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Economics : The Formalization of the Informal Labour Sector: A Lever to Overcome Poverty

โดย ดร.เกรียงศักดิ์ เจริญวงศ์ศักดิ์

Thailand’s informal economy is very large - comprised of 22.5 million workers, or nearly 70% of the total labour force, working in such occupations as shop retailing, street vending, motorcycle taxi, taxi and tuk-tuk driving, farming, sanitation work, and personal service employment, such as maids, drivers and workmen.   

These workers face the risk of economic fluctuation, possible redundancy, their failure to be paid, diminished income and lack of social security. Most of Thailand’s poor are informal workers, whose identity and location is unknown to the government, thus causing a problem in ineffective poverty reduction policies where the government cannot decide on specific measures for the poor.    

 In addition, where there is informal business and labour, there is also unfair tax collection due to informal income earners not having to pay full taxes. The formalization of the informal labour sector would increase tax revenue for the government and also increase the government’s capability to deal with the poor.

The formalization of all informal business and the informal workforce will reduce the size of the informal economy and likely function as a lever to eradicate poverty. The formalization of the informal sector is not likely to be easy though, as informal sector costs are lower than those of the formal sector. Therefore, to formalize all informal business and the labourforce, the government must determine measures to encourage and gently push them to formalize, while increasing the costs or decreasing the benefits for staying in the informal sector.  

The first measure I propose is, “The right to access social welfare,” such as health insurance or old-age insurance, along with advancing a new model for social welfare especially with vat rebates for the poor and negative tax measures, as I have already proposed in many published articles. The social welfare system should be integrated with the social security system, stipulating conditionally that only formal workers be given this right, with high income workers from outside the system having to contribute to the social security fund. Workers, whose verified income is below the criterion, would be exempt.

Another measure is, "The right to public service provision," such as licensing for drivers, electricity and water meter provision, or passport provision, fundamental education and government service contact, all leading to  comfortable wage earning and access to facilities. For instance, taxi and motorcycle taxi drivers must first access the social security system, so that they can extend their vehicle and drivers’ licenses.

The last measure is, "The right to benefit from government policies," especially the right to access financial capital from banks or government projects, such as government bank loans, and student loan funds.


The existing informal sector labourforce, street vendors especially, will have steep borrowing costs from informal financial resources, but formalization will give such workers a higher chance to access low interest financial capital resources.

In the long run, those in the formal labourforce will be able to use identification or social security cards in order to exercise their right to use the government services I have mentioned above. The informal labourforce will be unable to access government services, however, because all public services and rights will be integrated exclusively for the formal labourforce. For example, the “Universal Coverage Health Insurance Project” will be combined with the health insurance system as part of the social security system. This will increase the costs of remaining in the informal sector.

However, the formalization of all business and the informal labourforce is not easy. There is a problem in imperfect information because the government cannot know the exact revenue of the informal business sector and its corresponding labourforce. Therefore, any formalization operations should be run gradually, especially for tax collection, defined contributions to Social Security Funds and for compulsory savings. It should firstly begin with a class of operation that is easy to formalize.  

Due to the uncertain income of the informal labourforce, there should be a fixed-level tax rate, defined contributions to Social Security Funds and compulsory savings determined by average income assessment according to operational class and area. Moreover, there should be a special channel for the poor and for workers whose income is below the asking criterion for welfare without defined contribution payments and compulsory savings. To do this, a well designed verification process is needed, to prevent false income statements.  

The formalization of the informal labourforce could be a lever to solve the poverty problem because it will increase tax collection for the government from earners in the informal sector and allow the government to know where and who is the poor. Following this, the government can formulate targeted poverty reduction policies more effectively and have more tools for dealing with the poor.

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