Not poor and not formal: Who are the ‘missed middle’ of social protection?

Close your eyes and picture an informal worker. What economic shock is that person most worried about? What resources (social, financial, or other) can they tap into in hard times? Can they safely put money aside at the end of the month for the medium- or long-term? Your answers will be radically different depending on whether you pictured a seamstress earning a small but regular wage in an unregistered garment factory in Bangladesh; an Andean farmer growing potatoes on 45-degree inclines in the Puna; a Zambian saw miller and her 10 employees; or the owner of a fleet of 20 matatu buses in Nairobi. Not so surprising, given that “the” informal economy employs up to 95% of the labor force in some countries.

Historically, social protection has focused on the poor (targeted by social safety nets) and the formal (covered by social insurance programs). This leaves a large segment uncovered, untargeted, and often unstudied. In “Social Protection for the Informal Economy – Operational Lessons for Developing Countries in Africa and Beyond,” we show that this “missing” or “missed” middle of non-poor informal households (NPI) accounts for more than half of the population on average in six African countries (Figure 1).

Figure 1: Size of the missed middle in six countries in Africa

Size of the missed middle in six countries in Africa

Why shouldn’t we just focus social protection on the poor? One reason is that, in the absence of social protection, many of today’s non-poor are vulnerable to becoming tomorrow’s poor. Poverty is transient in normal times and several powerful recent economic and social transformations are increasing downward transitions into poverty. COVID-19 and ensuing lockdowns increased the extreme poverty count by 97 million globally in 2020, hitting hard at relatively stable segments of the urban informal economy. Heightened climate variability will similarly increase the vulnerability of the many farmers who are currently faring well. While many low-income countries are still very young, they are aging faster than developed countries have. Eventually, an increasing ratio of inactive to active populations will reduce the availability of support from families and informal networks. Moreover, reducing economic uncertainty for the informal non-poor can unlock investment and tap an important engine of economic development. Third, engaging segments of the informal sector that can save and contribute towards their own social protection can help focus constrained fiscal resources on the most vulnerable via non-contributory or subsidized programs. In sum, even with poverty reduction as the primary goal, the non-poor informal must be part of an integrated social protection strategy to ensure lasting graduations out of poverty and inclusive economic growth.

Household surveys can be used to profile NPI households relative to poor and to formal households. In the countries we analyzed, NPI households look quite like poor households in terms of employment (e.g., prevalence of self-employment and employment in agriculture), exposure to shocks, and household wealth (e.g., ownership of land and durable goods, lack of access to water, electricity or the internet). However, NPI households are closer to formal households in terms of consumption, financial inclusion, school enrollment or fertility. And while formality is highly correlated with consumption, most households in the highest consumption quintile are, in fact, not in the formal sector.

The report puts forth an exploration at how such profiles can guide the appropriate set of policy tools to support. We propose a simple typology of households that can be implemented using existing household survey data (Figure 2). The typology separates NPI households who exhibit signs of economic distress from those who do not. Half of NPI households (50.8%) across the six-country sample reported that they had experienced a significant economic shock in the previous 12 months. Out of those, some households report coping strategies with long-term negative effects such as taking kids out of school, reducing essential food consumption, or fire-selling productive assets. These behaviors reveal binding financial constraints. Other households either did not experience negative shocks or were able to tap into social and financial resources (savings, borrowing, increasing labor supply) to mitigate the impact.

Figure 2: Typology of households by social protection needs

Typology of households by social protection needs

From household profiles to policy action

By implementing such profiles at the country level, policymakers can then invest in appropriate and scalable policy options that are suitable for the range of household types.  For example, non-resilient and financially constrained households are unlikely to take up contributory social protection programs and may instead need subsidized health or unemployment insurance, and help accumulating precautionary savings. For the most resilient segments, contributory social insurance or voluntary long-term saving schemes might be a best fit. This layered approach can help target social protection programs to occupational or geographic segments where take-up will be highest or where scale will be sufficient to absorb fixed costs.