I HAD previously argued the need to improve our welfare system to protect the vulnerable persons as 40% of workers in the formal sector are not enrolled in any retirement scheme.

These people are mainly from non-standard employment and self-employment.

The risk exposure is perhaps amplified when these workers are employed in an unregistered firm (informal sector).

This kind of outfit would not be obliged to pay any retirement and social security benefits for their employees.

Consequently, the employees are not entitled to any social welfare programme benefits linked to employment. The government also loses tax revenue because it is unable to collect it from unregistered firms.

These are the precious source of government income that can be used to fund various administration and development programmes.

Growing informality is a concern

There are two ways to measure informal economy. One is based on informality within the formal sector such as non-standard employment and self-employment.

The other is a firm-based approach, which measures employees’ work in the unregistered firms.

According to the Informal Sector Survey Report 2019, the number of informal workers was 2.5 million or 16.8% of total employment. Among the informal workers, those working in unregistered firms accounted for 8.3%.

The number of workers in the unregistered firms grew from 950,000 in 2010 to 1.26 million in 2019.

The 2.9% compound annual growth rate between this period exceeds the total employment growth rate (2.5%) and the employment growth rate in the formal sector (2.7%).

Due to data limitation, the number of unregistered firms in the same period is unknown.

With 8.3% of total workers in the unregistered firms contributing to 7.8% of GDP, it is significant enough to deal with the unregistered firm issue.

Consequences of informality

The fact is, the workers in the unregistered firms are not entitled to any retirement arrangements, social security and social protection measures by the government.

It aggravates the socio-economic problem where informality within the formal sector reached almost 40% for the workers without retirement arrangements, and 34% workers in this sector did not have any form of social protection in 2019.

They are vulnerable after they retire (no Employees Provident Fund savings to be withdrawn to support living expenses), accidents in the workplace (especially when the informal sector is correlated with a high labour-intensive and high-risk work environment, no Socso to provide insurance), and during unemployment (no employment insurance scheme as a stopgap support for income before the next employment).

In fact, unregistered firms are unable to access financing from the government and financial institutions.

Given that small- and medium-sized enterprises already accounted for 96% of the total registered companies, the number of unregistered firms would have a high correlation with the SMEs.

The only advantages they seem to enjoy is that they are not required to contribute company and income taxes to the government and might not need to pay some fees to the local authorities or the relevant professional bodies.

Benefits and incentives

The statistics showed that only 8.3% of workers are in the unregistered firms. This indicates that most companies comply with formal registration (either the Companies Commission of Malaysia, local authorities or professional bodies).

To address the concern, there is a need to increase the incentives to formalise, such as improving access to entrepreneur financing, especially for SMEs, after registration. 

It will be a tangible benefit to motivate the unregistered firms to formalise.

The government also needs to consider the reasons behind the reluctance of certain people to formalise and try to resolve the issues.

Simplifying the registration process and effectively disseminating the information regarding the process that makes the public understand easier would be certainly helpful. – January 30, 2023.

* Nick Tan Beng Teong graduated with Bachelor of Economics at University of Malaya. A member of Agora Society, Tan believes in policy reforms in order to build a better nation.

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.