The dysfunction of formal labour markets, plus the growing gap between those with and without access to social insurance safety nets (such as unemployment insurance, pensions and healthcare), is a central factor in the dramatic rise in global inequality, lack of social mobility and economic insecurity. These problems in turn have contributed to the rise of nationalist, populist movements in the US, Europe, Asia and Latin America, and to social protests that have destabilized established and consolidating democracies alike.
There are also development reasons for expanding access to social insurance for informal sector workers. The most important is the long-standing need to increase productivity, low levels of which are major impediments to development in emerging markets. The reasons for informal labour’s low productivity are multiple: low wages, lack of training, a high proportion of labour to capital, and inefficiency. As informal workers make up anywhere from 15 to 80 per cent of the workforce in different countries, improving the productivity of such workers could have a significant impact on economic growth.
The policy responses required are varied, and include training programmes, expanded access to credit, and infrastructure investment. Social insurance of the type proposed in this paper is one of those tools, although it is not the only prescription. While social insurance for informal workers is unlikely to close the productivity gap completely across all channels (in two studies, productivity in the informal sector was estimated to be 30–35 per cent lower than in the formal sector), access to even partial health and unemployment insurance can help avoid economic shocks that disrupt productivity. As the International Labour Organization (ILO) has noted, accelerating ‘the productivity growth of low-productivity workers at the bottom end of the wage/income spectrum is one of the best ways to accelerate average economy-wide productivity growth, while at the same time counteracting increasing inequality’.
The scope of the COVID-19-related economic and social crisis provides a unique moment for a broader re-engineering of social safety nets and labour markets. The types and forms of social insurance programmes needed will vary according to the context. In many cases, informal sector workers in developing economies lack access to basic unemployment insurance and pension systems, while publicly supported systems provide access (albeit often imperfectly) to healthcare. In developed economies, self-employed and gig workers often lack access to unemployment insurance or – as in the case of the US – to comprehensive, affordable healthcare.
Given low levels of popular confidence in government globally, any policy that inserts the state into the process of collecting and redistributing revenue will also likely be met with scepticism and resistance.
Reorienting the role of the state to address inequalities and inefficiencies in modern labour markets will not be easy. Many national governments, especially in developing economies, lack the fiscal capacity to engage in such a re-engineering on their own. There will also be political constraints, including fierce economic and partisan opposition to changing tax structures and regulations in ways that would redistribute income and obligate private employers to make the necessary fiscal contributions. Given low levels of popular confidence in government globally, any policy that inserts the state into the process of collecting and redistributing revenue will also likely be met with scepticism and resistance. (On the other hand, such programmes, if conducted successfully and comprehensively, could help to rebuild popular trust in government.) In addition, in most cases, without significant international political, financial and technical support, even ambitious social programmes will tend to revert to small-scale, incremental initiatives rather than wider-ranging reforms.
Despite these challenges, the ongoing economic crisis and new-found attention to fractured labour markets as a source of inequality present an opportunity for IFIs, multilateral organizations and national policymakers to finally address the dysfunction and structural roots of social and economic inequality. Failure to respond aggressively at the national and international level will not only slow the global economic recovery post-COVID-19, it will also leave long-lasting social scars and inequalities.
