Informal workers: push formalization or protect them as they are?

Advocates complementary public interventions—not forced formalization—to strengthen informal safety nets for informal workers, prioritizing pragmatic, non-distorting measures like public works.

The World Bank Group in 1995 did not advocate for forced formalization of informal workers, nor did it endorse leaving them entirely unprotected as they are. Instead, it emphasized that informal sector workers face heightened income risks and rely primarily on informal arrangements (e.g., family, community, employer-based support), which are increasingly inadequate—especially amid urbanization and economic shocks. The WBG recommended targeted, pragmatic government interventions—such as well-designed public works programs—to complement, not replace, these informal safety nets, while cautioning against formal social insurance schemes that could incentivize informality or fiscal insolvency due to weak contributory linkages and evasion. Formalization was implicitly supported only where labor market institutions (e.g., unions, competitive product markets) and policy design reduced dualism and enhanced equity without undermining efficiency.

Advocates formalization of informal workers, but only alongside regulatory/tax reforms to avoid harming the poor and expand protections.

The World Bank Group in 2005 advocated for encouraging formalization of informal workers and enterprises, but explicitly conditioned this on regulatory and tax reforms that reduce unjustified burdens, strengthen property rights, improve access to finance and public services, and reform labor market regulations to extend social protections—warning that strict enforcement of existing rules without reform would harm the poorest and exacerbate poverty.

Advocates improving conditions and rights for informal workers via inclusive institutions and gradual upgrading—not forced formalization nor static protection.

The World Bank Group's 2006 position rejects a binary choice between forced formalization and passive protection of informal workers. It argues that labor regulations applying only to the formal sector exacerbate inequality and harm informal workers—by raising formal-sector labor costs, limiting job creation, and leaving informal workers without coverage or enforcement. Instead, it advocates shifting jobs along a continuum of working conditions toward better wages and rights, through context-sensitive interventions—including collective organization (e.g., SEWA, StreetNet), social protection extensions, and regulatory reforms that avoid undermining efficiency or growth. It emphasizes heterogeneity within the informal economy, distinguishing voluntary microentrepreneurs from vulnerable casual laborers, especially women at the bottom.

Advocates targeted, institution-building formalization—expanding social protection, easing regulatory burdens for small firms, and strengthening enforcement—conditioned on state credibility and affordability.

The World Bank Group's 2013 World Development Report advocates a nuanced, context-sensitive approach to informal workers—not blanket formalization nor passive protection, but a three-pronged strategy: expanding social protection and activation policies for those outside regulatory reach; simplifying regulations and reducing compliance burdens for small firms that legally avoid formalization; and strengthening enforcement against deliberate evasion. It cautions that heavy-handed labor regulation, mandated benefits, or ill-designed social insurance can reduce productivity and stifle dynamism, and emphasizes that formalization must be paired with trustworthy, efficient state institutions and affordable, valued programs to gain worker and employer buy-in.

Advocates universal citizen-based social protection over employment-linked formalization, to include informal workers without distorting labor markets.

The World Bank Group in 2014 did not advocate for forced or premature formalization of informal workers, nor did it endorse leaving them unprotected as they are. Instead, it emphasized shifting from employment-based social insurance (which excludes informal workers) toward universal, fiscally sustainable social protection funded by general revenues and broad-based taxes—thereby protecting 'citizens', not just 'workers'. This approach aimed to reduce labor tax distortions that discourage formal hiring, especially for vulnerable groups, while recognizing that formalization must be gradual and supported by institutional capacity building, consistent regulation, and context-specific design aligned with labor market development stages.

Advocates extending social protection to informal workers without mandating formalization, by delinking benefits from formal employment contracts and adapting systems to new work realities.

The World Bank Group's 2016 World Development Report advocates for rethinking social protection and labor institutions to better include informal workers—not by forcing formalization through rigid regulatory compliance, but by delinking social insurance from formal employment contracts and expanding coverage to nonwage, noncontributing workers. It emphasizes that traditional labor regulations tied to formal jobs are ill-suited for evolving work arrangements (e.g., freelancing, gig economy), and recommends adapting systems—like those piloted in Bolivia, Chile, and Costa Rica—to extend protections without requiring formalization as a precondition. The report cautions against policies that make labor unduly expensive or overly protective, as these may accelerate automation and displace low-skilled informal workers instead of safeguarding their livelihoods.

Advocates pragmatic formalization via reduced regulatory/tax barriers and expanded social protection, conditioned on country-specific drivers and safeguards for vulnerable livelihoods.

The World Bank Group (WBG) in 2019 advocated for a balanced, context-sensitive approach to informality—neither outright pushing formalization nor preserving the informal status quo. It emphasized that while large-scale informality is associated with lower productivity, higher inequality, and weaker fiscal capacity, many informal workers are 'excluded' by excessive regulatory and tax burdens or 'exit' voluntarily for flexibility and autonomy. Therefore, WBG recommended reducing formality costs (e.g., simplifying registration, lowering taxes, digitizing payroll), improving access to social protection through non-contributory or parallel systems (with caution against inadvertently reinforcing informality), and strengthening complementary policies—including better education, infrastructure, finance, and safety nets—to enable transitions to stable formal employment without undermining livelihoods.

Advocates formalization by reducing tax and labor regulatory barriers to make it economically viable for firms and workers, not through coercion but incentive-aligned reform.

The IMF's 2011 position advocates for formalization of informal workers, but conditionally: it emphasizes removing key barriers—especially high tax burdens and overly rigid labor regulations (e.g., excessive severance costs)—that discourage firms from operating formally and hiring workers with social insurance coverage. It frames formalization as essential for inclusive growth and fair competition, urging policymakers to simplify business entry, reduce compliance costs, and reform labor institutions—not to enforce top-down mandates, but to make formalization economically rational and accessible. The stance presumes that reducing disincentives will organically expand formal employment and social protection without undermining livelihoods.