Lanka’s Informal Sector: A rare gem awaiting a formal polish
Like most developing countries, Sri Lanka, has a large informal sector work force. The term “informal sector” refers to workers who perform an entirely legal task, are paid for their labour in cash, but are not governed by any labour legislation. Labour relations - where they exist - are based mostly on casual employment, kinship or personal and social relations rather than contractual arrangements with formal guarantees. Most workers have no formal contracts, social service benefits or leave entitlement. This does not refer to the illegal economy involving criminal activity. As a share of its working-age population, Sri Lanka has a particularly large informal sector. The informal sector employs over 4.5 million Sri Lankans, which is more than the number employed by the formal private sector, the government sector, and stateowned enterprises, combined.
Indeed, Sri Lanka’s dynamic and productive informal sector plays a major role in employment creation, production and income generation and sustains millions of employees and their families and is the life blood of families across all classes of society. Much like the gemstones that Sri Lanka is famous for, the informal sector is Sri Lanka’s hidden gem, albeit unpolished.
However, the true value of a gem is attained when it is finally cut and polished and that is the challenge facing Sri Lanka. Can we enhance the quality of the gem of the informal sector duly polished by the protections, safeguards and benefits of formality?
There are two categories of employers using informal employment of labour. The first category is a small unregistered enterprise with less than 10 workers. The second category of informal employer is a legal entity that is formally registered, pays taxes and pays social insurance contributions and has a formal labour force, but also hires some additional workers informally. The data shows that 60% of Sri Lankan workers are in the informal sector, through one or the other kind of employment, and even more so in the outlying districts.
There are four types of workers in the informal sector: employees, employers, own account workers, and workers contributing to a family enterprise. Workers contributing to a family enterprise are often not paid any regular cash payments. Almost 80% of contributing family workers, who are often not paid at all, are women.
Women are more vulnerable in the informal sector. There is a much higher gender gap in wages between women and men in the informal sector. Data are hard to find but interviews suggest that women in the informal sector experience more sexual harassment.
In the agricultural sector, 87.5% of workers are informal. In non-agricultural employment, it is still a large percentage: slightly more than half or 50.1%. There is a very high percentage of informal sector workers in the North and the East of the country. Informal employment is more frequent among workers with fewer years of education and persists in all levels of society.
Informal workers are not covered by any labour rules concerning wages or working hours and are not covered by any safety or health rules. They are not entitled to maternity benefits, annual leave or sick leave. They are not entitled to due process in adjudicating labour disputes.
A variety of solutions can increase the formality of the workforce. In general, these are efforts to reduce barriers and costs of formalization through a transformative approach that makes the formal sector more beneficial and accessible for firms that are smaller and operating on tight margins, and enforcement measures through a punitive approach.
Transformative measures to make the formal sector more beneficial and accessible include:
Regulatory reform designed to make it easier for a business to register, making administrative actions fast and inexpensive through some sort of simpli- fied process;
Allowing small businesses to easily and legally employ people for a fixed period of time, parttime, or for a special task (for example a travel agency can easily hire tour guides for limited periods of time on an as-needed basis);
Reducing the costs and uncertainties of formality, at least for small firms newly entering the formal sector, in terms of termination costs, expensive mandated benefits, and onerous labour dispute adjudication processes;
Making tax and social security payments very easy (for example, by setting up payments through telephones via SMS as has been done in the Philippines for many years);
Reducing the tax or social insurance contribution obligations, either for small businesses in general, or for newly registered businesses; this may include explicit forgiveness of any liability for previous time periods; or
Allowing for presumptive lump sum payments of taxes or social contributions without a need to make calculations of individual payments.
All of these transformative measures should be accompanied by awareness raising, informing employers that this will not be as onerous as they feared in the past, and informing employees of the benefit to them. The provisions that benefit SMEs specifically have proven challenging in many ways, including how to get them to transition to a larger size with greater payment of taxes and contributions. But there is great benefit in helping SMEs to formalize as they are often the engines of growth and innovation.
In addition, the reduction of informality can take place through punitive measures, by imposing financial obligations and significant penalties on employers even though they are in the informal sector. This could take the form of imputing a contract of employment from behaviour and requiring employers to pay social contributions even if they are small and not organized. This was the approach used in many coun- tries to cover agricultural, fishing and domestic workers with social security. For self-employed informal workers this may include imputing income from their expenditures ( for example, a fisherman who reports little income but has an expensive car). The punitive approach reduces the financial incentive to stay informal but requires political will and serious enforcement capacity.
Generally speaking, it is better to tackle the problem with a transformative approach first, and then make strides in social awareness and public perception to increase the expectation that all work is formalized. It should become socially embarrassing to hire someone informally, without benefits. The last remaining most difficult segments of the economy can then be tackled through targeted punitive measures at the very end.