How companies can help transition informal workers into the formal economy

June 2, 2022

Over 60 percent of the world’s employed population, or nearly 2 billion people, earn their living in the informal economy, according to the International Labor Organization (ILO). The informal economy consists of a diverse set of unregulated economic activities, ranging from domestic work to street vending to contract work in restaurants and hotels. Most informal workers have been shut out of the formal economy. And because of the lack of protections by the state, many in the informal economy face poor working conditions. Informal work is also associated with economic inequality and gender inequality.

The persistence of the informal economy—and its high incidence in developing countries—has become a widely recognized obstacle to sustainable development. In response, in 2015, the International Labour Conference (ILC) published recommendations for how governments and workers’ and employers’ organizations could facilitate the transition from the informal to the formal economy. The recommendations align with the United Nations’ Sustainable Development Goals (SDG), aiming specifically to meet SDG #8: ensuring decent work for all.

However, the ILO reports that few countries have been able to develop a comprehensive and integrated approach for reducing the growth of informality. Since the ILC adopted a resolution of Conclusions about decent work and the informal economy in 2002, policy responses have remained uncoordinated. And billions of people continue to depend on the informal economy as their only source of income, with informal labor making up a third of the economic activity of low- and middle-income countries. In some regions, the informal sector provides the majority of employment. In sub-Saharan Africa, for example, the informal sector makes up nearly 90% of the economy. In several Central American countries, informality claims 70% or more of the total employment.  

While policies that provide vulnerable workers with legal protections are key to facilitating formalization, efforts like those of GOI members and other organizations to promote access to education and skills training can begin to address many of the major drivers of informality. Some companies have begun to take an active role as well. For example, technology giant Cisco joined forces with the United States Agency for International Development (USAID), the United Nations Development Program (UNDP), and the United Nations Volunteers (UNV) to deliver sustainable capacity-building programs in developing regions of the world. The partnership has established six programs that integrate information and communications technologies (ICT) to provide individuals with the skills and knowledge to integrate into the global economy and transition from unsustainable informal work to stable formal occupations. Once in the formal economy, workers are more likely to be able to stay.  

The ILO has also identified global supply chains—common organizational structures in the global economy—as major drivers of employment in developing countries. However, the dynamics of production and employment relations in some supply chains have led to labor exploitation and poor working conditions. For instance, in the 1990s, an exposé of Nike documented low wages, poor working conditions, and other abuses in a number of the company’s factories in Southeast Asia. The resulting backlash forced Nike to change its practices, including raising the minimum wage; performing audits of over 600 of its factories; publishing a complete list of all of the factories it contracts with; and in general acknowledging, rather than denying, the widespread issues in its supply chain. Today, Nike is a member of several “corporate responsibility initiatives committed to addressing forced labor issues in global supply chains.” 

While low wages, poor working conditions, and exploitation of labor continue in many small businesses that perform outsourced services, the ILO has created training programs, like the Factory Improvement Toolset (FIT), to encourage sustainable enterprises and promote decent work in developing countries. FIT is a scalable approach to factory upgrading, consisting of customizable tools to support garment manufacturers in improving productivity and working conditions. Although owners typically use the FIT tools to improve profits, the techniques deliver returns for workers too. The program is currently piloted in five countries, including Bangladesh, Cambodia, and Pakistan, three countries in which informal labor makes up over 80% of employment. 

A job in a factory in the formal economy, according to the World Economic Forum, is often an improvement for many workers in low-income countries. Large companies, then, can facilitate the transition from the informal economy simply by creating more formal employment opportunities.

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