Social protection and formalization in low- and middle-income countries: A scoping review of the literature

Social protection is a central component of achieving ‘SDG 8: decent work and economic growth’, yet at a global level a large social protection deficit remains. The majority of those uncovered are found in or dependent on income or profit from the informal economy, which remains the dominant source of employment in many low- and middle-income countries. The relationship between a lack of social protection and high informality in low- and middle-income countries is generally confirmed across the literature, yet the perceived direction of the relation and the mechanisms behind it vary depending on the country-specific context, including dominant form(s) of informality and types of social protection schemes and benefits provided. Much of the existing literature on social protection and (in)formalization examines the relation between non-contributory social protection (social assistance) and the broader concept of the informal economy. Taking a different focus, this article reviews the evidence on the relationship between contributory social protection and formalization of enterprises and workers among micro- and small enterprises in low- and middle-income countries. We adopt a scoping review methodology and follow a thorough literature search and screening process in which 30 primarily quantitative studies are carefully synthesized. In analysing the main findings and mechanisms underlying the observed linkages between contributory social protection and formalization, our study finds substantial variation across as well as within countries. In general, the evidence paints a favourable picture in terms of contributory social protection leading to increased formalization of enterprises and workers, yet it is not a given that enterprise formalization (the extensive margin) automatically leads to worker formalization (the intensive margin). The results point to the importance of appropriate incentive structures in social protection policies as well as ensuring stronger coherence and coordination between different types of social protection schemes and other labour market policies.