The persistence of the informal economy: Causes, consequences and pathways to formalization

In many countries, the informal economy constitutes a significant part of the labor market and plays a vital role in production, employment, and income generation. On average worldwide, 6 out of 10 workers are engaged in the informal sector, with the figure rising to 7 in Asia-Pacific countries and 9 in Africa. In the case of Mongolia, approximately 4 out of 10 workers, including those in agriculture, belong to this sector. As of the end of 2023, about 70% of herders and 45% of self-employed individuals are not covered by social insurance. Informal workers and their sales or services are often not included or are underreported in official records. As a result, there is limited data on the informal economy. The ILO recommends a "diagnosis-implementation-analysis" cycle for planning efforts to formalize informal sectors. After diagnosing the current state of the formal sector, appropriate measures should be taken. Both domestic and international researchers have conducted relevant studies, noting that although informal employment presents challenges, it also offers some advantages. For self-employed individuals and employers, the lack of resources and vulnerability to risks are major issues, while informal wage workers face social protection exclusion, poor working conditions, and violations of labor rights. On the other hand, employers benefit from lower labor costs and fewer regulatory pressures in the informal sector. Despite high contribution rates, the benefits derived from them are inadequate. Small and mediumsized enterprises often lack full-time accounting personnel, and the process of registering officially - ranging from taxation to paying contributions - is fraught with difficulties and hardships. These are the main reasons why individuals and organizations in the informal sector do not contribute to social insurance. Workers in this sector are often left out of social protection, so to implement effective comprehensive policies aimed at them, it is essential to establish a unified database on informal workers and to implement intersectoral policies and strategies based on fair, equitable, and worker-friendly principles. The authors declare no conflicts of interests.

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