Impact of labor and tax policies on the informal sector in Cameroon
This analysis shows that, while labor migration from the informal to the formal sector would increase growth, ensuring a minimum wage across all sectors would significantly reduce poverty. Find out more below, or through the PEP Working Paper 2016-04 and Policy Brief 137 (in French)
The findings and policy recommendations of this particular PEP study contributed towards a decision by the Ministry of Labor to extend social security to the informal sector. The findings were also presented during a national event and reported in the national media. Find out more below, or in the PEP Impact Brief.
Around 40% of Cameroon’s population lives in poverty, a figure that the government aims to address using various economic policies within the national poverty-reduction strategy. Current measures reduce taxes on essential products and aim to increase job opportunities in the formal sector (particularly in the public sector). However, a nationwide employment study found that the poverty rate is closely linked to the dominance of the informal sector, which employs more than 80% of the labor force. Wages in the informal sector are very low – approximately 50% of formal sector wages – and not secure, meaning that households face permanent instability.
Among heads of households, the poverty rate is 9.6% for those in the formal private sector, whereas the rate is 23% in the informal non-agricultural sector and 59.6% in the informal agricultural sector. In order to address this issue, the government is prioritizing efforts to migrate employment opportunities from the informal to the formal sector.
In light of this situation, a team of local researchers was awarded PEP funding and support to evaluate the impact of the informal sector on the Cameroonian economy and the impact of the employment and tax policies affecting the informal sector and poverty. The team aims to use these results to identify the best policies for achieving the government’s growth and well-being objectives.
Research questions, method, and key findings
Using data from the 2010 national accounts, the research team built a social accounting matrix for Cameroon. Using this matrix, the team simulated three situations to examine their (macro) economic and social impact:
- Increasing skilled labor in the formal sector by 12.6%, with labor that has migrated from the informal sector;
- Taxing informal sector products and produce;
- Reducing tax on essential items purchased by poor households.
Results of the analysis indicate that moving labor from the informal to the formal sector (simulation 1) would lead to an increase in GDP, however the taxation policies (simulations 2 and 3) would have no significant effects on the informal sector.
In terms of the population’s well-being (indicated by revenue and poverty levels) the team’s analysis shows that simulations 1 and 3 both see an increase in household revenue, by 1% and 0.7% respectively. On the other hand, simulation 2 reduces household revenue by 0.45%.
Simulation 1 also significantly reduces the national poverty rate (by 2.32%) and is especially effective in urban areas with a 6.15% reduction. Simulation 3 also reduces the poverty rate but to a lesser extent than simulation 1. However, simulation 2 increases the poverty rate by 3.38% in urban areas and by 0.46% nationally.
This study’s findings demonstrate that taxation of the informal sector will not improve household well-being nor the poverty level in Cameroon. They also show that the wage gap between formal and informal employment has a significant impact on household purchasing power and thus on household well-being. These results suggest that reducing poverty is not necessarily dependant on reducing the informal sector as a wage increase in the informal sector would significantly increase growth and well-being. Based on these results, the research team recommends that a minimum wage be established and enforced.
Find out more about the research methods and findings, as well as subsequent policy implications, through the PEP publications posted below - in particular, Working Paper 2016-04 (in French) and Policy Brief 137 (in French)
Project links and documents
|Find out more about this project - its analytical approach and outcomes - through the following links/documents:|
|PEP Project MPIA-12659||
Working Paper 2016-04 English (PDF)
Working Paper 2016-04 French (PDF)
|Project Proposal (Word)||Policy Brief 137 (PDF)|
|Final Report (PDF)||Impact Brief (PDF)|
Policy engagement, consultation, and dissemination
Prior to funding for the project being confirmed, the research team began preliminary consultations with national organizations responsible for employment, and particularly, the informal sector. These meetings allowed the team firstly to guarantee high-level interest in the project, and secondly to ensure the project would address the particular concerns (youth, informality etc.) of the various policy actors. Indeed, following discussions with resource persons at the Ministry of the Economy, the project was oriented specifically towards the impact of the employment and tax policies on the informal sector, instead of a more general socioeconomic analysis of the sector.
The team presented their preliminary findings to a representative of the Ministry for Labor, the Ministry being particularly interested with regard to the implications for social security. Following the meeting, the representative confirmed the Ministry’s intention to extend social security to self-employed workers as well as the informal sector.
In June 2016, the team organized their PEP national policy conference in Yaoundé, where they presented their findings to representatives of the Ministries for Labor and Social Welfare, for Youth, for Employment, and of the Economy and Planning, as well as the National Institute of Statistics and the National Employment Fund. There was also a strong public, academic and media presence. The conference provided the team with the opportunity to discuss and engage with key policy actors and stakeholders regarding their results.
Reports by three newspapers, a television channel, and a radio station meant that the team was able to reach out to the sectors of the population with which the project is most concerned. Furthermore, following the conference, researchers and representatives of government organizations approached the team for support and collaboration on future projects.
A secondary effect of the research project was that the findings allowed one of the consulting organizations, PIAASI (Programme intégré d’appui aux acteurs du secteur informel) to evaluate their own actions and aims as they help informal workers move into the formal sector. Based on the team’s results and recommendations, PIAASI should also advocate for a minimum wage for informal sector workers.
Find out more in the following PEP Impact Brief.
The project described above is one of the several projects selected for support under the PEP research and capacity building initiative for Policy Analysis on Growth and Employment (PAGE) in developing countries. The PAGE program is co-funded by UK's Department for International Development (DFID) and Canada's International Development Research Center (IDRC).
This particular project was selected in May 2014, following the first of three competitive calls for proposals of the PAGE initiative. A total of 65 projects have been supported under the three PAGE funding rounds. Find out more