As global uncertainty persists with an elevated risk of economic downturn, a pervasive shadow economy haunts inclusive recovery, calling for a policy package to address the complexity of informality that encourages a transition from a shadow to a licit economy.

There is a widely accepted notion that women are the backbone of Indonesia's economy.  This is due to the fact that women dominate the micro, small and medium-sized enterprises (MSMEs), which account for around 62 percent of GDP, or about Rp 8.6 trillion (US$580 billion) and absorb about 90 percent of total workforce. More than half of the 64 million SMEs in Indonesia are women-owned businesses, but most of them are in the micro and small sector and operate informally.

In 2020, informal workers accounted for 60.47 percent of the labor market, up by 5 percent from 55.72 percent in 2019. During this period, the share of women in the informal sector surged from 41.97 percent to 57.35 percent. From self-employed workers in MSMEs such as market vendors and hawkers, to wageworkers like domestic workers and home-based workers, women were overrepresented in informal labor. 

Given the persistently low female participation in the workforce -- at around 54 percent or significantly below that of their opposite gender at more than 80 percent -- data indicate that informal employment is more common among female workers. This is in line with the findings of the International Labor Organization (ILO) and Women in Informal Employment: Globalizing and Organizing (WIEGO), which show that women are more likely than men to work in the informal economy.

ILO defines the informal economy as all economic activities by workers and businesses insufficiently covered by formal arrangements. Consequently, the law is not applied or enforced on the activities operated by informal workers, limiting their access to legal rights and adequate social protection.

Although Indonesia has provided universal health coverage, including for informal workers through the non-employee scheme (BPU), the enrolment has been scanty. According to data from the Workers Social Security Agency (BPJS Ketenagakerjaan) in 2021, there were only 3.55 million or less than 5 percent of the workforce registered workers in the national healthcare security program.

The low participation has further constrained the informal workers' access to other social safety nets. The wage subsidy assistance during the pandemic, for instance, was given to BPJS Ketenagakerjaan-registered workers only.

In addition, informal female workers' skills tend to decline over time since they do not make the most of their abilities and miss out on opportunities to develop new ones. As they tend to work with limited capacity, skills or funding, they stand little chance of advancing in their careers or business. Therefore, they are susceptible to low wages and precarious employment.

Lack of legal, health and social protection and scant opportunities to grow have left those women more vulnerable to low-quality jobs or small-scale and less-productive businesses.

Prevalent informality can also cause the government to suffer from low productivity levels, leading to low economic growth in the nation and unrecorded economic activities that would otherwise add to the country’s GDP. After all, the government could fail to expand the tax base and lose sources of tax revenues that are critical to funding the development and recovery measures.

The large informality among women may seem abstruse considering the progress in women's educational participation and attainment. However, as its causes are often complex and tied to gender-related obstacles, gender equality in education cannot translate into quality and decent jobs for women if such structural and systemic barriers are not adequately addressed.

A literature survey by the World Bank in 2009 demonstrated that informality in women is an outcome of either exclusion or voluntary action. Those who are excluded are willing to work in the formal sector, yet they are hampered by internal and external factors.

The internal obstacles are related to the necessary skills to produce at the level required by the formal labor market, thus hindering women from entering the formal labor market. Meanwhile, external factors can be labor protection, discrimination, social norms, domestic responsibilities or simply a lack of demand relative to supply in the labor market.

In contrast, voluntary informality has roots in workers' perceptions of the cost of formality, which is higher than the benefits. Simply put, working in the informal sector has discerned invaluable benefits for workers. Whether it is related to monetary values such as income after taxes or non-monetary advantages like flexibility in working conditions, autonomy and freedom, cost versus benefit considerations have been one of the key determinants of informality by choice within women.

With a global recession looming and the risk of increased participation in the informal economy, a strategy to overcome those underlying causes of informality and facilitate a smoother transition to the formal sector is considered necessary.

A set of comprehensive policies and bespoke instruments could reduce the workers' barriers to moving to the formal sector. Appropriate approaches should also address the labor market's supply and demand sides through legal, regulatory and policy frameworks.

Some fiscal measures to lower the formal sector's entry costs, such as tax incentives, have been available through the National Economic Recovery (PEN) program. It reduces the final income tax rate for MSMEs with a one-year turnover not exceeding Rp 500 million from 0.5 percent to 0 percent during the pandemic. There is also no cost incurred for MSMEs' owners to apply for a Business Registration Number (NIB) through the Online Single Submission (OSS) provided by the Investment Ministry. Simplifying tax reporting and registration schemes, strengthening tax administration and integrating business and tax registration could potentially advance the effort to overcome some of the barriers.

Non-fiscal measures should further be leveraged and steered toward a more gender-balanced labor market and adaptable regulatory framework. The government can also harness digital tools to help MSMEs scale up their businesses, for instance, by bundling the registration process and business reports with technical support, like capacity building and lifelong learning, and greater access to credit financing and business services.

Additionally, supportive macroeconomics is pivotal to providing a conducive, enabling environment that will promote the productivity of the private sector. Other critical elements are complementary policies and institutions to ensure the implementation's viability.

Promoting women's transition to the formal sector is intertwined with the women's empowerment agenda. Therefore, it should also be combined with efforts to address social norms and discrimination that hide them under the shadow economy, not least by reducing women's triple burdens, including disproportionate distribution of unpaid and domestic work care and unbalanced parental leaves.

 ***

The writer is a senior analyst at The Knowledge Management Unit, Center for State Revenue Policy, Fiscal Policy Agency, Finance Ministry. The views expressed are her own.