Informal employment is a widespread phenomenon in Romania and a key challenge for the country’s development. As illustrated in a recent report by the OECD Development Centre, many jobs are not fully subject to labour legislation. Employees often lack access to social protection or employment benefits, and untaxed envelope payments are common.
Informality on this scale is a serious problem. It means less tax income for the state and therefore less room to provide infrastructure and public services. The insufficient reach of safety nets to the informal sector renders people vulnerable to economic shock and poverty.
However, not everybody in the informal sector tries to evade taxes or social security contributions. For some people informal employment offers the only chance to earn a living. In this respect it even helps fight poverty.
Simply trying to abolish informal employment—through stricter laws and enforcement mechanisms, for example—can thus not be the answer. On the contrary, a better understanding of the complexity of informal employment and a more nuanced approach to address the specific needs of informal workers is urgently needed.
Effectively addressing informality starts by underpinning the benefits of the formal sector. Employers who have not registered their firms might do so if taxes are lowered and administrative procedures simplified. Workers who prefer informal employment will be more likely to sign up for social insurance schemes if benefits are linked to contribution levels. Finally those who are currently marginalised to the informal sector could find a way back to formal employment if active labour market policies such as training programmes offer them the necessary skills. Needless to say, all such policies need to be designed in a way that avoids disincentives for formal employment.
Above all, Romania has to strengthen people’s trust in public institutions. This means leaner bureaucracies, less corruption and better public services, but also innovative policies such as information campaigns on the merits of formality. While people won’t change their attitudes towards the state overnight, the government must implement the right polices now.
To learn more on informal employment in Romania and our work on poverty reduction and social development, find additional information here:
Estelle Loiseau (email@example.com; +33 1 4524 9559)
Flagship 2008: Work and Well-being
Policy Insight 70: The Two Faces of Informal Employment in Romania
DEV Working Papers 271: Report on Informal Employment in Romania