Informal employment remains the dominant form of work across much of low- and middle-income Asia. According to estimates from the International Labour Organization (ILO), informal employment accounts for about 86.6% of total employment in South Asia and 69.3% in Southeast Asia. In these settings, the systems that underpin social protection in high-income economies, such as payroll withholding, employer reporting, and income verification, are often much weaker, making both financing and targeting more difficult.
It is therefore useful to think about informality not simply as a failure of compliance but as an equilibrium in which workers and firms are allocated between formal and informal arrangements based on the relative returns of each option. Lowering registration or compliance costs alone rarely shifts this equilibrium, because the private gains from formalization often remain too small. Greater effectiveness does not necessarily translate into better welfare outcomes, as much depends on the management of transitions.
This perspective helps clarify the role of social protection. Well-designed social insurance and safety nets can increase the returns to formality by making formal participation more attractive through access to health coverage, pensions, work-injury protection, and portability. But the mechanism only works when coverage is credible and easy to access. If eligible workers do not enroll, cannot navigate verification procedures, or expect poor service quality, the promised insurance value is not reflected in their perceived returns, and incentives to formalize remain weak.
Social protection has expanded quickly across low- and middle-income countries, including in Asia, yet the ILO estimates that 3.8 billion people globally still lack any social protection coverage at all. In highly informal settings, the gap between eligibility and effective coverage is often explained by last-mile frictions, such as awareness, difficult enrollment procedures, authentication problems, payment failures, and burdensome renewal requirements.
Behavioral constraints are widely recognized, but they remain under-measured in policy design across much of Asia. There are major four types of frictions that recur: low salience and imperfect information; administrative burdens, such as paperwork, travel, and queues; mistrust and fear of exclusion or scrutiny; and present bias under volatile incomes, making regular contributions hard to sustain. Evidence from across Asia illustrates how these barriers operate in practice. In Indonesia, for example, a randomized evaluation of a national health insurance program, Jaminan Kesehatan Nasional, tested subsidies, information, and registration assistance for non-poor informal workers. Subsidies and assistance increased enrollment, but overall take-up remained limited, suggesting persistent frictions and adverse selection in opt-in schemes. Complementary evidence on lapsed contributors points to income uncertainty and changing needs as key drivers of nonpayment.
Thailand offers a clear example of the difference between enrolling people and keeping them enrolled. Evidence based on a large temporary enrollment incentive for informal workers showed that coverage rose sharply from 6% to 73% within months. However, only 13% of those induced to enroll by the incentive remained enrolled after 12 months, far below the retention rate of those who had enrolled without the incentive. The implication is that sustained coverage depends on credible value, simple claims processes, and low-friction renewals, not only one-off pushes.
A similar challenge can be seen in the Philippines, where PhilHealth’s policy work stresses that the informal sector’s heterogeneity and irregular income complicate identification, validation, and regular premium collection, motivating demand-side segmentation rather than one-size-fits-all enrollment rules. Cambodia’s experience similarly highlights the scale of the challenge. An ILO brief notes that even in the formal sector, many workers remain outside the National Social Security Fund due to non-compliance. At the same time, recent voluntary enrollment for self-employed workers shows how expansion can occur when pathways are simplified and benefits are clearly understood.
Pakistan’s cash transfer system illustrates a different design trade-off. Biometric verification can strengthen payment integrity, but it can also increase exclusion risks through authentication failures and travel burdens, raising the effective cost of participation for the poorest households. India’s Unified Payments Interface shows how digital public infrastructure can lower transfer costs and support expansion at scale. Yet digital infrastructure alone cannot eliminate the take-up gaps when trust is low, entitlements are poorly understood, or renewal processes remain cumbersome.
The policy implications are direct. If social protection is to raise the perceived returns to formality, governments need policy frameworks that can convert eligibility into credible, sustained protection. This means default or assisted enrollment, where feasible, such as pre-filled forms, proactive registration, and one-stop enrollment. It also means making benefits salient and credible through faster claims and better service quality; aligning contribution schedules with the realities of informal work through flexible frequencies, grace periods, and easy re-entry; and routinely measuring the full enrollment funnel (awareness, application, verification, payment, and renewal) to identify which frictions matter most for which groups.
In developing and middle-income Asia, informality and weak effective coverage reinforce each other. Informality constrains conventional social insurance administration, while limited protection lowers the perceived returns from formal participation. The underappreciated margin is behavioral. Strengthening social protection for informal workers therefore requires better delivery for measuring frictions, improving design, and ensuring that protection is real, visible, and easy to maintain. Only then can social protection meaningfully raise the returns to formality over time.
