Spill over effects on the efforts to reduce the size of the informal economy

Enrolling more non-regular workers in social insurance schemes via their employers can be expected to support efforts to reduce the size of the informal sector. Although there is no simple and reliable way to measure the incidence of informal employment, several methods can be used to estimate it. According to results from survey-based and national accounts-based estimates, the incidence of informal employment in many high-income OECD countries is around 5% or less, while in other OECD countries including Korea, Mexico, Southern European countries, and some transition countries in Eastern Europe, it is several times higher. As regards wage and salary workers, the observed extent of the gap between the theoretical liability for social security contributions based on wages and salaries in the national accounts and the amount of actual contributions collected reveals a shortfall in receipts for Korea and Mexico of between 25% and 30%.

Older and less educated workers, along with social benefit recipients, are particularly likely to be hired informally. The current Korean benefit system tends to encourage informal work, because many benefits are withdrawn as soon as a household’s income (i.e. the sum of benefits and earnings) exceeds a threshold tied to the minimum cost of living. While informal employment may provide a buffer for some people with few labour market options, it also leaves workers with little protection against old age, unemployment or work accidents. Informal employment is also generally associated with tax evasion. The resulting shortfall in tax revenues hinders the government’s capacity to provide necessary public services. The long-term effects of informality also include a lower aggregate economic growth potential since informality goes hand-in-hands with unfair competition, lower training rates and inefficient production methods.