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Building Resilience: Offering Social Insurance in the Informal Sector
INFORMAL WORKERS ARE VULNERABLE TO SHOCKS
Informal sector workers are disproportionally vulnerable to shocks. Because they are not covered by formal employment protection laws and social insurance programs and are concentrated within microenterprises and small firms that have limited cash reserves, they are more highly exposed to job loss during negative shock events. Possessing fewer savings and poorer access to credit than formal workers, informal sector workers are also less able to cope with labor market shocks.
The COVID-19 crisis has made the vulnerability of South Asia’s informal sector all too evident. Chapter 7 uses a large panel data set on India to assess how informal workers have weathered the crisis compared with formal workers. Difference in differences event study regressions show that informal wage workers were significantly more likely than their formal counterparts to lose a job during the early period of the pandemic (April–May 2020). The likelihood that informal workers would lose a job was 6 percent higher relative to formal workers in the same location (district) and industry (figure 1.8, panel a). Because the analysis controls for location and industry-specific variation in the shock, this excess vulnerability among informal workers is not driven by the concentration of these workers in specific industries, such as tourism and hospitality, which were disproportionately affected by the lockdown, but likely reflects the inherently greater risk faced by informal workers. To a lesser extent, self-employed individuals were also more vulnerable than formal workers (figure 1.8, panel b).
OFFERING SOCIAL INSURANCE IN THE INFORMAL SECTOR: A MULTIFACETED APPROACH
Individuals working in South Asia’s informal sector typically lack access to social insurance programs that help cover risks such as job loss, illness or injury, and old age. The heterogeneity of income and savings capacity among informal sector workers calls for a multifaceted approach to extending social insurance to these workers.
Chapter 8 examines ways to extend pension arrangements to informal sector workers in South Asia, an issue that will become increasingly urgent as the population starts to age. There are two traditional approaches to this problem. The first is to start from the bottom and move up, that is, by expanding and deepening the coverage of targeted social assistance programs. The second is to start from the top and move down, that is, by trying to include more of the informal sector into the net of tax-funded insurance programs. New evidence on the heterogeneity of savings capacity among informal
