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COVID-19 and the Informal Economy

By Alice Chen

COVID-19 has dramatically shaken the countries impacted by the pandemic. Deeply rooted economic inequality, racial inequality, and healthcare inequality have been exposed in this time of crisis, as many of the hardest hit communities face disproportionate risks. In response, governments have acted quickly and decisively, supporting national economies with immediate injections. As administrations and governments dole out 9 trillion dollars in economic aid, workers in the informal sector who are “at the greatest risk from the economic fallout created by the coronavirus pandemic,” remain comparatively less supported (1,2).

According to the International Labour Organization, 61 percent of workers around the world were employed in the informal economy in 2018 (1). Over 2 billion individuals worked in a sector consisting of the “diversified set of economic activities, enterprises, jobs, and workers that are not regulated or protected by the state,” typically indicated by unregistered self-employment and employment in an unregistered enterprise. The legality of informal enterprises varies, as the term encompasses a wide variety of activities, including drug-trafficking, family-run food stands, and under-the-table skilled trades. Typically, workers do not pay income taxes and are not formally protected by labour regulations of their region (1). While it is difficult to assess the exact size and scope of informal economies across regions due to their very nature, they play a particularly large role in many lower-income countries. Sacha Wunsch-Vincent of the World Intellectual Property Organization (WIPO) suggests that informal economies are “enormously important in many countries.” (1)

The key factor separating informally employed workers from their counterparts is the availability of government support they can officially claim. Informal enterprises are unregistered, unregulated, and unofficial. They are not included in government registers, making them ineligible for many initiatives providing economic aid to small businesses. Yet individuals working in the informal sector are often the most financially vulnerable. Studies by the World Bank reveal that informal workers earn 19 percent less than formal workers, have limited savings, and generally are not protected by social safety nets (1). According to the United Nations Office for the Coordination of Humanitarian Affairs (OCHA), “[w]orkers in the informal economy may not be able to stay at home when they are sick without paid sick leave. They lack disposable cash and cannot stock food.” (1) These factors exacerbate the economic and social consequences of COVID-19 on informal workers and economies with high informality, especially emerging markets and developing economies (EMDEs). On average, the informal economy accounts for 70 percent of total employment in EMDEs and 40 percent of GDP in Sub-Saharan Africa, Europe and Central Asia, and Latin America and the Caribbean (1).

Beyond the location of areas with high informality, the demographics of individuals who make up the informal workforce skews heavily to vulnerable populations. 75 percent of migrant women and 70 percent of migrant men work in the informal economy in low and middle-income countries (1). They frequently lack the legal protection local workers enjoy, particularly if they are employed in the informal sector.

This global pandemic presents unique challenges to informal enterprises beyond purely economic circumstances, with additional layers of challenges including restrictions on public marketplaces, the flow of goods and services, and closure of schools. In South Asian countries, one in four households living below the poverty line are informally employed in the construction and services sectors, which have been hard hit by national and regional lockdowns (1). Historically, economic crises and recessions already had a disproportionately negative effect on the informal sector in South Africa. In South Africa, 31 percent of informal workers who did not fully lose employment were temporarily shut out of employment in April compared to 26 percent of formal workers. Of those who continued to work in the informal sector between February and April, typical working hours decreased by 49 percent for women compared to 25 percent for men, showing disparities between genders as well as types of employment (1).

What can governments do to protect workers in the informal economy? Many traditional measures, including unemployment insurance, tax relief, or wage subsidies, are ineffective given the unique features of the informal sector and those it employs. Alternate sources of emergency financing with different methods of vetting for small, informal enterprises should be made available without requiring proof of incorporation or documentation in government registries. Expanding social security nets, particularly in consideration of individuals and communities most affected by COVID-19, is essential in the short and medium term. At the risk of inefficiencies and higher spending, consider untargeted payments to minimize the number of informal workers who slip through the social safety net. Ensure that social security benefits remain accessible to all individuals, both formally and informally employed, by providing food aid, rent/utility bill waivers, and cash (1).

Beyond a global health crisis, COVID-19 presents a major challenge to economic systems and individual workers. As governments evaluate the best courses of action to take in the wake of a pandemic, they must consider the disproportionate economic hardships experienced by vulnerable populations who make up an essential part of their economy.



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