In its 2019 annual development report, the World Bank called for exploration of ‘mandated and voluntary social insurance’ programmes to build more inclusive labour support. The final declaration of a 2018 G20 meeting in Mendoza, Argentina spoke of the need to ensure decent work ‘with a focus on promoting labour formalization and making social protection systems strong and portable, subject to national law and circumstances’. The decision by the G20 to discuss the topic reflected growing recognition of the weaknesses of social insurance in developed and middle-income countries.
In this context, upcoming meetings of the G20 and G7 could provide a unique moment for the world’s developed economies to place the issue of the informal sector and gig economy workers on the broader agenda for governments, IFIs and multilateral organizations, such as the UN Development Programme. The first step will be extending recognition of the structural deficiencies in developed- and developing-economy labour markets, and examining ways to redesign national programmes and international financial programmes to address these deficiencies.
Upcoming meetings of the G20 and G7 could provide a unique moment for the world’s developed economies to place the issue of the informal sector and gig economy workers on the broader agenda for governments, IFIs and multilateral organizations.
Several options already exist, but to date these have been mainly small-scale or experimental. The Netherlands, for example, has a system of portable, flexible social insurance accounts which involves workers paying into accounts that they can draw down if their incomes decline because of loss of work, retirement or health problems. China, meanwhile, has a pension programme to support rural and informal workers; currently 360 million people contribute to the programme, and 150 million already receive benefits. Elsewhere, Costa Rica and Thailand have similar options for informal sector employees. Other examples include micro-pension accounts in Kenya, Ejo Heza LTSS (‘long-term saving scheme’) in Rwanda and the Extension of Coverage for the Informal Sector (ECIS) project in Zambia.
At the same time, and notwithstanding the Dutch example above, a struggle over the status and benefits of gig workers is occurring in a number of developed countries. A recent example is in California, involving drivers for app-based ride-hailing services such as Uber and Lyft. In September 2019, the state legislature passed Assembly Bill 5 (AB5), which required gig workers in most cases to be classified as employees and not independent contractors. Uber and Lyft responded with the claim that implementing the law would result in a 20–30 per cent increase in costs, which would be passed on to customers. They and others pushed instead for a ballot proposition to define their drivers as independent contractors, and spent upwards of $200 million in advertising to defeat the law. Their lobbying paid off: the law was rescinded. The battle shows that there will be opposition to any broader policy to address informal sector and gig workers. On the other side of the Atlantic Ocean, however, after a UK Supreme Court ruling, Uber agreed in March 2021 to recognize its drivers as workers, entitling them to holiday pay and pensions.
In designing and implementing social insurance policies and programmes for the large number of workers who are unprotected, policymakers will need to take several factors into consideration. The observations and guidance below draw from existing policy prescriptions, as well as from general lessons regarding public policy and social programmes:
- Given the small size and low profitability of many businesses that employ informal sector workers, employer-contributed social insurance is often insufficient or in some cases unfeasible as a means of funding programmes. The levying of fees or taxes on small businesses would only incentivize even more informality and off-books hiring. The fact that, as mentioned, the bulk of informal sector workers are self-employed or employed in family enterprises also partly rules out this social insurance option.
- In developing economies, the state will need to subsidize individualized social insurance schemes. These programmes will have to play a redistributive role. Workers in informal and gig sector employment often lack the income to be able to fund adequate private accounts to cover health and/or unemployment insurance and pensions. Without the capacity of firms to contribute co-pays, governments will need to step in and understand and defend the investment as a broader plan for economic support.
- State support cannot be so generous that the benefits and income exceed those of low-income formal workers. Excessive support could not only engender political opposition; it could also incentivize formal sector workers to defect to informal employment or self-employment.
- Informal sector and gig workers will need to make minimum contributions to their own accounts. But getting workers to do so, as individuals often discount the future, will require incentives to ‘nudge’ them into contributing at least a minimum of their salaries to social insurance accounts. Those nudges can include specific recognition of their contributions – as is done in Kenya, where participants are rewarded with a gold-coloured coin showing the number of weeks worked – but a variety of tactics should be used. They can include public education campaigns, tax incentives, access to financial services for the unbanked, and access to technology to track and monitor accounts.
- Participation in flexible, individualized social insurance programmes should be voluntary rather than compulsory. While this will likely create ‘leakage’ in the system, with some individuals choosing not to participate or contribute, a compulsory programme would impose a financial burden on lower-wage informal and gig workers. If participation has too high a required financial cost for participants, this could create another level of informality by encouraging workers to remain unregistered and illegally evade compulsory payments.
- Independence, transparency and state guarantees are essential. Even in the creation of the US social security system in 1935, the Franklin D. Roosevelt administration had to overcome popular distrust; it took years of demonstrable success to expand the enrolment base. Today, with confidence in government low worldwide, countries will need to create professional, independent bodies to oversee accounts and guarantee deposits, potentially tapping the private sector for assistance.
- Setting the minimum and maximum contributions at appropriate levels is essential. If the contribution is too low, it will fail to enable the consumption-smoothing function of social insurance. If the minimum is set too high, it will discourage contributions, especially from poorer workers.
- For the opening and oversight of accounts and for mobilizing worker participation, national governments and IFIs should seek to build alliances between private businesses, informal sector associations and labour unions. On the financial side, the need to overcome distrust of the state means that banks, insurance companies and other financial institutions may have to guarantee the oversight and professional management of these accounts. Outsourced management of social insurance accounts will also benefit from the retail outreach, customer service capacity and experience of private sector companies. In terms of mobilizing and working with groups to enrol, it will be necessary to establish collaboration involving formal sector businesses, informal sector businesses, financial institutions, informal sector associations and labour unions. Such alliances could usefully organize intended beneficiaries, explain the programmes and benefits, and provide an important element of trust and protection – provided, of course, there is proper independent regulation of their activities and accounts.
- In developing countries, sovereign debt forgiveness – not just relief on service payments – and bilateral and multilateral grants for participating governments should be tied to the design and implementation of social insurance policies and plans to support informal and gig sector workers. Developed and developing economies alike will come out of the current crisis with heavy debt burdens and significantly reduced fiscal space to implement new social programmes. This fiscal climate will provide an opportunity for IFIs, donor governments and developing-economy states to address long-standing structural and productivity challenges, as well as to respond to any long-term economic scarring caused by the pandemic. To that end, IFIs, G20 countries and private lenders should work with client governments to design innovations and interventions in social insurance, backed initially by debt forgiveness and offers of additional lending or grant assistance to jumpstart such initiatives.
This latter point will be particularly crucial as differences emerge between the stimulus packages of developed economies and those of developing ones, especially in terms of the scale of labour market disruptions that such packages will need to address. In September 2020, according to the ILO: ‘The estimated fiscal stimulus gap was around US$982 billion in low-income and lower-middle-income countries (US$45 billion and US$937 billion, respectively). This gap represents the amount of resources that these countries would need to match the average level of stimulus relative to working-hour losses in high-income countries.’ Narrowing the gap will require not just coordination among developed and developing economies and the IFIs, but also creative new approaches to social policy. This could include the individualized, flexible and portable social insurance programmes described above, as well as targeted efforts to increase formal employment.
The recent election of Joe Biden to the US presidency provides an opportunity for US and G20 leadership on this issue, in collaboration with other G20 members. In the US, Biden’s $1.9 trillion economic relief package included funding to shore up private health insurance for individuals and bail out failing pension plans. President Biden’s new Treasury secretary, Janet Yellen, a labour economist, will oversee recapitalization of and any potential reforms to the IFIs. An effort to direct organizational and financial attention to structural reforms addressing problems in the informal sector would also play to the Democratic Party’s labour base while re-establishing multilateral US leadership – both generally and, more specifically, within the Bretton Woods system and the development sphere. As the host of the next G7 summit in mid-2021, the UK is also in a strong position to advocate for a broad re-examination of the issues and promote appropriate reform.
There are compelling economic reasons for integrating and providing social insurance for the world’s 2 billion-plus informal sector workers and the growing legions of gig and part-time workers. These arguments include the potential to increase productivity, expand consumer markets, and help governments and markets generate long-term revenue. There are also moral arguments for finally addressing the needs of a working class left behind by globalization. However, the most urgent and important rationale is political. In 1944, reflecting on the Great Depression and the economic destruction wrought by the Second World War, President Roosevelt acknowledged that ‘people who are hungry and out of a job are the stuff of which dictatorships are made’. At a time when inequality has climbed to historic levels, the global consensus over democracy is fraying, public trust in governments has declined and nationalist populism is on the rise, a new social contract that addresses the complex exclusion and insecurity of the new labour classes will go a long way towards recasting and restoring the socio-economic foundations of the global market economy and liberal national and international orders.
