Payroll Tax Evasion and Precarious Employment: Constraints to Social Protection in Sub Saharan Africa

By Wirajing Muhamadu Awal Kindzeka

Executive Summary

Payroll tax evasion and precarious employment have become major obstacles to social protection financing across Sub Saharan Africa (SSA). A large share of workers remains employed outside formal payroll (85% of informal employment) and social security systems (827 million people in SSA), reducing governments’ capacity to mobilize revenues and finance pensions, healthcare, and labour protection programs. In many African economies, firms increasingly rely on undeclared or insecure employment arrangements to reduce labour costs, particularly within highly informal and weakly industrialized economic structures. This policy brief argues that the challenge facing African labour markets is no longer only unemployment, but the expansion of vulnerable and weakly protected employment systems. Weak labour administration, limited enforcement capacity, and low productive transformation continue to reinforce payroll tax evasion and labour informality. As a result, social protection systems remain underfunded while workers face rising income insecurity and limited access to formal benefits. The brief recommends strengthening labour inspection systems and simplifying payroll registration in the short term, digitalizing social contribution systems in the medium term, and promoting productive industrialization and formal job creation in the long term. Without such reforms, labour informality will continue to weaken fiscal sustainability, social protection, and inclusive economic transformation across the continent.

Key Messages

• Payroll tax evasion significantly weakens social protection financing and domestic revenue mobilisation across Africa.
• Informal and precarious employment structures continue to exclude millions of workers from pensions, healthcare, and labour protection systems (estimated about 827 million people in SSA).
• Weak institutional capacity and poor labour market enforcement encourage firms to rely on undeclared employment practices.
• Expanding vulnerable employment undermines productivity growth and long-term structural transformation.
• Coordinated reforms linking labour formalization, digital tax systems, and productive job creation are essential for strengthening inclusive development.

1. Introduction

Social protection programs have expanded to 4.7 billion people, with an increase of 10%, from 41% to 51% of the population between 2010 and 2022 in low- and middle-income countries. In 2025, more people had access to social protection than at any point in history, with over 4.7 billion people across low- and middle-income countries who have benefited from social protection programs. However, there are still some critical gaps, with over 2 billion people in those countries remaining uncovered or inadequately covered by social protection. Out of these uncovered or inadequately covered individuals by social protection schemes, Sub Saharan Africa accounts for about 41.35% (827 million people). Among the many reasons for this is payroll tax evasion which is worsened by labour market informality and weak tax compliance across many African economies. While official unemployment rates often appear relatively moderate, a large share of workers remain trapped in vulnerable, insecure, and weakly protected employment arrangements. Many workers operate outside formal contractual systems, limiting access to pensions, health insurance, social protection, and labour rights. In this context, payroll tax evasion has emerged as a major but often overlooked structural constraint to inclusive labour market development. Payroll taxes and social contributions play an important role in financing social protection systems and supporting public services. When firms avoid declaring workers or underreport wages, governments lose substantial fiscal revenues while workers remain excluded from formal social security systems. This weakens the sustainability of pension schemes and limits governments’ capacity to finance healthcare, unemployment support, and labour protection mechanisms. The challenge is particularly significant in Sub-Saharan Africa, where informal employment dominates labour markets. According to the International Labour Organization (ILO), nearly 83% of total employment across Africa is informal, with Sub-Saharan Africa reaching approximately 85%, with limited social protection coverage and widespread employment vulnerability. This policy brief examines how payroll tax evasion and precarious employment affect social protection systems and labour market quality in SSA. It also highlights the policy trade-offs between labour formalization, enterprise survival, and employment creation.

2. The Expansion of Precarious Employment in Sub Saharan Africa

African labour markets have undergone major structural transformations over the past two decades. Rapid population growth, urbanization, and weak industrial expansion have increased pressure on labour markets, particularly among young populations entering working age. However, the pace of formal job creation has remained insufficient to absorb this growing labour supply. As a result, precarious and informal employment has expanded considerably across sectors such as trade, transport, agriculture, construction, and low-productivity services. The severity of this informality worsens in the case of women and youth who are disproportionately represented. In Sub-Saharan Africa, for instance, nearly 90% of women workers hold informal jobs, dominated by low-income activities. Informality is no longer limited to self-employment or small-scale street activities. Increasingly, wage employment itself is becoming informal, with many firms employing workers without contracts, social contributions, or labour protection. This situation reflects both structural and institutional weaknesses. African economies remain heavily dependent on low-productivity sectors with limited industrial transformation and weak private-sector expansion. Simultaneously, labour administrations often lack the institutional and technological capacity to effectively monitor payroll systems and enforce labour regulations.

For many firms operating within uncertain economic environments, payroll tax evasion becomes a short-term survival strategy. Employers frequently perceive labour taxes and social contributions as excessive operational costs that reduce competitiveness and profitability. Consequently, firms often avoid formal worker registration or partially declare wages to minimize fiscal obligations. While these practices may temporarily reduce labour costs, they contribute to the expansion of insecure employment structures characterized by low wages, unstable working conditions, and limited social protection. Over time, this weakens labour productivity and reduces the quality of economic growth.

3. Payroll Tax Evasion and the Weakening of Social Protection Systems

On average, Sub-Saharan African countries collected 14% of their GDP in taxes between 1990 and 2020. However, this rate varies significantly with some upper middle-income countries like South Africa, Seychelles and Namibia having rates as high as 28-33%. In contrast, low-income countries like Chad, the Democratic Republic of Congo and Ethiopia have rates as low as 7%. Payroll tax evasion directly undermines the financing capacity of social protection systems across African economies. Pension systems, public health insurance programs, employment protection schemes, and labour compensation systems rely heavily on employer and employee contributions. When workers remain undeclared, these systems lose important financial resources. In many African countries, social protection coverage remains extremely limited. Large proportions of workers lack access to pensions, paid leave, unemployment support, and employment injury protection. This situation reflects not only fiscal constraints, but also the widespread expansion of undeclared and precarious employment arrangements. Tax evasion by firms in middle-income countries is often considered to be one of the key reasons why revenue levels as a share of GDP remain well below those in high-income countries.

Payroll tax evasion also deepens labour market inequality. Workers operating in the formal sector contribute regularly to social systems, while informal workers often remain excluded from benefits despite participating actively in economic production. This creates fragmented labour markets characterized by unequal access to social protection and income security. The long-term implications are particularly concerning. Weak pension systems increase the risk of old-age poverty, while unstable employment reduces household resilience during economic shocks. The COVID-19 pandemic clearly exposed these vulnerabilities, as millions of informal workers lacked access to emergency income support or unemployment protection mechanisms. Beyond social protection financing, precarious employment also affects labour productivity and enterprise development. Firms relying heavily on undeclared labour often underinvest in worker training, technological upgrading, and long-term workforce development. As a result, labour cost minimization discourages productivity growth and innovation.

4. Structural Drivers of Payroll Tax Evasion

• Weak Institutional Capacity: Labour inspectorates and tax administrations frequently suffer from insufficient resources, weak digital systems, and limited enforcement capacity. Monitoring labour compliance across large informal sectors becomes administratively difficult, particularly in fragile and low-capacity states.
• Weak Industrialization and Productive Capacity: Many African economies remain dominated by low-productivity sectors with limited formal enterprise development. Weak industrialization reduces the creation of stable and productive employment opportunities, thereby reinforcing labour informality.
• Complex Administrative and Tax Systems: Complicated business registration procedures and burdensome labour regulations discourage compliance among SMEs and microenterprises. Many firms avoid formal registration due to administrative complexity and high compliance costs.
• Low Institutional Trust: Limited trust in public institutions reduces incentives for compliance with labour taxation systems.
• Fiscal and Economic Pressures: Economic instability, inflationary pressures, and weak access to finance push many firms toward cost-reduction strategies. Under such conditions, avoiding payroll taxes becomes a mechanism for maintaining short-term business survival.

5. Labour Market Consequences and Development Trade-Offs

The expansion of undeclared and precarious employment creates major policy trade-offs for African governments. On one hand, strict labour formalization measures may increase operational costs for firms operating in fragile economic environments. On the other hand, maintaining widespread informality undermines long-term fiscal sustainability and productive transformation.

• First, one major consequence is the persistence of vulnerable employment structures. Informal workers often face unstable incomes, poor working conditions, and limited opportunities for career advancement. This reduces household income security and constrains domestic demand growth.
• Second, payroll tax evasion weakens domestic revenue mobilisation. Governments lose substantial fiscal resources that could otherwise support infrastructure, healthcare, education, and industrial development programs. Weak tax mobilisation continues to constrain fiscal space across many African economies.
• Third, labour informality distorts competition between firms. Enterprises complying with labour regulations often face higher operational costs compared to non-compliant firms. This discourages formal enterprise growth and weakens incentives for broader labour market compliance.
• Finally, precarious employment weakens structural transformation. Economies dominated by low-productivity informal employment struggle to develop strong industrial sectors, innovation systems, and sustainable productive capacities capable of supporting long-term growth.

6. Policy Recommendations

Short-Term Policy Actions: Governments should strengthen labour inspection systems and simplify payroll registration procedures, particularly for SMEs and small enterprises. Simplified labour compliance systems can reduce administrative barriers to formalization. In addition, targeted incentives should also encourage firms to formalize employment relationships, especially for youth employment and small businesses. Temporary contribution subsidies or tax reductions for newly formalized workers could facilitate transition into formal labour systems.

Medium-Term Policy Actions: African governments should accelerate the digitalization of payroll taxation and social contribution systems. Integrated digital platforms can improve compliance monitoring, reduce administrative inefficiencies, and strengthen revenue collection. In addition, governments should also improve coordination between labour ministries, tax administrations, and social security institutions to strengthen labour market enforcement and information sharing. Expanding digital payment systems and financial inclusion can further reduce undeclared wage practices.

Long-Term Policy Actions: Long-term solutions require productive structural transformation capable of generating stable and formal employment opportunities. Industrialization strategies, SME development policies, and investments in productive sectors remain essential for sustainably reducing labour informality. Also, expanding universal social protection systems is equally important. Broader social protection coverage can improve labour market resilience while increasing incentives for participation in formal employment systems. Finally, improving governance, institutional credibility, and public service delivery remains critical for strengthening labour tax compliance and rebuilding trust between governments, firms, and workers.

7. Conclusion

Payroll tax evasion and precarious employment represent major structural threats to social protection systems and inclusive labour market development across Africa. While informal employment may provide short-term survival opportunities for firms and households, its long-term consequences weaken fiscal sustainability, reduce social protection coverage, and limit productive transformation. The challenge facing African economies is therefore not simply reducing unemployment, but expanding stable, productive, and protected employment systems capable of supporting sustainable development. Without coordinated reforms aimed at labour formalization, institutional strengthening, and productive job creation, many African economies risk remaining trapped in low-productivity and weakly protected labour market structures. Strengthening labour market formalization is therefore not only a fiscal necessity, but also a central condition for inclusive growth, economic resilience, and long-term structural transformation across the continent.