66110 December 2011 – Number 49 Striving for Better Jobs: The Challenge of Informality in the Middle East and North Africa Region Roberta Gatti Diego F. Angel-Urdinola, Joana Silva, informality as “lack of social security coverage� Andras Bodor 1 captures well the vulnerability associated with informal employment and is the definition used in Introduction: This Quick Note provides an the study. overview of the World Bank report Striving for Better Jobs: the Challenge of Informality in the Middle East and Figure 1: Informality in MENA vis-à-vis other North Africa2. The report was completed as a regions revolutionary wave of demonstrations and protests % of the Labor Force not Contributing to Social Security swept across the Arab world. Millions of young MENA 67.0 people were chanting “dignity� and “social justice� in GCC 6.4 non-GCC the region, underlining deep-seated feelings of 67.2 exclusion and inequality of opportunities. Developed 8.9 Demanding democracy, human rights, and better ECA 39.4 61.3 governance, young Arabs were also striving to LAC EAP 76.1 realize their economic aspirations in a region rich in SA 91.0 human and physical capital. However, while there SSA 94.7 has been economic growth for a number of years in 0 20 40 60 80 100 MENA countries, this has not led to an adequate Self Employment (% of total Employment) number of good jobs and has succeeded, at best, in MENA 28.4 generating low-quality, informal jobs. GCC 6.2 non-GCC 29.1 Levels and Trends of Informality in MENA: Developed 13.8 The report looks at informality through a human ECA 16.3 development angle, focusing on informal SSA 31.8 LAC 32.5 employment. Informality is a complex phenomenon, EAP 34.5 comprising unpaid workers, wage and self SA 37.5 employed workers without social security or health 0 20 40 60 80 100 insurance, small or micro-firms operating outside Undeclared Output as % of GDP (Schneider Index) regulations and large registered firms that partially evade corporate taxes and social security MENA 27.2 contributions. Three indices are commonly used to GCC 20.2 non-GCC 34.8 measure informality: (i) the Schneider Index, which estimates the share of production not declared to tax Developed 16.4 and regulatory authorities; (ii) the prevalence of self- EAP 32.7 ECA 36.8 employment, and (iii) the share of employed SA 37.6 workers without social security coverage. Defining LAC 42.3 SSA 43.3 0 20 40 60 80 100 1 The authors are staff of Middle East and North Africa Human A typical MENA country produces one-third of its Development Department (MNSHD), The World Bank. 2 GDP and employs 67 percent of its labor force To be available shortly at Worldbank.org/MENA. informally. Therefore over two-thirds of workers in countries, an association that seems to be driven may not have access to health insurance and/or are primarily by more educated workers joining the not contributing to a pension that provides income public sector (particularly in Egypt, Jordan, security after retirement. Fiscally speaking, one third Morocco, and Syria). Informality rates among of economic output is undeclared, with predictable workers who completed primary and/or basic impact on government revenue. Yet, the share of education (accounting for at least 50 percent of all self-employment to total employment in MENA (29 the employed in most countries) are generally much percent) remains lower than developing regions like higher than among workers who completed Latin America and South Asia (33 and 38 percent). secondary and/or tertiary education. Informality in MENA has been rising in recent Figure 2: Informality rates for selected non-GCC years: Data indicate that informality has been countries increasing rapidly in the entire developing world, as Iran 19.8 Jordan 20.9 Schneider Index measured by the annual growth rate of the Syria 21.2 (% of GDP) Yemen 28.3 Schneider index between years 1999 and 2004. Using Algeria Egypt 34.8 36.2 this proxy, the increase in informality in the MENA Lebanon Morocco 36.4 37.3 region (at 0.42 percent per year) is comparable to Tunisia 39.2 that in Europe and Central Asia (ECA) but lower Tunisia 24.7 than that in Latin America, East Asia, South Asia, Morocco Egypt 28.0 28.2 Self-Employment (% of Total Employment) and Sub-Saharan Africa. On the contrary, when WBG Algeria 28.7 29.6 measured by the share of self-employed to total Lebanon 32.9 Yemen 33.2 employment, informality has been decreasing in all Syria 35.8 Iran 37.0 developing regions but MENA. Libya 34.5 Not Contributing to S.S. Egypt 44.5 (% of Labor Force) Tunisia 49.9 There are important variations in the prevalence of Algeria Iran 63.3 65.0 informality across countries in the region: Lebanon Jordan 66.9 67.2 Countries in the MENA region are quite Morocco WBG 80.1 81.2 heterogeneous in terms of size, role of the public Iran Syria 81.6 82.6 sector, availability of resources and labor, economic Yemen 90.0 development, and productive and demographic 0.00 20.00 40.00 60.00 80.00 100.00 structure, all of which influence the size of the Note: Time periods are as follows: Schneider Index, informal economy. Informality is higher in countries average 2001-2004; Self-employment; 1999-2007; Not such as Morocco and Yemen, where the share of contributing to social security (S.S.), 2000-2007. agricultural employment relative to total employment is high, and lower in Jordan and Egypt, Informality and Public Sector Employment: where the public sector accounts for 30 to 35 percent Informal employment is highest among youth and of overall employment. A country’s productive there is a key transition from informal employment structure is also an important driver of informality. into public sector employment as young individuals For example, energy rich countries (e.g., Iran, Syria) reach prime age adulthood. Informality rates are tend to display high rates of informal employment very high among youth between the ages of 15 and (about 80 percent) but have rather low informal 24. After age 24, informality decreases rapidly until output as a share of GDP (about 20 percent, as individuals reach 40 to 45 years of age. After age 45, measured by the Schneider Index) (see Figure 2). informality rates fall to between 20 and 30 percent. In some countries, this rapid decrease in informality MENA’s Informal Workers: Informality is highest rates goes hand in hand with a rapid rise in public among the working poor. In MENA informality employment. These trends are very different from generally decreases as wealth increases. Latin America. For example, in Mexico, informality Nevertheless, in some countries, informality is so rates also decrease by age but the observed widespread that it remains significant even among transition is not between informality and public wealthier segments of the population (Figure 3). employment, but between informality and self- Also, Lower education is strongly and linearly employment, with many of the young becoming associated with higher rates of informality in most December 2011 · Number 49 · 2 entrepreneurs and contributing to private sector jobs for differences in individual characteristics (age, (Perry et al., 2007). education, measured ability) and firm type. Most measures of job quality, including amount of annual Figure 3: Informality rates by quintile of per capita leave and other benefits, as well as access to consumption for selected countries training, suggest poorer working conditions in 100.0 95.9 99.2 informal jobs. This is also reflected in direct and 90.0 86.1 82.8 82.5 indirect measures of job satisfaction. For example, 80.0 70.0 73.1 Moroccan youth working in informal jobs reported Poorest 60.0 58.7 Q2 being significantly less satisfied than youth working 50.0 Q3 in formal jobs. In Egypt and Lebanon, informal 40.0 35.1 30.0 Q4 workers are uniformly more likely than formal 20.0 Richest workers to want to change jobs or to be searching for 10.0 0.0 a new job. Yemen Morocco Syria Lebanon Note: Consumption aggregate was not available for Morocco for The Issue of Low Mobility across informal and 2010 at the time of completion of this report. Morocco data is from formal jobs: In instances where the data allowed for the 2001 Living Standards Measurements Survey (LSMS). analysis, mobility from informal to formal jobs was found to be extremely limited. For example, between Where do informal workers work? Informal 2008 and 2009, an informal worker in Egypt had a 4 workers are mostly employed in small firms, with a percent chance of moving to a private sector formal distribution that is skewed towards firms with less job and a 5 percent chance of moving to a public than five workers who are likely engaged in low sector job. The implied average job duration of productivity activities. Estimates from Morocco, informal salaried work is about 3 years in Egypt and Egypt, Jordan, and Iraq indicate that controlling for is reported to be about 4 ½ years in Lebanon and other observable characteristics, workers in medium Syria, both longer than the duration observed in size (10-50 workers) and large size (over 50 workers) countries such as Mexico, where workers move out firms are, respectively, 16 to 21 and 17 to 53 percent of informal salaried jobs within 2 years (see less likely to work without social security coverage Maloney, 1999). than workers in small size (5-9 workers) firms. Barriers to Coverage and Policy Options: The Informality is prevalent among firms in MENA: report identifies five key policy options, detailed Among currently formal firms with more than below: twenty workers, MENA has the highest share of firms that start informal (25 percent) and the longest (1) Designing reforms that foster competition - operating period without formalization (4 years) Reforms to entry regulations have been shown to among developing regions. Among registered firms, have positive, albeit moderate, effects on approximately one-fifth of their sales and workers formalization. Reforms options include: (i) reducing are not reported. Micro and Small firms, which the costs of registration, and the number of account for a large share of enterprises and private procedures and minimum capital requirements; (ii) sector jobs in the region, are mostly unregistered providing information on procedures and benefits of and employ workers informally. While a great deal being formal, and training entrepreneurs (on filling of heterogeneity exists in the region, high taxes and forms, etc.); and (iii) facilitating registration by entry regulation are consistently identified by establishing one-stop shops. Overall, removing entrepreneurs as top constraints to formalization. barriers to entry for firms will also need to include a fairer and less discretionary application of Informality in MENA: Exclusion of Choice? regulation to reduce the rents of those incumbent Informal workers earn lower salaries than formal firms who have achieved a privileged relationship workers with similar skills: the estimated premium with the administration. associated with formal jobs varies from 10 percent for all workers (aged 15 to 65 years) in Syria to over (2) Realigning incentives in the public sector - 50 percent in Moroccan youth (15 to 34 years). The Reforming the civil service is a key priority. In some formality wage gap persists even when accounting countries, the public sector continues to employ a December 2011 · Number 49 · 3 large share of workers with wage scales that reward restrictions, and language barriers all limit access to education level and tenure, but not performance. and usefulness of traditional, class-based training Moreover, placement often depends on connections programs for informal workers, especially in rural and is virtually irreversible, and social security areas. Programs such as India’s Barefoot College and benefits are generous. As a result, the public sector Yemen’s Agriculture and Fishing Fund suggest that “package� is desirable in comparison with other how training is delivered (hands-on, community- employment alternatives, which induces queuing. In based, combining learning with earnings) matters. turn, this contributes to unemployment amongst Training is most effective if provided with graduates and fosters informality. Linking the public placement services, i.e. job search assistance and soft sector wage scale to competence and performance, skills training. easing the rigidity of civil service contracts, and realigning the social security access are likely to (5) Reforming existing social insurance systems reduce the gap between public and private sector and introducing new instruments for coverage and thus limit the incentive to work informally extension - Adequate coverage extension in MENA while queuing. is only likely if efforts go beyond providing traditional social insurance and target informal (3) Moving to labor regulations promoting labor workers and those outside the labor force. Coverage mobility and supporting workers in employment extension via social insurance systems is important transition - Keeping the cost of labor at a realistic but complex. All of MENA has achieved expansion level via affordable social security contributions and of social insurance schemes, mostly pensions, relaxing wage rigidities are likely to reduce beyond the civil service but in a fragmented manner, informality. In some MENA countries, firing and legal and actual coverage remains limited. regulations remain strict and firing costs are high. Except Egypt and its recent social insurance reforms, Centralized wage setting, as in Tunisia, leads to all MENA countries have defined benefit pension informality by setting artificially high wage floors systems with design elements that contravene for some occupations and skill levels. The tax wedge international best practice. Controversially, social between the employer’s labor cost and workers’ pay insurance coverage could be uncoupled from formal could also be reduced through reforms that lower employment for some workers. Also useful are social security contributions (as in Egypt) or by Matching Defined Contributions (MDCs), i.e. shifting a portion of labor taxes towards other voluntary defined contribution savings with old-age general revenue sources, such as consumption or or other benefits, and the government or employer property taxes. Engaging in an inclusive social providing matching individual contributions. dialogue is critical to sustaining these reforms. The Piloting MDCs targeted to informal workers with traditional tripartite structure convening small but positive savings capacity could give policy governments, unions, and employers is likely to makers insights to increasing coverage. However, in favor the status quo of protective regulation. the short run, non-contributory schemes, i.e. social Including outsiders could shift the dialogue towards pensions, will play a key role. facilitating entry into labor markets, improving mobility, and a more equitable distribution for less Contact MNA K&L: favored populations. Laura Tuck, Director, Strategy and Operations. MENA Region, The World Bank (4) Enhancing informal workers’ productivity Regional Quick Notes Team: through training/skills upgrading - Evidence from skills upgrading efforts uncovers success factors for Omer Karasapan, , Roby Fields, and Hafed Al-Ghwell Tel #: (202) 473 8177 informal, rural employment. Informality’s low productivity dimension is especially notable in The MNA Quick Notes are intended to summarize lessons learned poorer MENA countries and in rural areas where from MNA and other Bank Knowledge and Learning activities. workers with little literacy and education work in The Notes do not necessarily reflect the views of the World Bank, its board or its member countries. micro entrepreneurship and low-yield agriculture. Targeting some well designed skills upgrading interventions to these workers can be beneficial. However, low levels of literacy, travelling December 2011 · Number 49 · 4