World Bank: With informal employment set to persist, Putrajaya should protect workforce and offer security

KUALA LUMPUR, Feb 26 — The World Bank has projected that informal employment is likely to persist over time in Malaysia, although the extent of informal employment will depend on the growth of productivity and labour costs.

According to its report titled “Informal Employment in Malaysia: Trends, Challenges and Opportunities for Reform” launched today, it said the share of informal employment would only fall along with the rise of gross domestic product (GDP) if the total factor productivity grows higher compared to the growth of labour costs.

“Moving forward Malaysia can enhance the protection of informally employed workers by a combination of measures to increase the coverage of social insurance, leverage private sector instruments, and extend social assistance coverage.

“Malaysia can take steps in the short-, medium-, and long-term to comprehensively enhance the protection and productivity of informally employed workers,” the report said.

It listed efforts such as expanding the coverage of existing social insurance schemes, targeted subsidies for social insurance coverage, mandating social insurance coverage, and enhancing social assistance coverage as ways to do this.

“Existing programmes for skills training can contribute further to increase the productivity of informally employed workers by enhancing the content and suitability of training curricula, offering relevant modular training through active labour market programs, and updating and calibrating training content and practices based on continued evaluations,” the report said.

The International Labour Organisation (ILO) defines informal employment as covering workers who are not subject to national labour laws and income tax, or entitled to social protection and employment benefits.

These include unpaid work in a family enterprise, casual wage labour, street vending, employers in informal manufacturing establishments, or skilled self-employed workers in small businesses.

The report found that informally employed workers are more vulnerable and are subject to more precarious working conditions than formally employed workers.

“On average, informally employed workers have lower levels of educational attainment than formally employed workers, and are more likely to be from lower-income households. They are also more likely to be employed in low-skilled jobs compared to formally employed workers.

“Further, informally employed workers earn less than formally employed workers, even after taking into account gender, age, education level, sector of employment, urban-rural location, and ethnicity.

“Both time- and skill-related underemployment is higher among informally employed workers,” it said.

It also expressed concerns that the gap in the skill-related underemployment rate between those who are formally employed and those who are informally employed workers has been increasing over time.

“During the Covid-19 pandemic, informally employed workers were more susceptible to job losses and reductions in income and were also more vulnerable to food insecurity,” the report said.

However, the report also found that informal employment is projected to decrease to 21 per cent of employment by 2040 if productivity growth is high.

Main concerns over informal employment

The report also found that there are gaps in social insurance coverage in Malaysia.

“While the majority of the labour force is covered by some form of social insurance through employer-based contributions via standard employment contracts, and the hardcore poor are meant to receive some form of social assistance (though in reality some may not, due to errors of exclusion in social assistance).

“There is still a considerable coverage gap, particularly for those in non-standard employment or informal employment, often referred to as the ‘missing middle’,” the report said.

Citing existing social insurance coverage in the country, specifically, private employees typically receive Employees Provident Fund (EPF) and Socso coverage through mandated contributions from their employer, which also include employees’ contributions.

“Public sector employees such as civil servants and members of the armed forces also have pension coverage through the Public Service Pension Fund (KWAP), and the Armed Forces Pension Fund (LTAT), respectively.

“While voluntary schemes such as i-Saraan and Self-Employment Social Security Scheme have made significant progress in recent years in terms of coverage of the informally employed (especially the self-employed), it is still far from universal (at 12 per cent and 16.4 per cent of self-employed in 2021, respectively).

“Hence, a large portion of the self-employed remains unprotected,” the report said.

Occupational health and safety are the common concern among informally employed workers in all sectors studied.

According to the report, for all informally employed workers interviewed, there are various risks involved in their jobs, for example, for location-based workers, there are risks of accidents on the road while delivering a parcel, as well as potentially harming effects of long driving and riding hours on their health.

“Similarly, for agricultural labourers, there is a risk of accidents whilst operating machinery. For care workers, improper handling of clients could result in fatal accidents. For street vendors, one respondent mentioned that there is a risk of fire when conducting business. Across sectors, informally employed workers face considerable risks when performing their work, making it imperative to protect these workers.

Also highlighted in the report, is the instability of income as well as mistreatment by clients/employers are some of the concerns for informally employed workers.

“Particularly for location-based workers, where they face customer complaints and for care workers, where the employer (head of household) tends to ask to complete tasks beyond care duties.

“For location-based workers, it is to file grievances. Furthermore, respondents in the street-vending business have also mentioned that they face certain regulatory hurdles — in one case, the respondent worries that they do not have a stable business location despite having applied for a license, and fears that the location will be demolished,” the report said.

Addressing questions of whether policy action should seek to reduce informal employment, the report found that there is already a downward trend in informal employment, while welcomed as an indicator accompanying economic growth and transformation, may not be a sufficient end to pursue in itself.

From a macro perspective, informal employment in Malaysia has already been on a downward trend, driven partly by reductions in the share of the workforce engaged in agriculture, as well as by sustained economic growth, which, has a strong formalisation effect on the Malaysian labour force.

“As such we should expect to see a greater share of formal employment in total employment in the medium to long term in Malaysia, even though it may not be possible (or even desirable) to pursue a specific target level of informal employment in Malaysia,” the report said.

During the report launch today, World Bank country manager for Malaysia, Yasuhiko Matsuda, said there should be efforts to enhance policies to better protect and improve the productivity levels of the informally employed considering their higher degree of absolute vulnerability to shocks and their relatively lower economic productivity.

“Many informal workers are very vulnerable, given their inability to further invest in skills enhancement to achieve career advancement, or in risk-taking when starting new businesses.

“Malaysia can enhance the protection of informally employed workers by measures such as enhanced access to micro-insurance, private retirement savings funds and voluntary savings schemes,” he was reported saying by Bernama.

The report was a collaborative effort between the Ministry of Economy and the World Bank Group through the Reimbursable Advisory Services, which delves into the analysis of the scale and trend of informal employment. It deep dives into the regulations, policies and programmes governing informal employment.