LABOR 

Labor informality. At the beginning of May, the World Bank (WB) published the report “The Long Shadow of Informality: Challenges and Policies“, which points to a drop in labor informality in Latin America, although it remains aboe average for emerging countries. The document makes clear that informal labour accounts for more than 70% of total employment, almost a third of the Gross Domestic Product (GDP), and puts this down to a “confluence of factors” that have “allowed informality to flourish”, such as labor market inefficiencies, corruption and economic and social inequalities. It therefore proposes “regulations on burdensome taxes”, in view of the fact that average regional income tax rates are higher than in other emerging markets. 

According to the World Bank, a market that does not operate through formal channels “reduces the capacity to mobilize the fiscal resources needed to prop up the economy during a crisis, carry out effective macroeconomic policies and generate human capital for long-term development”. This first survey by the multilateral organization reveals a “worrying picture” of the extent of informality and its implications for economic recovery, which speaks of a latent problem for Latin America.

This study indicates that informal production in Latin America has been equivalent to 35% of GDP between 2010 and 2018, down from 40% corresponding to the previous decade. It should be noted that informal employment is equivalent to self-employment as a percentage of total employment, a variable that registered an increase of close to 2% in both periods to reach 36%. The WB recalls that the outbreak of the pandemic in the labor market has probably drastically increased the proportion of informal employment, at least temporarily, in view of the “disproportionately large” income losses suffered by workers in this segment.

Next steps

The World Bank states that designing policies to address informality requires an understanding of its causes and characteristics, a diagnosis that varies across countries in the region. However, it explains that policies that have been successful in addressing informality in Latin America have focused on reducing the tax burden, strengthening the enforcement of labor regulations and removing disincentives to formal employment. On the tax front, it suggests making fiscal policy less burdensome by reducing tax rates to incentivize firms to become formal and increase demand for their workers. It also suggests stricter enforcement of labor regulations.