Journal number 1 ∘ Tamila Nutsubidze ∘
HOW DOES INFORMAL AND NON-STANDARD EMPLOYMENT AFFECT SOCIAL POLICY?

10.36172/EKONOMISTI.2021.XVIII.01.Tamila.Nutsubidze 

Abstract

The objective of this paper is to highlight the increased awareness of the global society about trends in labor markets and their implications for workers and social protection policy. The recent pandemic has just highlighted issues related to informal and Non-Standard workers in  developing, emerging, and advanced economies. Evidence and hypothetical findings suggest that working-life income poverty and retirement income insecurity are the main consequences of informal and non-standard employment arrangements impacting social protection policy around the world. High risks of poverty and vulnerability among workers emphasize the importance of the role of the state, and in particular public social insurance and non-contributory pension programs. 

Key words:informality, social protection policy, labor policies,  public finance 

Introduction

The COVID-19 Pandemic highlighted the precarious nature of informal and non-standard work worldwide. Multiple fiscal and monetary policy measures were implemented by governments around the world to reduce increasing health and social risks among the most vulnerable workers and their families. While the governments’ measures proved effective, there is a clear trend of increasing unemployment and poverty amongst low-income informal and non-standard workers in less developed economies. In Georgia, as well as in other transition economies, it is important to learn more about informality; informal employment and non-standard employment since it contributes to employment heavily. According to different formal and unofficial statistical data, informal and non-standard employment exceeds 30 percent but could also reach higher percentage of the labor force in Georgia.

Informal employment has always been associated with the developing world. Indeed, informal employment is substantial in most developing and emerging countries. It is an important part of the economies that contributes to economic growth and remains the main source of employment for the poor. However, informal employment plays a significant role in national economies not only in the developing world, but also in the developed world. It can be found in such advanced countries as the United States, Canada, most advanced European economies (United Kingdom, Germany, France, etc.), Australia, and developed Asia (Japan, Singapore, South Korea, etc.). 

Today, informal employment is widely associated with unprotected employment that is precarious and insecure (not covered by employer-sponsored social protection benefits), both in rural and urban areas, and within developing and developed worlds. Most importantly, informal employment is found more and more often within formal sectors (i.e., within the tax and regulatory system) due to the process often referred to as “informalization” of job. Moreover, most non-standard jobs such as temporary, part-time, casual and others are informal by nature, and are, therefore, unprotected and insecure from social protection policy perspective.

In this paper, we discuss both informal and non-standard forms of employment since they have similar social protection policy implications and consequences for workers in developing and developed worlds. Workers with informal and non-standard employment arrangements, represent substantial parts of world economies and labor forces. For instance, millions of workers in the U.S. are involved in informal and non-standard employment and can be represented by legal and unauthorized workers, agricultural and nonagricultural workers, self-employed and hired workers, and white- and blue-collar workers. These workers can work both in real off-line and gig economies and can combine multiple jobs, including formal traditional jobs. Real examples of such workers can be numerous. Most temporary and part-time workers, who represent the most vulnerable category, are employed in education and health industries (over 30 percent), professional and business services (15 percent), and construction, retail, leisure, hospitality services (around 10 percent each). They often combine their work with other non-standard work that can possibly be found off-line or through electronically mediated platforms such as driving for a ride-share company, doing house-keeping or technical writing work, or performing some other job. The main consequences of informal and non-standard employment for workers in both developing and developed worlds, including the U.S., are usually the same: income insecurity and a high risk of poverty during work life and in old age due to lack of earnings and access for employment and pension benefits through employment. In fact, on a global scale, most of the workers in informal and non-standard employment live in poverty or are at high risk of poverty during their work life. Even in the U.S., most of these workers, when compared to traditional workers with more stable employment, are more likely to live beyond poverty thresholds and are dependent on federal and state assistance and welfare programs (GAO 2015). Additionally, these workers, while representing about 70 percent of the labor force in the developing world and less than 20 percent in the developed world, lack access to social protection, including pension coverage (ILO 2018). The data on the U.S. shows no difference. A very small number of these workers have access to private pension plans available through employers (BIS 2018). Thus, the nature of informal and non-standard employment, as well as gaps in existing labor and social protection policies, leave many workers vulnerable and unprotected in the world. 

Informality: Methodology and Global Trends

In general, the concept of informal employment in the informal sector encompasses economic activities that are outside tax and regulatory policies (including registration, taxation, labor and social protection policies). However, informal employment outside the informal sector, i.e., within the formal sector, is a job-based concept, and it is defined in terms of the employment relationship and protections associated with the job of the worker. According to the ILO methodology, in practice, the formal or informal nature of a job held by an employee is determined based on operational criteria related to social protection and employment policies (2018).

Non-standard employment describes a diverse set of employment arrangements that can be precarious and often overlap with informal employment. Therefore, they also raise similar social protection policy implications related to the forms of employment relations and unprotected nature of the employment contract (ILO 2016). Non-standard workers work in formal sectors and encompass: 1) workers involved in temporary employment; 2) part-time and on-call workers; 3) workers involved in temporary agency work and other working arrangements that include multiple parties; 4) workers with disguised employment relationships and dependent self-employed workers. These workers usually have less formal contracts, or no contracts at all, and lower earnings. Most importantly, they often lack access to employment and social protection benefits since they are often outside the scope of labor and social protection laws and regulations, or they do not meet qualifying thresholds  (ILO 2016; ILO 2018). However, workers in non-standard employment arrangements are not always informal by law and/or practice depending on different jurisdictions.

Statistical information available suggests that informal employment, both in informal and formal sectors, is in wide use in both developing and developed worlds. The share of informal employment varies significantly by regions. The highest levels of informal work are in Sub-Saharan Africa and Southeast Asia (around 90 percent but also in some particular places can reach extreme numbers close to full employment). In contrast, the lowest numbers of up to 20 percent are found in developed Europe and northern Americas (the U.S. and Canada). This demonstrates a strong correlation between the levels of socio-economic development, education, and formal employment. Additionally, involvement of women in informal employment also significantly correlates with socio-economic development and is lower in countries with high economic development (ILO 2018). It is worth mentioning that a substantial part of informal employment is represented by self-employment. While the ILO does not make clear conclusions regarding regional and global trends, some countries show either an increase or decrease in informal employment. Furthermore, almost all countries in the Eastern European and Central Asian regions show increases in informal employment, which plays an important role particularly in countries with transitioning economies (ILO 2018).

Across the globe, informal employment substantially overlaps with non-standard employment, specifically in developing and emerging countries. ILO (2018) suggests that temporary and part-time employment is one of the most significant forms of non-standard employment that is either increasing or has remained stable during the last decade in the largest emerging and advanced economies. The highest incidence of temporary employment is found in emerging Asia, as well as in Africa and South America. Its magnitude can vary from over 30 percent in China to a high of 80 percent in Indonesia. Across Europe, temporary employment also varies and is about 15 percent on average in European Union member countries (ILO 2018; ILOSTAT 2019).

Overall prospects for workers in informal and non-standard employment are not positive. Informal and non-standard workers are at much higher risk of income insecurity and poverty during their work lives and in retirement than standard, traditional workers who have formal full-time stable permanent employment arrangements and are usually covered by labor and social protection policies. The poverty rates suggest that in developing, emerging, and advanced countries there is a strong correlation between poverty and informal job arrangements. As is the case with informal employment, across Europe poverty risks among non-standard workers and self-employed, in general, are high compared to standard workers (EC 2017). In the U.S., non-standard workers are much more likely than standard workers to live in poverty, and there is evidence (as is in Europe) that they are more likely to be dependent on federal and state assistance and welfare such as cash assistance programs, Supplemental Nutritional Assistance Program (known as food stamp program) and Supplemental Security Income (GAO 2015). 

Social Policy Implications of Informal and Non-standard Employment 

Historically, in developing and emerging countries, informal sectors and informal employment have been associated with poor government regimes and lack of legal and regulatory framework including low levels of social protection available for the workers (ILO 2017).  In fact, the situation of most informal sector workers and workers in informal employment outside the informal sector is critical in terms of earnings and available social protection coverage in developing and emerging countries. Unpaid domestic and family work, all remunerative work including self-employment, casual employment, micro entrepreneurship, and others, have been important informal economic activities for the poor in many developing and emerging countries. However, informal work in many cases provides workers and their families with a living subsistence or not much more income. National poverty rates, which do not always precisely reflect poor conditions of workers and their households, indicate the potential of informal work and earnings. Even more, in informal employment, women are usually very vulnerable, poorer, have lower income than men, and often are family contributing unpaid workers.

Workers engaged in informal employment outside informal sectors are also very vulnerable in terms of earnings. Low incomes are still encouraged by the week registration and taxation regulatory frameworks, and by the lack of development of labor and social policies both contributory and non-contributory. Evidence suggests that median wages among workers in emerging and developing economies are low and there is a significant level of income insecurity for those who lose their jobs; only about 50 percent of emerging countries and over 10 percent of developing ones have implemented unemployment insurance systems. In many developing and emerging countries, pension systems are often established for dependent employees. Thus, informal elderly workers’ ability to earn a living is often strongly dependent on remaining physically and mentally active and healthy, particularly in countries with large agricultural sectors and significant manual labor. A number of studies show that in Asian, African, and Latin American countries the pension coverage is low, and workers face significant challenges in providing for their own retirement; the vast majority of elderly live in poverty and/or insecurity (Kidd 2017; UN 2018). Even in countries in which informal sectors and employment prevails and persists, for instance, in Bangladesh, India, Indonesia, Nigeria, and Pakistan, which account for about a third of the world’s population, the percentage of people covered by pension systems has not exceeded single digits for many decades (Rutkowski 2018). For instance, in Asia, existing mandatory pension systems mostly provide coverage for formal workers and coverage is low (with the lowest in India (5,5 percent), Pakistan (6,3 percent) and the highest in Malaysia (33,5 percent) and China where coverage reaches 50 percent (OECD 2018). In Latin America and Caribbean the coverage on average reaches 56 percent, however this figure is strongly influenced by coverage in a small number of populous countries, such as Argentina, Brazil, and Mexico (Kidd 2017). In Africa, on average less then third of older people are covered by any social protection programs, and the number is about 17 percent in Sub-Saharan Africa (ILO 2017). Additionally, in most developing and emerging countries existing public assistance poverty targeted pension programs usually provide coverage for a minority of populations and often create substantial coverage gaps that leave millions of informal workers unprotected (United Nations 2018).

The main challenge in most developing and emerging countries is that social protection systems are usually established for workers involved in formal employment, while the level of formalization is low, as well as a contributory capacity of the workers. Related is the problem of reduction in the number of workers who contribute to the pension plans. This trend was found in Latin American countries, where coverage gaps were expanding substantially (Holzmann, Robalino, and Takayama 2010), as well as in Eastern European and Central Asian countries (Palacios and Knox-Vydmanov 2014). Furthermore, in the Eastern European and Central Asian region reduction in formal employment challenges social protection systems that are traditionally based on payroll contributions .Thus, the trend of growing “informalization” in the region jeopardize the proportion of covered workers since fewer workers will be able to contribute to pension plans. The problem of pension coverage of non-standard workers is prevalent in countries with payroll-based contributory pension systems. Challenges that limit non-standard workers’ access to retirement income include problems that are directly associated with existing payroll-based contributory pensions: legal and statutory provisions exclude workers from entitlements to social protection payments or limit their access to social protection (ILO 2016; ILO 2018; OECD 2018; European Commission 2017). Studies suggest that in general temporary and part-time workers are the most vulnerable since they are more often excluded, at least partially, from social protection coverage (specifically in many developing and emerging countries across the world) or are entitled to lower pensions (as is for instance in the European Union (EU) member countries). For instance, the problem of lower pension benefits that arise due to low level of contributions is prevalent in many EU member countries where pensions are closely linked to contributions (for example, in Bulgaria, Hungary, Ireland, Slovakia, and Romania). However, in the rest of the EU member countries, where non-standard workers have common access to an adequate public basic pension that is provided to all regardless of employment status (as in Denmark, the Netherlands, Finland, and Sweden), the problem is less of an issue (European Commission 2017). Specific types of vulnerable workers in EU member countries, in terms of statutory access, besides temporary and part-time workers include: temporary agency workers, on-call workers, casual workers, seasonal workers, as well as immigrant workers. Additionally, in regard to self-employed workers, the most problematic issues related to statutory access to social protection arise when social protection is organized on a social insurance basis, i.e., based on contributions from the employee and the employer (European Commission 2017).

In the US, specific situations of non-standard workers, such as lower earnings and often precarious employment, potentially impact Social Security coverage and benefit levels.(Rutledge et al. 2019). Another common reason that workers do not have access to pension participation is the lack of employment itself as well as that employers simply do not offer employees access to social protection benefits (Rutledge, 2014). 

Policy Recommendations

International society has been increasing awareness about current labor trends and their impact on work patterns, living standards of workers, inequality, societies, and consequently, labor and social protection policies. Main directions of policy recommendations provided by international organizations and experts include efforts aiming to increase “formalization” of jobs and making informal and non-standard employment decent. On the one hand, there is a need to “disaggregate” informal employment into policy-relevant categories including social protection and tax and registration policies (Keen 2015). On the other hand, policy-makers need to make improvements in social protection and labor laws and regulations in order to ensure adequate life-long and old-age income for workers with informal and non-standard employment arrangements. Policy recommendations provided for countries, in which informality and poverty prevails, have been focused on the need for reimagining social protection systems in order to adapt labor market conditions that “…shift the pattern of demanding worker benefits from employers to demanding welfare benefits directly from the state”. Expansion of social protection toward universality through the combination of contributory social insurance and non-contributory programs and providing tax financed guaranteed minimum basic protection to the most vulnerable are suggested as essential policies in those countries (Rutkowski 2018; World Bank 2019). Most importantly, there is an emerging consensus on the greater reliance on the role of state and financing through general government revenue sources in order to close coverage gaps.

Many countries in the developing world have already undertaken measures to improve their pension systems through implementing and/or enhancing social insurance and non-contributory pension policies to adapt their social protection systems to the needs of their workers. However, the main challenges still include the lack of pension coverage and benefits adequacy. Most importantly, medium- and long-term sustainability of public pension systems is one of the main issues, particularly in less developed countries (ILO 2017; United Nations 2018).

Policy options aimed to address challenges related particularly to non-standard employment most specifically highlight the need to strengthen the resilience and adaptability of payroll-based contributory pension models to ensure that non-standard workers are not left uncovered by systems that are set up with formal sector traditional workers in mind. For instance, one set of recommendations aimed to increase coverage include changes to regulatory and legal systems such as: eliminating or reducing thresholds on minimum earnings, hours, or duration of employment; making systems more harmonized and flexible with regard to contributions required to qualify for benefits and allowing for interruptions in contribution periods in order to allow all to contribute. Additionally, simplifying procedures for registration and contribution payments, and making benefits portable across jobs and forms of employment is recommended (ILO 2016; ILO 2017; OECD 2018). Studies emphasize the importance of preventing misclassification of workers and providing both public and private pension coverage to self-employed workers (ILO 2016; Mercer, CFA Institute 2015; OECD 2018).

Some recent reforms have focused on strengthening social protection coverage for those who were previously excluded or inadequately covered, such as part-time and temporary workers and those who were self-employed. Many European Union member and other OECD countries already employ strategies to provide social protection to non-standard workers including someone who is self-employed (European Commission 2017; ILO 2016; OECD 2018).  Additionally, while it is reasonable to maintain the contributory nature of pension systems, further recommendations proposed by international organizations and experts underline that tax financed, public non-contributory pension programs (including means tested) may close the gaps in pension coverage for non-standard workers by guaranteeing a basic level of retirement income security, in cases where benefits are adequate and are politically sustainable (ILO 2016; OECD 2018).

Furthermore, it is important to mention that key policy recommendations suggest that making pension systems mandatory is essential. In contrast, there is evidence that current voluntary pension schemes cannot be effective for non-standard workers: they are not in active use by workers neither in developed Europe, nor in the U.S. (Gale at el. 2016; OECD 2018). Innovative and digital voluntary individual and group based solutions are being discussed recently to address challenges of non-standard workers. It is worth mentioning that policy debates on social protection for non-standard workers are on-going in many advanced and developing countries and interest towards them is gaining momentum. IF focusing on the U.S., experts highlight that informal and non-standard employment still tends to be overlooked in policy circles and the area of informal and non-standard work has implications for numerous policy options related to workers and their families, and businesses. The authors focus on the importance of enhancing tax and worker security policy incentives (such as for example, occupational skill trainings, child-care support for working parents, and immigrant workers’ support) that can significantly facilitate participation in and shift to formal and standard employment. Recent studies emphasize specific challenges related to employer-provided social protection systems and of non-standard workers in the U.S., and they find solutions to address weak connections between employers and non-standard employees. For instance, Munnell at el. (2018) suggest that compulsory pension and retirement coverage for non-standard workers and self-employed persons can close the gap in the U.S. social protection system. Additionally, improving portability, decoupling retirement savings and pension plans from employers, and encouraging innovative and internet-based solutions are suggested to address the needs and circumstances of non-standard American workers (Gale et al. 2016; Munnell et al. 2018).  Lastly, the box below summarizes main parametric and systematic policy recommendations discussed in the literature reviewed in the current section of the paper. 

The Box: Enhancing Retirement Security through Social Protection Policy for Non-standard Workers

Source:

Summary of comprehensive policy directions: Make pension systems mandatory or consider the level of compulsion, and reduce possibilities for exemptions Make social protection more universal Complement social insurance programs with non-contributory programs that can provide a basic level of coverage for all Develop Innovative, Internet and digital based pension and retirement solutions: work related and voluntary, individual and group based Improve application of social protection laws and regulations in practice Reinforce counselling as well as information and advice services so as to inform the workers about their social protection rights   Specific parametric policy options: Eliminate or lower thresholds regarding working hours, earnings or the minimum duration of employment Allow more flexibility and harmonization with regard to the contributions required to qualify for benefits and interruptions in contribution periods Enhance portability of entitlements between different schemes and employment statuses Simplify administrative procedures for registration and contribution payments   Policy options relevant for self-employed: Avoid exclusion of self-employed from private and public pension programs Prevent the misclassification of workers aimed at avoiding social protection coverage and ensure adequate pension and retirement savings coverage Monitor taxation of self-employment jobs including in the digital economy Consider measures to fight against under-declaration of income and tax avoidance in order to improve the financing of social protection benefit schemes and provide adequate benefits to workers Enhance legal and regulatory framework for digital economy

Author' findings and conclusions 

Concluding Remarks

This paper provides a discussion on how informal and non-standard employment impacts social protection, specifically, retirement and pension coverage and policies. From a social protection policy perspective, the most significant issues that result from informal and non-standard employment arrangements that call for the need to tackle their unfavorable consequences include lack of income security and limited access or no access at all for pension coverage for workers in informal and non-standard employment both in developing and developed worlds.

In a broader sense, poverty and vulnerability are important consequences of informal and non-standard employment. Studies suggest that among non-standard workers, worldwide, the most vulnerable are temporary and part-time workers, since they often lack access to employer-provided and/or public retirement and pension coverage, and their benefits are often lower or inadequate. Adapting social protection policy for self-employed individuals including those working through online platforms, needs special attention as well. Most importantly, both workers with informal and non-standard employment arrangements are significantly dependent on state social insurance and non-contributory assistance. This is also relevant to most developed and developing EU member countries. At the same time, a problem that arises in the EU includes tradeoffs between providing state assistance to the most vulnerable workers and an increase in government spending (EC 2017).

Evidence and hypothetical findings suggest that the retirement well-being of the U.S. non-standard workers, particularly temporary, temporary agency, and on-call workers, as well as self-employed and those in the gig economy, is substantially dependent on the U.S. government’s Social Security program. In general, the importance of state social insurance benefits is increasing in the U.S., and undoubtedly more workers, including traditional ones, will be dependent on the public Social Security program in the decades ahead due to the current trend of reduction in employer-provided pensions and aging (Munnell et al. 2016).

It is worth mentioning that as it is in the EU, in the U.S., an increase of non-standard work may have unfavorable consequences for state assistance programs since it tends to lead to greater reliance on them. GAO (2019) highlights that if non-standard workers do not receive work-provided health or retirement benefits, or do not qualify for workers’ compensation or unemployment insurance programs, costs formerly borne by employers and employees may be shifted to federal and state public assistance programs, such as Medicaid and others.

The discussion in the current paper points to the need for further research of retirement income security, particularly of the most vulnerable groups of the U.S. non-standard workers including those who are self-employed. As recommended in the literature reviewed, there is a need to address challenges associated with expansion and improvement of the access to employer-provided, as well as voluntary pension and retirement coverage and the provision of adequate benefits for the workers. Innovative retirement and pension saving solutions, including digital approaches, should also be developed to complement existing public benefits.

Related areas need to be explored as well: misclassification of workers and non-reporting and underreporting of taxes that also potentially affect sustainability of public and private social protection systems. Special attention should be paid to the regulatory frameworks that cover electronically mediated workers and their employers. The knowledge about lower income workers in general who tend to have informal and non-standard work arrangements and represent the most disadvantaged socio-economic groups should be shared with policymakers.

Lastly, any increase in informal and non-standard employment throughout the world needs research to assess its effect on social protection and to identify ways to adapt policies to those changes. Specifically, causes, consequences, and policy implications of an increase in informal and non-standard employment in the Eastern European and Central Asian region should be analyzed. Transition economies with traditional payroll-based pension systems and sizable informal and non-standard employment need special attention. Other specific issues for further research may also include challenges related to social protection of women in informal and non-standard employment. In general, the proportion of workers covered by contributory pension systems is consistently lower for women as are the benefit levels, and women tend to be in a disadvantaged position in terms of earnings and retirement income security across regions and countries. This is becoming particularly compelling as the world’s labor force is aging and inequality in pension coverage needs to be addressed. 

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