How can we protect contract and informal workers in Pakistan?

Social protection has to move away from schemes for formal workers towards accommodating more dynamic work patterns.
Published May 23, 2019

For the next four decades, at least three million people are expected to enter Pakistan’s workforce each year. By 2050, the country may end up with as many as 181 million people needing jobs.

Not only will these people need jobs, but also access to a safety net that protects their livelihood and ensures resilience in the face of adversities like natural calamities, economic downturns and internal conflicts.

Against a global average of 11.2 per cent, Pakistan spends just under 2pc of its GDP on social protection.

Pakistan also has the lowest affiliation to pension schemes in the world. As a share of the labour force, active contributors to a pension scheme were last recorded at 5.4pc, much lower than the South Asian average of 13.7pc.

There has been virtually no change in social insurance participation and coverage in the country for decades. In fact, the percentage of workers covered hovers around single digits in all of Pakistan, Bangladesh, India, Indonesia and Nigeria that collectively account for about a third of the world’s population.

Provision of social protection is complicated not just by the mere size of the population but also the extent of informality. With a total population surpassing 200 million, Pakistan has the 10th largest workforce in the world. Over two-thirds of this workforce is engaged in informal work.

Lack of access to social protection is so pervasive across the unregulated sector that it has come to define informal employment. Think of the food stands lined across busy markets, the vendors selling balloons and toys, the rickshaw drivers, street-side cobblers, home-based stitchers, embroiders, domestic workers and now Uber and Careem drivers.

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They are all part of a global informal workforce that has now crossed the two billion mark. Yet their economic contributions remain unacknowledged and they continue to have limited access to social protection — no insurance against illness or disability, unemployment, pregnancy or old age.

In recognition of this, Prime Minister Imran Khan has launched the Ehsas initiative aimed at developing social protection measures for workers in the informal sector.

The government also plans to extend registration of social insurance schemes like the Employees Old-Age Benefits Institution (EOBI) to such workers. Pakistan already has a voluntary pension scheme and EOBI has been allowing self-registration since a decade.

However, for such policies to work and for social protection programmes to be effectively designed to cater to informal workers, the magnitude and dynamics of the informal economy need to be understood.

Until recently, not much was known about the worldwide informal economy and employment. Information about Pakistan’s unregulated economy is still limited.

Given what we already know, what can we say about the challenges in extending social protection to the informal sector? What are the key deficiencies of social protection systems and Pakistan’s approach towards social protection for the informal sector?

Pakistan’s informal economy

Overall, this sector contributes one-third to the GDP, according to the World Bank's latest Global Economic Prospects. Up to 72pc of the jobs outside agriculture are in the informal sector. Of this, three-fourths are taken up by women. Moreover, the share of informal work in Pakistan has persisted without any clear upward or downward trend.

Informal work is dominated by household enterprises not formally registered (often with less than 10 employees), street vendors and domestic workers. Such work is also concentrated among low-skilled, young, female and rural workers. Most of these workers are own-account workers which means they are more susceptible to seasonal fluctuations in income.

With the advent of platforms such as Uber and Careem, the number of self-employed informal workers is expected to rise, with the downside that these companies are not obliged to provide protection and benefits to the people — considered self-employed or independent contractors — that are using their platform.

Informal work also includes off-the-books activities by registered firms such as home-based workers subcontracted by factories. Pakistan is estimated to have close to 12 million home-based workers, of which 80pc are expected to be women. By hiring contractual labour (mainly outsourced), such establishments successfully circumvent labour legislation.

In addition, most labour laws (such as those determining minimum wage, terms of employment and occupational safety) and social insurance regulations are not applicable to small and unregulated businesses.

Social protection in Pakistan

The Asian Development Bank (ADB) regularly publishes a Social Protection Indicator report that presents data on government social protection programmes collected from 25 countries across Asia, including Pakistan.

Based on this, we can answer some simple questions: How much does Pakistan spend on social protection? How many are covered by such programmes? And what is their outreach to informal workers?

Most of the expenditure on social protection, almost 80pc, is dominated by spending on social insurance. This primarily includes civilian and military pension payouts. Less than 1pc is spent on contributory social insurance schemes such as EOBI, Workers Welfare Fund and provincial employees social security institutes. In any case these are meant to cover just formal workers.

Expenditure on social assistance programmes (shown below in the graph) is fueled by the Benazir Income Support Programme (BISP), that now reaches over 5.6 million families. This cash transfer programme targets the ultra-poor, but not all informal workers are poor.

The total beneficiaries of all social protection schemes, as recorded in 2015, stands at 40.7 million (approximately a fourth of the population).

Coverage rates for key target groups — unemployed, underemployed, the poor, persons with disabilities, children and elderly — is however lower at 19.2pc and almost 80pc of the beneficiaries are non-poor.

Specifically, social insurance programmes in Pakistan cover just 17pc of the target population which is all from the formal sector.

The country’s labour force consists of 61.7 million workers, yet EOBI reaches only 0.378 million, Workers Welfare Fund close to 20,000 while barely two million are registered with the four provincial Employees' Social Security Institutions.

Why do informal workers need protection?

Not all informal workers in Pakistan are poor but most are prone to poverty more than their formal sector counterparts.

A recent study on informal workers again funded by the ADB finds that 30pc of those surveyed were uneducated and lacked basic numeracy and literacy skills.

Only 4.3pc had received any formal skills training. These workers also belonged to households larger than Pakistan’s average household. Close to 45pc were working without any written or oral employment contracts with over half contracted as daily wagers or temporary staff.

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Even though, on average, informal employees worked longer hours (6.6 days a week for 10 hours a day), around half earned just around or below the minimum wage. Almost 37pc of the households had no alternate source of income. There was, thus, heavy reliance on informal work as the main source of livelihood.

Access to social safety nets and information and knowledge about social protection amongst informal workers is limited, as is the incentive to invest in social insurance schemes.

This stems mainly from a lack of understanding about the potential benefits of such schemes. Therefore, it was not surprising that less than 5pc of the workers surveyed were part of any social protection scheme.

An enabling environment?

Social protection is now a devolved subject. Currently, only Punjab has a dedicated social protection authority. Punjab and Khyber Pakhtunkhwa have both drafted a policy on this, while Sindh is presently developing one.

Historically, labour policies have been divorced from legislation for informal workers. Own-account, agriculture, home-based and domestic workers are not recognised as workers, nor their places of work as workplaces.

Recently, Sindh passed a bill to recognise home-based workers. Punjab has also drafted one, but is yet to pass it. Efforts are also underway to secure the rights of domestic workers.

However, provincial governments are yet to implement these policies, only after which will these workers be able to register with social security institutions and become entitled to a minimum wage.

Most small businesses and factory owners find ways to circumvent any obligation to provide social protection or contribute their share to the social security institutions as per Pakistan’s labour laws. Most labour laws only apply to firms with 10 or more workers.

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It is also common practice for factories to underreport their number of employees. For example, Pakistan Readymade Garments Manufacturers and Exporters Association accounts only for those workers that are registered with the EOBI and social security institutes. The rest are not recognised as workers.

Weak inspection systems also enable businesses to get away with noncompliance to labour laws. Factory owners often know beforehand when inspections are to take place. Inspections thus fail to uncover several violations including the lack of implementation of the stipulated minimum wage.

Pakistan’s labour laws are also silent on the absence of unions and collective bargaining units in the informal sector. Only 2.3pc of the country’s workforce (both formal and informal) is unionised.

In the ADB survey, more than 50pc of the respondents were unaware of the role of unions. Such lack of awareness facilitates noncompliance with the current labour legislation, allowing smaller firms to bypass social security laws.

What can the government do?

Despite several institutional and legal frameworks in place for securing basic workers’ rights and access to social protection, the execution and scope of these excludes the vast majority of informal workers.

Social protection programmes in Pakistan need to move away from schemes designed specifically for formal, full-time and life-long (mainly male) workers towards accommodating more dynamic work patterns that have evolved with the informalisation of work.

Allowing workers to self-register with social security institutions, as is being planned, can ensure coverage of social protection for informal workers.

Contributory, voluntary social insurance schemes are a common way to extend social protection to informal workers. In fact, an overall extension of contributory schemes can in itself expand the fiscal space for the provision of non-contributory protection for poorer workers and citizens.

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However, access to such schemes is limited to only those who can contribute. Self-employed informal workers do not have an employer that can co-contribute to social insurance schemes. To join such schemes, informal workers can end up paying a proportionally higher share of their income compared to formal employees.

Where applicable, payments linked to social protection provisions should be matched to both the status of the enterprise concerned and ability of the worker to pay.

The government should also consider using social protection as a tool to address vulnerabilities of informal workers and encourage their entry into the formal sector. For example, cash transfers under the BISP can supplement low wages while a universal health insurance can provide maternity cover to women workers whose employees are not yet providing them with such benefits.

Labour market interventions, such as skills development programmes, must also specifically target the informal sector. Since many informal workers are poor with little education, courses must be tailored to their needs and level of understanding.

To safeguard contract employees, a formal structure within the existing legal framework can be put in place for contractors supplying informal labour to factories and other establishments. Under this system, companies may only be allowed to hire from registered contractors. This would, in turn, provide an incentive for contractors to register themselves as a prerequisite for operating in the labour market.

There is a risk that registered contractors may also exploit these workers. In any case, a sub-sector of informal workers is already being exploited and is not protected by any labour rights. The case is for stronger regulation of these contractors.

The ADB survey showed that most employees at the managerial or supervisory level in garment factories are recruited directly by industrial establishments, while others are hired indirectly through intermediary agents and labour-only subcontractors. The subcontractor, in turn, hires labour informally. The factory owner pays the subcontractor a fixed price per worker. In case of the construction sector, employers also hire directly at pick-up points for day-labourers.

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As can be expected, even if a firm pays the subcontractor the legal minimum wage per worker, the workers receive less than the legal minimum wage. The majority of subcontracted workers are not represented in official records. In short, there is no effective social protection for workers hired indirectly through subcontractors that are not registered.

Another trend that is picking up is companies that provide domestic help (such as drivers, cooks, maids), security staff and janitorial services. Hiring through them ensures households/companies are paying a minimum wage, meeting basic safety standards and accounting for overtime.

Again, stronger regulation is needed to ensure these companies, in turn, do transfer minimum wages to the workers. However, registered companies, as opposed to informal set-ups, have a better chance of ensuring worker rights.

In the end, much needs to be done — but can be done — to integrate informal workers into mainstream social protection programmes beyond short-term targeted interventions.

At some level, the limited coverage of conventional models makes new approaches easier to embrace. A country like Pakistan needs innovative solutions to mitigate the risks faced by its labour, especially engaged in informal work.

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