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.