Combatting informal employment goes digital: What can we learn from the Estonian experience?

High rates of informal employment remain a challenge in most of Eastern Europe and range between 20% for Ukraine and 56% for Albania. The large informal economy reduces tax revenues, leads to unfair competition and negatively affects the quality of jobs. A considerable share of the workforce has no access to labour rights and social security. A new ILO publication analyses how Estonia used modern information technology to promote the transition to formality.

News | 03 June 2021

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Known as a “technological tiger” and the “world’s most digitally advanced society”, over the past three decades Estonia has invested heavily to develop its IT infrastructure and support a digital culture among its citizens. Today, approximately 98 per cent of tax declarations are completed online and in a matter of minutes. In addition, 98 per cent of companies are registered online and these businesses can file their annual reports and update their own data through the e-Business Register.

To formalize private person-to-person services, anyone can open an Entrepreneur Account at a bank and automatically have their taxes deducted from payments. Moreover, among its many accolades, Estonia was ranked first in entrepreneurial activity by the World Economic  Forum in 2017, first in start-up friendliness by Index Venture in 2018, and first among EU countries in the European Commission’s 2020 digital economy and society index.

With the Covid-19 pandemic, Estonia navigated the shift to teleworking relatively seamlessly because of its already existing IT infrastructure and digital culture. With such wide-ranging measures and demonstrated success, Estonia is a prime case study to understand better how the usage of technology can play a role – both directly and indirectly – in encouraging the transition of unregistered workers and unregistered economic units to the formal economy.

E-formalization took place in the context of the digital transformation in Estonia since its independence in 1991 where the online economy and technological innovation were considered as the road to development while still reducing government costs and improving the life of its citizens. The digitalization process addressed issues of corruption and informality with increased tax revenue for the Estonian government. The costs of being formal have been reduced for businesses with simplified compliance procedures. Formal registration of employment becomes easy and simple that provides workers’ access to medical insurance and pension.

There are several insights to be gained from Estonia’s two decades of experience as a functioning digital society to promote policies of e-formalization. These lessons learnt are extendable to other countries that wish to put in place policies which can directly or indirectly promote the formalization of the economy. The ingredients for success fall roughly into five categories: 1) political will and public-private collaboration, 2) a digital spirit of society supported by data protection and used-friendly services, 3) digital foundations such as digital identification and a digital platform for exchanging data, 4) implementing e-services is not about the digitization of paper processes but rather about rethinking the whole process, regardless what the country inherited, and 5) e-services do not require overbearing financial investments, moreover they save money. The driver of the necessary IT application needs to be the policy-maker rather than the IT company, through small investments and public –private collaborations.

Read the ILO report  E-formalization case study: e-Estonia: A digital society for the transition to formality

Check out ILO work on e-Formality