started operations.
← 24. Ibid.
← 25. The majority of the enterprises were micro enterprises with less than four employees (41%), 28% were small enterprises with 5 to 19 workers, 13% had 20 to 49 workers, 8% had 50 to 99 workers, while 10% of the enterprises had more than 100 employees.
← 26. ILO and UNDP, Impact of the COVID–19 pandemic on enterprises in Jordan, 2020. These results are opposite to the findings of the follow-up enterprise survey, that included 601 firms which were interviewed between May 2019 and November 2019 and then re-contacted in July/August 2020 and in November 2020 – January 2021. In this survey the largest number of businesses that had permanently closed since pandemic declared were large firms (15.8% large, 13.5% small and 7.2% medium-sized enterprises).
← 27. ILO and UNDP, Impact of the COVID-19 pandemic on enterprises in Jordan, 2020.
← 28. While it is widely accepted that there is no one unique definition of social protection (Mahon and Heymann, 2012[38]) (Bender, Kaltenborn and Pfleiderer, 2013[41]), this chapter uses UNDP’s definition. For UNDP, social protection systems are articulated around programmes, platforms and institutions that provide coherence and consistency and are organized around contributory or non-contributory forms of income support and around social assistance, social insurance and labour market interventions.
← 29. Based on author analysis of posted rates for countries in the Middle East and North Africa available at https://tradingeconomics.com/country-list/social-security-rate (Trading Economics, 2023[36]).
← 30. Winterization programmes (cash grants and winter items) support refugees and IDPs to cope with the weather conditions during the coldest months of the winter. For instance, the UNHCR Winterization strategy focuses on: 1) Provision of seasonal cash assistance for vulnerable families, 2) Provision of core relief items specific to winter such as high thermal blankets, plastic sheets, and winter clothes, and 3) Winterization of shelter including shelter weather-proofing and repairs, improvements to drainage systems and other infrastructure in camps and informal settlements.
← 31. https://www.social-protection.org/gimi/gess/ResultAchieved.action;jsessionid=Xkw431t8FlqG1BhQjvLRKRJwmV_PnrLneAamwh2N91ZjqntAPAgX!256579239?id=939
← 32. MSMEs have three options for business registration: self-employment (i.e. no partners, but can have employees), a partnership or an LLC.
← 33. According to a survey conducted among informal businesses in Jordan (Sobh, 2019[18]); and this was also one of the biggest obstacles to doing business in Jordan in the 2013 and 2019 by the World Bank enterprise surveys.
← 34. The question was asked only in Iraq, Lebanon, Libya, and Morocco.
← 35. The question was asked in most countries covered by the Arab Barometer Survey.