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Employment and efficiency effects of Social Security (SS) and Social Protection (SP) systems in the context of an informal sector

a conceptual review

Albert Berry


Prominent features of most developing countries are serious “imperfections “in many markets, including the labour, capital and various product markets; a high level of informality (lack of connection with the state, e.g. non-registration, non-compliance with tax and labour regulations, etc.); and attempts to improve the welfare of specified groups through social security (SS) systems in the formal sector and (sometimes) social protection systems (SP) that cover informal workers. Three main policy issues arise around the combined existence of these features:

i) what can be done to limit such negative effects as the imperfections may have?

ii) what is the best design for SS and SP systems?

iii) should formalization be pursued as a policy?

Many variables affect the impacts of both the SS and SP systems and that of informality, including labour demand elasticities, the effectiveness and security (SS) and social protection (SP) packages, and the presence of the market imperfections cited.

To better understand the way these features of a system interact to determine the outcomes, it is convenient to begin with the simplest possible case, and then approach reality step by step. Although it provides some useful insights, we conclude that the formal-informal sector dichotomy is not the appropriate conceptual framework within which to analyze these issues and needs to be supplemented and/or replaced by a threesector model. It is clear that no general theoretical conclusion can be reached about the impact of SS and/or SP systems on employment or economic efficiency. The analysis identifies a number of the variables whose empirical values can be predicted to determine those effects

Publication Type(s)

Conference Paper

Ten Years of War Against Poverty Conference Papers

Conference: Ten Years of War Against Poverty


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