Informal Workers – Protecting the Unprotected

Pakistan has become the fifth most populous country in the world, with a fast expanding workforce, especially in the informal sector. This growing workforce needs innovative solutions to ensure adequate access to social protection, in order to mitigate the risks faced by workers on a regular basis. Sustainable development goals now also demand pro-poor policymaking and inclusive growth.

 Government’s social protection programs target either the ultra-poor or the formal sector with a missing focus on those in between. Lack of access to social protection is so common across the unregulated sector that it has come to define informal employment.

Challenges in designing and delivering social protection systems for informal sector workers arise not only from their lack of access to traditional forms of social protection, but more generally from the heterogeneity of the sector itself. It spans a broad spectrum of employment that includes street vendors, home-based workers, self-employed workers, and workers who are paid wages. The problem is further compounded by lack of credible data that makes informed decision-making by policymakers difficult.

Pakistan’s informal economy is estimated at 40 percent of the GDP and extending social protection to this diverse and expanding sector remains a major policy challenge.

Pakistan’s informal sector

With a population of over 200 million and the tenth largest labour force in the world, Pakistan’s informal sector has grown faster than its formal sector. Close to 72 percent of all non-agriculture workforce is informal of which three-fourths are women. Women also form a staggering 80 percent of the estimated 12 million home-based workers in Pakistan. Self-employment – often vulnerable and seasonal –  is high at 60 percent of total employment.

The informal sector is dominated by family units or microenterprises –  small and medium sized enterprises with less than ten employees. Due to their size, most labor laws (such as those determining minimum wage, terms of employment and occupational safety) and social insurance regulation are not applicable to small businesses. SMEs and informal establishments often hire contractual labor (mainly outsourced) and circumvent labor legislation. Labor Inspections cover only registered factories and shops.

Social Protection Coverage in the informal sector

Spending on social protection remains relatively low in Pakistan. According to the World Social Protection Report 2017, the country spends the least within South Asian on social protection. Such programs cover just 2 percent of the population. Coverage is narrow even within the formal and public sectors.

Pakistan started off with a rights-based approach to social protection and put in place contributory schemes for employees’ benefits and old-age pension. Over the years, the social protection policy has entirely shifted towards assistance to the marginalised through non-contributory, tax-financed benefits. Even though social protection expenditure is dominated by spending on social insurance (over 70 percent of total social protection expenditure), social insurance covers only 17 percent of the total beneficiaries. Coverage rates for key target groups (unemployed, underemployed, poor, persons with disabilities, children, elderly) is under 20 percent.

Apart from pension schemes for government employees and army personnel, coverage of contributory social welfare schemes for workers is mainly limited to a small number of registered employees in the formal sector.

 Profile of informal workers

Informal workers in Pakistan are more prone than their formal sector counterparts to transitory poverty. Those engaged in the informal work are mostly uneducated, lack adequate core skills, have minimal income to enable savings, belong to large families with a significant number of dependents, and experience seasonal fluctuation in employment. Household incomes of informal workers hence remains irregular.

A recent study on informal workers funded by the Asian Development Bank found 30 percent of those surveyed were uneducated and lacked basic numeracy and literacy skills. Only 4.3 percent had received any formal skills training. These workers also belonged to households larger than Pakistan’s average household (6.7 versus 6.1 persons per household). Close to 45 percent were working without any written or oral employment contracts with over half contracted as daily wagers or temporary staff. Even though on average informal employees worked longer hours (6.6 days a week for 10 hours a day), they earned just around or below the minimum wage.

Access to social safety nets and information and knowledge about social protection is limited as is the incentive to invest in social insurance schemes. Less than 5 percent of the workers were part of any social protection scheme. There is general reluctance to register with contributory social insurance schemes as they were unable to understand the potential benefits of doing so.

Gender Perspective

Lack of supportive facilities such as child care, transport, and accommodation in the formal sector discourages women from gaining formal employment. In the absence of facilities for these women, extended family support systems often fill the void, although not all working women have access to such systems. Further, the uneven division of household labour makes full-time employment difficult for many women, particularly poor women who cannot afford the cost of child care, even when it is available. SMEs also struggle with regulations that require them to provide maternity leave and other benefits for women and this acts as a disincentive to hire women

As a result, women are largely concentrated in the informal sector and are particularly vulnerable. They mostly engage in home-based work and have lower overall average wages than their male counterparts.

Policy Environment

Social protection is now a devolved subject. Currently only Punjab has a dedicated social protection authority and has drafted a social protection policy along with Khyber Pakhtunkhwa (KP) while work is underway to draft a policy in Sindh. Minimum wage boards, constituted in each province, recommend wage levels for workers of different skills levels across industries. Only Punjab has a labor policy, the rest of provinces are still developing one.

Benazir Income Support Program (BISP) remains the largest social safety net program in Pakistan. The programme targets the ultra-poor. All its direct recipients are women. It is also currently conducting a farmer census (separately collecting information on poor farmers) and considering launching an employment guarantee scheme.

The provincial governments in Punjab and Sindh have recently passed bills to recognize home-based workers a special category of workers. The government is yet to implement these policies, following which home-based workers may register with public social security institutions and be entitled to a minimum wage.

Government also plans to expand the Prime Minister’s National Health Program to all over Pakistan by 2022. The program provides social health insurance), by issuing health cards to families living below the poverty line. More recently, the Securities and Exchange Commission of Pakistan (SECP) also proposed an Awami Pension Scheme for the informal sector.

 What can governments do?

Despite institutional and legal frameworks for securing basic workers’ rights, implementation excludes the vast majority of informal workers from social protection. These programs need to move away from schemes designed specifically for formal, full-time and life-long (mainly male) workers towards accommodating more dynamic and unpredictable work patterns that have increased with the informalization of work. This will impact how contributory schemes work, whether coverage for low-income workers will have to be subsidized through pooled funding mechanisms and how social protection programs are designed to adapt to a moving workforce.

There is need for compulsory coverage of social protection for informal sector workers by allowing workers to self-register with social security institutions. Where applicable, payments linked to social protection provisions should be matched to the status of the enterprise concerned and ability of the worker to pay.

Governments should use social protection as a tool to create an environment that encourages entry into the labor market, addressing vulnerabilities of the workers. For example, social assistance through cash transfers can supplement low wages while a universal health insurance can provide maternity cover to women whose employees are not providing them with such benefits.

Any effective and well-grounded skills development strategy should incorporate the informal sector workers and identify areas for appropriate interventions. Since many informal workers are poor and have little education, courses must be tailored to their needs.

Flagship social protection programs like BISP can design additional insurance instruments to target informal and agriculture sector workers. It has both outreach and capacity to engage technical expertise and ensure robust targeting.

A formal structure within the existing legal framework can be made for contractors who supply informal labour to factories and other establishments. Companies could be allowed to hire only from registered contractors. This would, in turn, provide an incentive for contractors to register themselves as a prerequisite for operating in the labour market.

In the end, much needs to be done –  but can be done – to integrate informal workers into mainstream social protection programs beyond short-term targeted social assistance. A growing demand for social support, extending the coverage of social protection benefits and improving the job quality of workers will be among Pakistan’s major challenges in future.

This is based on the chapter “Social Protection for Informal Workers in Pakistan: A Case Study of Small and Medium-Sized Enterprises” published in a book funded by the Asian Development Bank – Social Protection for Informal Workers in Asia which can be accessed from here

Hina Shaikh is a Country Economist at the International Growth Centre (IGC).