Social Protection and Labour Informality in the Middle Sectors
A relatively secure steady job is almost a defining characteristic of middle sectors in the developing world.1 This has profound implications for well-being, since regular pay has benefits that go beyond the monthly cheque. People with regular pay are likely to have better access to credit, for example, and most social-protection systems, be they for unemployment benefits, health care or pensions, are contributory. They are the middle sectors, in steady employment, who are most likely to pay into these schemes – and most likely to be able to draw on them when needed.
Yet labour informality remains high in Latin America and the Caribbean. This interacts with contributory social-protection systems to create a vicious cycle, in which the mass of informal workers weaken those systems by contributing irregularly if at all and yet fail to secure themselves support when they need it.
These two worlds – middle-sector workers and the informal market – are not mutually exclusive. The existence of middle-sector households who are also informal should be of immediate concern for public policy since poor coverage and irregular contribution histories put this group at a high risk of downward social mobility. Even short-term shocks, such as a temporary lay-off or a period of illness, can permanently move them back into poverty in the absence of public support.
In this chapter, therefore, we look at how social protection works in practice for the Latin American middle sectors, and examine some of the policy responses this implies. We approach this from a global perspective, and focus on unemployment benefits, health insurance and old-age pensions as the main elements of social protection. The analysis looks in detail at how the pension system interacts with labour informality, drawing on micro data for Bolivia, Brazil, Chile and Mexico over the decade to the mid-2000s.
An immediate result of this analysis is confirmation that labour formality (defined as those working with a contract) is limited, even among the middle sectors and the affluent. Correspondingly, pension coverage rates are low – from a maximum of just 60% in Chile to as little as 9.5% of the labour force in Bolivia. Coverage by sector is similarly low – falling from around 75% of formal workers to less than 7% among self-employed workers in agriculture. Against this background, we look at how social pensions and schemes with matching defined contributions – already implemented in some countries in the region – might help improve coverage.