Including informal sector workers in public income support programs

Abstract

In developing countries, tax and reporting compliance tends to be low for institutional reasons. Therefore, compliance can be dependent more upon program adopted or design of the program than on enforcement and tax rates. To include as many workers as possible in the public income support program against unemployment, therefore choosing or adapting to compliance-friendly program is desirable. A compliance-friendly program is the one where workers have strong interest in monitoring compliance. Severance pay individual account and UISA, with or without solidarity fund, are examples. An income support program being existent, if the government expand the mandatory coverage by eliminating grandfather clause, and lowers explicit costs of formality such as the size of tax wedge and job security provisions, provides larger benefits to compliant workers, and raises cost of non-compliance by strengthening inspection system and raising penalties of non-compliance, the compliance rate will go up. Besides these formal aspects, it is important to diagnose carefully various instances of the existing institution and behavioral aspects of administration officials. Coordination and information problems may exist, signaling the importance of a responsibletask force which investigates tax collecting offices, administration of reporting routine, way of working in front office of the social insurance, and coordinates different units of entities of which the income support system is comprised. In developing countries there existrooms for enhancing compliance by having active recourse to organizational incentive arrangements for stimulating the personnel of social insurance administration. The last, but not the least important thing is to let workers see it pays to be entitled to social insurance via advertisement, sufficient number of recipients, possibility of other benefits when workers prove their employment status, etc.