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Transition to formality A regional knowledge sharing forum for Latin American and Caribbean countries 24th to 28th August 2015 Lima, Perù

Formalization of the Informal Economy The Need for an Integrated Policy Framework Frédéric Lapeyre Informal Economy Unit, Head DEVINVEST/Employment Policy Department International Labour Organization 2

... What does formalization mean? 6

Some definitions Employment in the informal sector : All jobs in informal sector enterprises ENTERPRISE-BASED DEFINITION 15th ICLS 1993 Informal economy : All economic activities by workers and economic units that are in law or in practice not covered or insufficiently covered by formal arrangements 90th ILC 2002 Informal employment : All informal jobs, whether carried out in formal sector enterprises, informal sector enterprises, or households JOB-BASED DEFINITION 17th ICLS 2003 8

Why the formalization of the economy is a desirable goal? Informal Economy Formal economy 10

Formalization a mean and not an end for policy makers The transition from the informal to the formal economy aims at promoting: - decent work for all, - inclusive development. As most people enter the informal economy not by choice but as a consequence of a lack of opportunities in the formal economy: formalization should go hand in hand with ensuring opportunities for income security, livelihoods and entrepreneurship. 12

For individuals (workers and/or employers) Improved access to rights at work, social security and decent working conditions; Better access to representation and national policy dialogue; For enterprises Better access to credit and other productive factors, including through public programmes; Expended access to markets: participation in public procurements, access to imports and exports through formal channels; Reduction of the influence of corruption, greater respect for commercial contracts, etc. For society at large Broadening the tax base (increasing the scope of public action, reducing tax rates, etc.); Increased equity with regard to the contribution to public budget and to benefits of redistributive policies; Increased efficiency and sustainability of preventive & compensative measures to address risks; Fairer competition in national and international markets Greater social cohesion 13

Formalization of economic units Registration of economic units Increased compliance Extension in application of labour and social security regulation Formalization of jobs Extension of application of labour regulation Extension of coverage of social security Registration of employment relationship Registration of own-account endeavours Typology of formalization Productive job creation in the formal economy Most new entrants have access to employment in the formal economy Increased formal employment intensity of growth. 14

Informal employment: multiple dimensions Dimensions Legal framework: Labour legislation coverage Legal framework: Social security coverage Declaration with public authorities Formal employment practices Indicators - Recognition of employee status & associated employment rights - Employment rights in practice - Recognition of social security entitlements - Registration with SS system/scheme - Payment of SS contribution Income tax declaration - Written contract, terms of employment - Pay slip, record of payments 15

Dynamics of informal employment in the formal and informal sectors of the economy in Argentina 16

Lessons learnt about formalization 1. Some of the policies that explicitly sought to increase labour formalization were already present in these countries before although in an isolated manner with no positive effects on labour formalization. 2. Ad-hoc formalization policies delinked from a national development strategy and lacking political commitments are unlikely to make a sustained impact on informality. 3. Where integrated approaches have been adopted, the results for formalization have been more robust 17

... Why do we need an integrated policy framework? 18

Economic growth: A necessary but not sufficient condition 1. The growth of formal employment is insufficient to absorb the new entrants and those currently trapped in informal employment 2. The rate of informal employment in the formal sector is growing in many places 3. Informalization is a persistent phenomena even in countries with good growth performance 19

GDP growth and informal employment in Argentina during the economic crisis 21

Economic policy Institutionnal policy Formalization for inclusive development Employment and social policy What is an Integrated policy framework? 22

Key components of an integrated policy framework Macroeconomic, trade, industrial, tax, sectoral and infrastructure policies that promote employment, enhance productivity and facilitate structural transformations; Policies that affect transversal drivers of formalization such as the lack of a social protection floor, weak labour market institutions, low productivity and problem of access to finance, skills and infrastructure; Policies that target specifics categories of economic units (e.g. MSEs), groups of workers (e.g. domestic work, self-employed), type of informality (e.g. undeclared work in formal enterprises). 23

. TOWARDS AN INTEGRATED APPROACH IN LAC COUNTRIES Productivity Norms Incentives Enforcement Macro (environment) Information Training Link to business Formalisation (registry, taxes) Culture of compliance Meso (sectors, chains) Streamlining of procedures Link to social security (focus on hard- to-reach groups and non-conventional methods) Institutional strengthening (advocacy management, automation) Micro (business level) Social dialogue (improvement, change) Specific approaches (Formalisation standards, specific agreements, etc.) Specific approaches WAGE WORKERS OWN-ACCOUNT WORKERS DOMESTIC WORKERS 24

... A- Regulation, Incentives and information 25

Argentina Brazil INFORMATION Transition to formality National Labour Regularization Program - PNRT. Systematic media campaign STREAMLINING National Labour Regularization Program PNRT. MiSimplification Programme SIMPLES and SUPER SIMPLES, Law on Individual Micro-entrepreneur, esocial, REDESIM Chile Social Security Education Fund Chile Emprende Your business in a day, Law on reducing redtape for new firms, PREVIRED, Family-Owned microenterprise Law Laws and regulations Dissemination of information on how to register enterprises/workers, benefits, costs, sanctions, obligations, etc. Streamlining of administrative procedures for registering/formalizing an enterprise, tax and social security obligations Social dialogue to promote formalisation. 26

Argentina Brazil Uruguay SCHEME (Single Tax Regime) Monotributo & Monotributo Social SIMPLES & Individual Microentrepreneur Monotributo & Monotributo social CHARACTERISTICS Transition to formality Simplified regime for MSEs and own-account workers which merges tax payment and social security contributions in a one fixed monthly payment. Unification of contributions with other household members Access to pension benefits and medical care Subsidy (50% health insurance, total for security contribution) and tax exemption for activities performed by those in situations of social vulnerability. Simplified regime for MSEs and own-account workers. Merging of federal taxes and social security contributions in a single annual payment. Reduced cost of social security payments Special regime for own-account workers, domestic workers or entrepreneurs below poverty line. Small contribution for access to social security and tax exemptions. Access to health care for an additional fee. Incentives Tax incentives and special tax regimes for smaller firms Social security incentives 27

Simplification of compliance (reduce Simple measures: Reduce & simplify forms; guidance Technological measures: Online registration & payment One-stop shop registration transaction costs) More sophisticated instruments: vouchers Combined tool for payment of wages, social security contribution; job declaration; payslip Linked to access to fiscal incentives (tax deduction/credit, SS contribution exemption, etc.) 28

Enforcement Encouraging compliance Transition through information to formality and training Strengthening of inspection capacity Alternative specific approaches INFORMATION STRENGHTENING INSPECTION OTHER APPROACHES Argentina National Labour Regularization Program - PNRT National Labour Regularization Program PNRT. Digital Inspector Law to promote registered employment and prevent employment fraud Colombia Electronic Payroll (PILA) Formalisation agreements Ecuador Mexico Dignified Domestic Work Strengthening of labour inspection Strengthening of labour inspection Uruguay Share of information among entities 29

... B-. Social protection and formalization 31

What are the obstacles that keep workers in the informal economy? Insufficient legal framework Weak labour and social security inspection Registration of workers is complicated and lengthy. Social insurance contributions too high Lack of trust in social security institutions 32

How do these different situations arise? When there is no law applicable to a situation, the cause lies in the absence of legal provision for that situation or express legal exclusion Non-compliance, may be ignorance (the content of the laws is not known) The law itself discourages compliance because it is inappropriate, cumbersome and excessively costly It may be the will of persons, deliberate behaviour to evade costs 33

Two dimensions of social security. In most low and middle-income countries, only formal sector workers have access to social protection Some programmes target the poorest, leaving the rest of the informal sector uncovered Existing universal schemes Poor?? Rest of informal economy Population Formal economy Level of protection 34

Social protection floor Level of protection. All residents should enjoy at least a minimum level of social security Member states of the ILO should establish SPFs as a fundamental element of their social security systems Nationally defined SPF Poor Rest of informal economy Formal economy Population 35

Reaching higher levels of coverage Level of protection. Based on this floor, extend social security to provide progressively higher levels of SP benefits to more people Higher levels of social security to more people Nationally defined SPF Poor Rest of informal economy Formal economy Population 36

How can social protection contribute to formalization? Extend social security through formalization Formalising the informal workers in order to give them access to social insurance Extension to those in informal economy Extending coverage independently of status through non-contributory schemes and gradual approaches can contribute to formalization in the medium and long-term 37

... C- Formalizing Micro & Small Enterprises 38

Main. causes of Informality in MSEs: Main strategies to promote Formalization MSEs: 1. Low productivity and high costs of formalization 1. Promoting productivity in MSEs 2. Complex procedures, inadequate regulation for the size and characteristics of MSEs 3. Informality as an attractive option: flexibility and independence 4. Limited inspection and poor/ineffective compliance mechanisms 2. Revision / adaptation of regulations, procedures and norms 3. Creation or improvement of incentives to formalization 4. Enhance capacity to enforce compliance 39 39

Drivers of informalization and barriers to formalization INFORMAL NOT IN COMPLIANCE (50%-80%+) BARRIERS + HIGH COSTS + LACK OF INCENTIVES F O R M A L 40

Effective Compliance System Appropriate incentives INFORMAL NOT IN COMPLIANCE REDUCED BARRIERS & COSTS F O R M A L 41

5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0 Transition to formality SIMPLES Single simplified annual tax and social security declaration Number of micro and small enterprises registered with Simples Nacional, 2007-2012 (thousands) 2496 2627 3172 3569 3975 4409 2007 2008 2009 2010 2011 2012 42 42

Policies on MSE access to public acquisitions Simplification of public tenders - Sole access to small acquisitions - Special programmes Trends in Federal Government purchases from micro and small enterprises, 2003-2011 43

.. D- Formalizing hard-to-reach groups:. The case of Domestic Workers 44

Domestic worker: Person who performs domestic work in an employment relationship (C189) Domestic work: Work performed in or for a household or households (C189) 45

Invisible, but significant workforce 52.6 Million 1.7% of total employment 3.6% of paid employees Source: ILO TRAVAIL estimates. See Global and regional estimates of domestic workers, Domestic Work Policy Brief No. 4, ILO 2011. 46

Coverage of domestic workers by national labour legislation 47

Social security for domestic workers Latin America: Percentage with Access to and/or Contributions to Pensions or Retirement: Employed Women and Female Domestic Workers P e r c e n t a g e 80 70 60 50 40 30 20 10 Total Employed Women Female Domestic workers Source: ILO, Panorama Laboral, 2012 0 48

Pension Medical care; and/or sickness benefit Unemployment insurance Maternity benefits Payment to national general system Bolivia, Brazil, Chile, Colombia, Costa Rica, Panama, Peru, Uruguay Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Panama, Peru, Uruguay Costa Rica, Uruguay Brazil, Chile, Colombia, Costa Rica, Panama, Peru, Uruguay Special law/regime for domestic workers Argentina El Salvador, Guatemala, Paraguay Chile Bolivia, Paraguay 49

Decent work policies targeting the informal economy A policy of extending rights and social protection coverage is not the same as a policy of enforcing rights or effective protection. In the first case, it is necessary to introduce legislative measures and implementation procedures. In the second, it is a case of making use of the administrations mechanisms through its administrative units, programmes, procedures and methods of work. 50

.. TO CONCLUDE. 51

An Integrated Policy Framework should aim at (a) facilitate the transition of workers and economic units from the informal to the formal economy; (b) promote the creation, preservation and sustainability of decent jobs in the formal economy through coordinated effective public policies; (c) and prevent the informalization of formal economy jobs. 52