The informal economic sector generates the most employment, especially in many Asian nations. However, not all Asian countries are in the same boat when it comes to the percentage of employment created by the informal sector. Highly integrated economies such as South Korea and Japan exhibit some of the smallest proportion of informal sector employment while developing countries with a large working population such as Laos, Indonesia, and Vietnam within Southeast Asia fall towards the other end of the spectrum, according to the findings from the International Labour Organization that show how Southern Asia and Southeastern Asia have higher shares of informal employment than Eastern Asia.

The report from the International Labour Organization estimates that on average the share of employment being generated by the informal economy was 75.2 percent for countries in Southeast Asia and 87.8 percent for their South Asian counterparts while the share of the informal economy in Eastern Asia is around 50.7 percent. This data is depictive of the economic journey that several nations in this region are yet to undertake. The economic development of countries in the Asia and Pacific region varies considerably, and this is reflected in the proportions of those who are informally employed: the share of informal employment is on average 71.4 percent in developing and emerging Asian countries and 21.7 percent in developed Asian countries.

Impact of higher informal sector employment

The weight of the informal economy lays heavy on the country. Being part of the unorganized rector means little to no regulations and monitoring labor practices and wage standards. Such factors have a ripple impact on how effectively are job seekers able to procure well paying, satisfying jobs.  Rafael Diez de Medina, Director of ILO’s Department of Statistics, articulates this problem by adding that “the high incidence of informality in all its forms has multiple adverse consequences for workers, enterprises, and societies and is, in particular, a major challenge for the realization of decent work for all and sustainable and inclusive development.” This growing importance of ‘informality’ within modern day economies has led to its inclusion as one of the dimensions in the SDG indicators framework— a set of development goals that every UN signatory is expected to fulfil—-and as a result becomes one the most prime labor market concern in the region.

Today joining the informal economy often becomes a matter of forceful entry rather than willing participation. Socio-economic factors often play an important role. The level of education and skills today have become a key factor affecting the level of informality within economies. Globally, the ILO study on informal economies in Asia-Pacific, states that when the level of education increases, the level of informality decreases, expressing a far greater causality than other factors. People who have completed secondary and tertiary education are less likely to be in informal employment compared to workers who have either no education or completed primary education. The study also noted the geographical divide factored into the equation. People living in rural areas are almost twice as likely to be in informal employment as those in urban areas, and agriculture is the sector with the highest level of informal employment estimated at more than 90 percent. These trends are reflective of the barrier that policymaking faces when it comes to tackling the rising informality in Southeast Asian economies.

The other important, and often a more direct approach, boils down to how effectively have countries been able to create more jobs and promoted policies of financial inclusion. With booming economies and one of the fastest growing labor markets, if the growing informality is not kept in check, nations within ASEAN could soon be facing a major problem. Out of the major economies in the region, countries like Indonesia and Vietnam, today have the highest portion of employment generated through the informal sector.

Gearing up for digital transformation

Steps to tackle such impending labor issues have already begun in the region. Indonesian Central Bank has initiated steps to enable financial institutions to provide easier credit to their indigenous small and medium-sized enterprises. For a country that represents a significant portion of both population and share of the collective economic performance of ASEAN, Indonesia’s ability to reduce the burden on its informal sector would be pivotal for other nations in the region. Countries like Vietnam and  Cambodia that portray large portions of informal sector need to follow rapid formalization of jobs, especially within its manufacturing sectors as many such profitable revenue streams remain and function within the informal sector of their respective countries.

Other nations like Thailand and Malaysia, although have showcased strong economic performance over the years need to take a look at their labor policies that help manage the growing urbanization to tackle their informal economy. Hundreds of millions of Asians have moved from the countryside to cities in the past two decades, helping them reduce the number of people in informal work. But the impact of urbanization depends on local laws and policies. In order to prevent people from falling into the informal sector, it is necessary to provide adequate employment opportunities and labor policies that boost skill levels and productivity.

Being proactive in formulating and executing such labor policies is the need of the hour. This is not just because of what the present situation is like but also because how the future is shaping up to be. Although the high incidence of informal markets is often a sign of many within the labor force not having access to formal, structured wage jobs, it till now has played an important, albeit less visible, role in the region. A report in Nikkei Asian Review shows, for many within the region the rise of the informal economy to some extent was due to labor markets shifts that came into play when companies began adopting newer technologies. The skill shifts caused many—most from low skilled jobs to take up self-employed opportunities or find work within the informal economy. It, therefore, plays a buffer role between being formally employed and ending up as a statistic in unemployment surveys.

But there is a limit to which the informal sector can handle the inflow of job seekers without leading to some disastrous consequences. With the projected technological impact only to increase in the region, it is important that the informal parts of the economy are paid more attention to ensure the region, with its large working populations, is able to provide well-paid jobs to its job seekers.