The Inter-American Dialogue’s Daily Latin America Advisor

What Do Large Informal Labor Sectors Mean for the Region?

Editor's Note: In an interview with Inter-American Dialogue's Latin America Advisor, Guillermo Vuletin discusses Latin America's economic landscape. Read the full Q&A here

During the last decade, Latin America grew at unprecedentedly high rates, mostly driven by favorable external factors including large capital inflows and historically high commodity prices. Generally speaking, the region has also earned several longdenied achievement ribbons due to good fiscal and monetary macro-management, as well as the implementation of large-scale social programs. A strong increase in economic activity and policy graduation in several macro and social policy areas, among other factors, led to the rise of the Latin American middle class. In the past decade, the region's middle class grew 50 percent and now represents 30 percent of the population, according to World Bank figures. In spite of this rise, the relevance of the informal economy has barely declined and a large number of workers still have off-thebooks jobs without basic labor protections. Recent estimates for the informal economy in Latin America range from 40 to 60 percent, according to the ILO.

The relevance of the informal economy has barely declined...

Why is the degree of informality in the labor market still virtually unchanged in spite of the apparently exultant context of economic prosperity and policy graduation of the last decade? The answer relates to several domestic challenges and reforms still to overcome. Important determinants of informal markets such as tax and regulatory burdens, corruption, red tape, law and order, bureaucracy quality and education have barely improved in many countries during the last decade. Governments should intensively support domestic reforms aimed at improving these factors in order to fully integrate this marginalized segment of the workforce. Moreover, many of these still-pending informal labor-related reforms are also at the core of the desperately needed domestically-driven, growth-enhancing reforms. With the recent slowdown in global demand and increasing worries about a reversal in capital inflows and declining commodity prices, the region also cries out for domestically driven, growth-enhancing reforms. The above mentioned reforms would help increase productivity and investment opportunities which would, ultimately, allow the region to achieve long-term sustainable economic prosperity with economic inclusion.