Social protection and the informal economy: what do we know?

This paper takes stock of the literature that examines how the recent expansion of contributory and non-contributory social protection programmes in low- and middle-income countries in Asia and the Pacific, Latin America and Africa has influenced the conditions and incentive mechanisms that underpin work choices in the informal economy. In reviewing the literature, we adopt a systematic review methodology to identify studies, which through experimental, quasi-experimental, or qualitative research designs examine modalities and design features of these policies and how they impact the transition of formal (or informal) workers to the informal (or formal) economy. Overall, we find that the existing evidence base is too limited to draw definitive conclusions about ‘how’ the expansion of social protection systems is impacting the informal economy. While certain policy reforms to contributory social insurance schemes have produced desirable incentives for workers to formalise, other types of non-contributory programmes seem to discourage workers from entering the formal economy. These effects are nonetheless small and among certain populations. The study underscores the need for further research to better understand the conditions that seem to be detrimental for formalization and the mechanisms that underpin these effects; and how policy reforms could mitigate these unintended outcomes while procuring social justice and equity.