World Bank recommends reducing tax burden and strengthening employment inspections to reduce informal labor
29 enero 2019


Informal labor.  The report Global Economic Prospects – Darkening Skies published by the World Bank (WB) at the beginning of January states that approximately six out of ten workers in Latin America work informally. According to the report, the region has seen higher levels of informality than other emerging markets in the last decade. The picture various, however, across the region: informal labor in Chile makes up 16% of its GDP, while in Bolivia it’s 56%. For this reason, WB proposes addressing the issue through a lowered tax burden and stricter labor inspections. It also calls for simplifications in the procedures for establishing formal businesses and jobs.

Some of the alternatives that the World Bank promotes as solutions are the creation of less restrictive tax systems (as an incentive for companies to demand more formal work), the realization of stricter labor inspections, and reforms with the objective of eliminating barriers to accessing formal jobs (such as simplifying the process of opening new businesses). The WB also proposes lowering taxes and the minimum wage, making legal systems more efficient, improving the protection of private property and liberalizing trade.

The report indicates that several of the countries with higher levels of informal sector production (such as Panama and Peru) have experienced a drop in these indicators in the last 20 years, due to the rapid creation of formal work in contexts of strong growth. However, it clarifies that this has not always been reflected in a reduction in informal employment. Among the causes attributed to this problem are restrictive business and labor regulations that discourage the participation of companies in the formal sector and the liberalization of trade in inflexible labor markets.

The document associates informality with lower growth, lower productivity and higher levels of inequality. It should be noted that the WB sees the informal sector as continuing to be important in Latin America due to the region’s weak institutions, high taxes, and excessive regulations.

Next steps

Given how extensive labor informality is in the region, in 2019 Latin American congresses and executive branches are expected to promote measures to promote formal employment. The recommendations of the World Bank will be taken into account in the design of eventual public policies. Proposals that may be looked at by countries in the region include, for instance, reducing the tax burden, tightening labor inspections and simplifying processes to open new businesses.