Informal activity remains widespread, both among workers and firms, despite gradual improvements. More than half the workforce is in informal employment (Figure 4). Educational attainment among informal employees is often low and training opportunities limited. Access to social protection is growing but still low. Improving protection for informal workers while strengthening formalisation incentives requires a comprehensive strategy. Business formalisation would benefit from lighter business and labour regulations, as well as a simplified tax regime for small firms.
Investing in human capital can help shift more of the workforce into higher-quality jobs. Vocational education and skill development programmes could become more effective with better coordination and a clearer alignment of training content with employers’ needs, including those of small firms. Better career guidance in schools can reinforce this and ensure that women have access to the full range of career choices.
The design and financing of social protection can improve to foster formal job creation. Contributory social security schemes including old-age pensions and healthcare benefits have been expanded since their inception in 1999 but cover only a minority of workers.
Thailand has made good progress in rolling out tax-financed non-contributory pensions and healthcare. These schemes should be expanded further to strengthen social protection for low-income households, including those in the informal economy, while ensuring a better integration of contributory and non-contributory schemes. Current non-contributory pensions benefits fall substantially short of the poverty line and should be raised gradually to further reduce old-age poverty.
A stronger reliance on non-contributory schemes would allow lower social security contributions for low-income and self-employed workers, promoting formalisation. Improvements to the contributory scheme would allow it to better complement the basic pillar, delivering better replacement rates and thus helping incentivise the switch to formal employment.
Some business regulations contribute to informality. Improving the business environment by easing licensing regulations could reduce barriers for formalisation, while the costs of formal job creation could be lowered by reviewing labour market regulations, including minimum wage rules. At 50-60% of the average formal-sector wage, with regional variation, the minimum wage is high relative to wage levels in informal activities. A targeted, presumptive tax regime for small businesses would also improve formalisation.
Stronger incentives for workers to formalise should be accompanied by stronger enforcement efforts. The enforcement of tax, labour and wage regulations is weak but should be stepped up, though with caution to ensure that it drives informal workers into formal jobs and not into unemployment. As incentives improve and the cost of formal job creation declines, however, this will also enhance the positive contribution that stronger enforcement can play.