Reducing Inequality through Social Protection for Informal Workers: Challenges and Prospects

Informal employment constitutes 63.9% of total employment in Arab States, which is higher than both the developing and emerging countries’ average of 59.5% and the world average of 61.2%. More than 75% of this share work in the informal sector.[2] The share of informal employment in Arab countries with relatively large populations, like Egypt, is typically higher than the region’s average. On the other hand, countries with smaller populations stand below this level but their national averages are substantially exceeded by the share of informal employment in rural areas and urban informal settlements, as well as in certain sectors like agriculture and construction, for example. In fact, by specifically including agricultural work, the share of 63.9% increases to 68.6%.[3] In its broadest sense, informal work intersects with other forms of precarious work, such as care work and migrant and domestic work, and is thus a substantially gendered space. As informal workers also overlap with marginalized communities, non-working age groups, people with disabilities, migration and displacement, among others, informal work becomes a hotbed of intersecting social vulnerabilities.[4

Informal labor is characterized by a lack of job and income security, being often part-time, on an on-demand basis, seasonal or temporary, and linked to challenging working conditions, extended working hours, the absence of paid and sick leave, and significant risks of physical injury or illness. This even applies to the case of own-account employment. Moreover, this type of labor is characterized by a lack of social security, especially due to informal laborers’ self or subjected-to- exclusion from tax systems and State-led social protection schemes.[5] Arab social protection systems are fragmented, transient, and inadequate. They are mostly employment-based and therefore not inclusive of informal labor by nature.[6] They are also largely limited to poverty-targeted social safety nets, which exclude the informal middle class – also known as “the missing middle” – by design, although it occupies a considerable portion of informal labor.[7] As a result, informal workers are generally not covered or only partially covered by social protection in the majority of Arab countries. This status quo is hardly captured by quantitative indicators due to the dearth of data in the region, especially on informal labor, and the failure of mainstream measurements like the Gini coefficient to account for the multidimensional nature of inequality and accurately quantify the distribution of resources and services.[8]

Sizable informality in the region is first and foremost the produce of rentier economic models and consequently poor job creation. It also mainly stems from labor market deregulation and flexibilization, which arose globally in the 1980s with the upsurge of neoliberalism and has been supported by the Bretton Woods Institutions (BWIs) whose intention is to supposedly stimulate economic growth and the continual generation of job opportunities.[9] This shift has been accompanied by poor job creation, instead, and by waves of privatization, including of social protection services. From the perspective of private corporations, it is more profitable to opt for informal and non-standard employment, which is one of the main reasons behind the rise of informalization.[10] In addition, the region’s private sector is predominated by Medium and Small and Medium Enterprises (MSMEs) who cannot afford to pay taxes or contributions in order to be formalized.[11] More so, labor market incentives have been entailing reductions in employers’ contributions, as a form of a “tax wedge,” therefore also making it difficult for informal workers in the formal sector to pay their share of the contributions when they have the option to do so.[12] The two latter conundrums further hamper the financial sustainability of contributory social protection schemes in the region, rendering them scarce and fragile. BWIs promoted labor flexibilization reforms in ten MENA countries and “tax wedges” in 5 of them, including Algeria, Egypt, Jordan, and Kuwait, only between 2020 and 2022.[13]

Informality is both a result of and a reason for multidimensional inequality, which compounds income, wealth, health, education, and other interrelated forms of socioeconomic inequality. The inherent disparities determining someone’s access to livelihood opportunities, income, and essential social services highly influence their labor formality status. Similarly, whether a person is a formal or informal laborer is a key determinant of their level of access to decent work as well as to quality and sufficient social protection, and thus of their socioeconomic situation. Rather than breaking this vicious cycle through worker-centered policy interventions, many Arab States have been primarily focusing on including informal workers in tax systems.[14]

Opportunities and Prospects:

Nevertheless, Arab governments can contribute to reducing the negative impacts of mutually reinforcing informality and inequality through the following measures:

• Protect existing public financial resources from corruption, leakages and illicit financial flows, and make more efficient use of them to deliver the segment of universal social security that is non-contributory or government-financed, being essentially the social protection floor which covers everyone, including informal workers, by healthcare and social assistance for minimum income security. When more public revenues are needed to finance such schemes, governments should introduce new progressive and redistributive taxes such as corporate income taxes, property taxes, and other wealth taxes – to name a few – in order to fill the funding gap. Oman has set a new benchmark in the region since it committed to establishing a floor in July 2023.[15] Social protection floors are especially important when informal companies that could be formalized are rare or inexistent.[16]
• Introduce self-sustained contributory schemes consisting of different forms of social insurance, notably health insurance and old age pension, whereby contributions are financed by employers and workers together and sometimes subsidized by the public budget to make it possible to include informal workers. While the full or quasi formalization of such workers can be a viable solution, investing in the quality and adequacy of benefits of public social insurance is a crucial step to ensure the success of such a solution. For instance, where informal companies such as MSMEs exist, formalizing informal workers with good contracts and wages can be done through tools like the Monotax, which is a single payment covering taxes and contributions, collected and subsidized by the government, to extend social protection coverage to specific groups, namely MSMEs, domestic workers, and rural workers, thereby encouraging worker formalization. The Monotax was adopted in Uruguay, Brazil, Argentina, Ecuador, and Peru.[17] While it worked in the first four contexts, it was not fit to purpose in the latter because it did not offer sufficient incentives to companies, as the quality of social security it subsidized was bad, making it unattractive for both informal workers and employers. This reasserts the importance of providing quality services in parallel with, if not ahead of, introducing new financing mechanisms in order to reestablish people’s trust in public systems and rebuild the broken social contracts where taxes are feared and evaded by payers, and mismanaged by authorities.[18] Oman and Tunisia were recently the region’s pioneers in developing solid and inclusive social insurance systems that formalize workers in the informal economy.[19] Morocco has been following suite, moving beyond merely giving informal workers the option to contribute and benefit from social protection coverage, if they need it and can afford it, to compulsorily including them in the AMO health insurance and, by 2025, in the pension scheme.[20]  

While such reforms require serious political will by governments and enough time to establish new social contracts, recent developments in the aforementioned Arab States as well as in countries like Lebanon and Jordan that lately adopted new national social protection strategies, constitute pivotal leverage points. Knowing the dynamics of poverty and inequality, reducing them would not be feasible through inclusive social protection schemes and the tailoring of these schemes to cater to informal workers’ needs, alone. These reforms ought to be complemented with coherent actions and policies, which include:[21] i) collect the needed data, in disaggregated format and through large-scale anonymous surveys, and measure inequality and informality using a mixed-method and multidisciplinary approach, while looking at as many indicators as possible and undertaking statistical robustness checks in the case of quantitative measurements; ii) promote productive economic models that create equitable jobs and generate constant economic value by promoting the necessary shifts in the development paradigms; iii) conduct awareness raising and sensitization campaigns to ensure the legitimacy of incremental formalization roadmaps; iv) put tripartite social dialogues center stage to allow for participatory processes that involve workers, employers and governments, and guarantee the cooperation of the private sector without promoting private-led solutions to social protection and formalization; v) simplify registration and administration procedures for a smoother incubation of informal workers in standard-labor; vi) devise legal and regulatory frameworks that ensure all aspects of decent work conditions throughout the transition to formality; vii) invest in quality public education, as well as in digital and financial inclusion and literacy, given their proven tremendous impact on formality.[22]

[*]Acknowledgments: This section was informed by desk research as well as key informant interviews with Adib Nehmeh (Expert in Development and former UN-ESCWA Regional Advisor), Isabel Ortiz (Director of Global Social Justice and former Director at the ILO), and Paul Makdissi (Professor of Economics at University of Ottawa). The author is grateful to the interviewed experts for their valuable inputs, which have greatly enriched this section.

[2]https://www.ilo.org/sites/default/files/wcmsp5/groups/public/@dgreports/@dcomm/documents/publication/wcms_626831.pdf

[3] Ibid.

[4]https://researchrepository.ilo.org/esploro/outputs/encyclopediaEntry/Innovative-approaches-for-ensuring-universal-social/995219078602676?institution=41ILO_INST

[5]https://www.wiego.org/sites/default/files/resources/files/Informal-Economy-Arab-Countries-2017.pdf

[6]https://www.socialprotectionfloorscoalition.org/campaigns/social-security-for-all-key-pillar-for-new-eco-social-contract/social-security-for-all/

[7]https://www.unescwa.org/sites/default/files/pubs/pdf/middle-class-arab-countries-english_1.pdf

[8]https://ruor.uottawa.ca/items/deb14bce-19a3-4267-8750-e14866eee58e

[9]https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3856299

[10]https://www.ilo.org/publications/social-policy-advice-countries-international-monetary-fund-during-covid-19

[11]https://researchrepository.ilo.org/esploro/outputs/encyclopediaEntry/Enterprise-formalization/995218727602676?institution=41ILO_INST

[12]https://reliefweb.int/report/world/end-austerity-global-report-budget-cuts-and-harmful-social-reforms-2022-25

[13] Ibid.

[14]https://annd.org/en/publications/details/2016-arab-watch-report-on-informal-employment

[15]https://www.ilo.org/resource/article/far-reaching-reforms-oman-set-new-benchmark-social-protection-region

[16]https://researchrepository.ilo.org/esploro/outputs/encyclopediaEntry/Extending-social-security-to-workers-in/995219004802676?institution=41ILO_INST

[17]https://www.social-protection.org/gimi/gess/Media.action?id=14451

[18]https://www.arab-reform.net/publication/a-guide-to-universal-social-protection-in-the-arab-region-challenges-and-opportunities/

[19]https://www.social-protection.org/gimi/gess/ShowRessource.action?id=2618

[20]https://www.social-protection.org/gimi/ShowCountryProfile.action?iso=MA#:~:text=Social%20protection%20situation&text=The%20generalisation%20of%20family%20allowances,7%20million%20school%2Dage%20children.

[21] As deduced from the interviewees’ recommendations on priority interventions.

[22]https://unesdoc.unesco.org/ark:/48223/pf0000177683