In the regional bloc, only Chile escapes this trend marked by low levels of education and gaps between job opportunities in the countryside and the city.
Given the lack of opportunities and social inequalities, many Latin Americans have resorted to creating their own jobs or turning to micro-businesses. Without employment contracts, nor affiliation to health and pension systems, these citizens experience this model day by day.
It is a situation that has endured for generations and is defined as labor informality. In fact, it is the majority modality in many countries in the region and the members of the Pacific Alliance are a clear example.
The most emblematic case of this regional bloc is Peru: the 2022 National Household Survey (Enaho) revealed that informality reached 13.4 million workers, which implies 75.7% of total jobs nationwide. The sight of shopping streets occupied by hundreds of street vendors has been common in cities like Lima and Trujillo for decades. We are talking about a reality that is also manifested in the Enaho figures: 70.5% of urban workers are informal and in rural areas, the sum rises to an alarming 95.3%.
There were apparent improvements: the Peruvian Labor Market Performance Report 2023, carried out by ComexPerú, revealed that informality in the country was reduced from 74% in 2022 to 71.1% in 2023. But before the Peruvian authorities present it as a achievement, the report clarified that this was mainly due to the reduction of jobs in 16 of 24 departments. In parallel, sectors such as fishing and electricity registered contractions in average remuneration.
“There are several factors that influence the high rate of informality in Peru. On the one hand, we still have a great challenge in educational terms: the PISA tests show that we achieve very low scores in mathematics and reading comprehension. Therefore, a complex tax regime is difficult for small companies to administer, especially in lower-income sectors,” explained Orlando Marchesi, Country Senior Partner of PwC Peru to AméricaEconomía .
From his perspective, Marchesi considers that without basic education or job training, the low productivity of microbusinesses is imminent. Because they cannot absorb the employer's high labor costs, nor “navigate” the regulations of the sector. This gets worse if we take into account that in Peru, a good part of the citizens work in SMEs. To be precise, the 2022 Enaho revealed that 96.4% of Peruvian companies are SMEs and employed 45.8% of the economically active population (EAP) at that time.
CHILEAN RESILIENCE
Chile represents a special case among the members of the Pacific Alliance and the region in general. It is true that recently, the National Institute of Statistics (INE) showed an increase in the informal sector to 28.1% between January and March 2024. It even represents a considerable increase to the 27.4% registered by the International Labor Organization ( ILO) in 2022. However, there is a huge gap between these figures and those experienced in neighboring nations such as Peru (68.1%), Argentina (48.9%) and Bolivia (81.5%).
“Poverty levels in Chile are not comparable with those that exist in countries like Mexico or Peru. The higher the level of poverty, we will see lower levels of education and greater precariousness of the labor market. On the other hand, there is a factor of illegality in some activities in the aforementioned countries that exceed the levels of Chile and that are employers of a large mass of informal workers,” says Marchesi.
Something similar happens with enforcement or compliance with the law. According to the manager of PwC Peru, the Chilean population tends to respect current regulations to a greater extent. While in countries like Peru, enforcement is non-existent by labor or tax authorities.
“Although an extreme degree of supervision could end up leaving a part of this workforce out of work, if these companies end up closing, there should be some degree of support and supervision for this segment of taxpayers.”
Another aspect to take into account is the rotation of the informal sector in Chile. Research by the Economic Policy Institute of the Andrés Bello University reveals that based on data from the latest National Employment Survey, the average duration of informality in Chile is 16 weeks.
Although this figure is highly dispersed, it is much lower than that existing in other important economies in the region such as Argentina, Brazil and Mexico. The study states that the main reason for this low duration is the relatively high transition from unemployment to informality, especially before October 2019, when massive social protests broke out in the southern country.
In this way, it is shown how informality in Chile, although it is a structural problem, many citizens assume it as a hinge stage between unemployment and a formal job. A reality that stands out among the more permanent and widespread informality that afflicts other countries.
COLOMBIA: THE GAP BETWEEN THE COUNTRYSIDE AND THE CITY
This May, Colombia received a new report from the National Administrative Department of Statistics (DANE) that revealed something new. Although five out of ten Colombians worked in the informal sector during the first quarter of 2024, the numbers have decreased. Today, 56.3% of the EAP is informal, which represents a decrease of 1.9% compared to the first quarter of 2023.
Although, as in neighboring Peru, the data has one of lime and another of sand. If in the 23 main cities and metropolitan areas of the coffee-growing country, the figure stood at 42.7%, in rural areas and smaller population centers, the informality rate rises to a worrying 84.1% of the total. This problem also does not make gender distinctions: 58.1% of men and 53.7% of women work in the informal sector in Colombia.
“Urban areas tend to better manage the levels of education and State access to service provision, regardless of whether it is Colombia, Peru or any other territory. Economic growth is required in regions that use intensive labor to reduce the mass of informal workers,” declares Marchesi about the notable differences between urban and rural environments.
Likewise, opportunity gaps are also manifested in the regions of Colombia: the cities with the greatest informality were Sincelejo, Riohacha and Cúcuta, cities in the northeast of the country, close to the border with Venezuela. And in contrast, large metropolises such as Bogotá and Medellín recorded the lowest rates.
Regarding Venezuelan immigration, Marchesi admits that apart from Colombia, no Latin American country was prepared to assimilate such a large workforce. Due to this inability, it was logical that the majority of migrants opted for the informal sector to survive. “But as the formal economy and the need for workers in that sector grow, informality among migrants should gradually decrease,” he says.
AMLO'S PENDING CHALLENGE
Andrés Manuel López Obrador can boast of economic achievements in his management of Mexico; However, there are indicators that were adverse. Informality is a clear example: the 2023 National Occupation and Employment Survey (ENOE) revealed that 54.85% of the EAP worked in this situation at the end of 2022. By June 2023, this percentage had reached 55. 23%, a figure that is not far from the 56.2% shown by Inegi in January 2019, at the beginning of AMLO's six-year term.
This is in contrast to the progress in the fight against unemployment, which reached a peak of 5.46% during June 2020, in the midst of the pandemic crisis, and fell to the historical minimum of 2.3% in March 2024. Well Although more Mexicans have a job, this does not mean that they work under fair conditions.
As a sample, 8.1% of the population belongs to the underemployed sector. That is, people who declared they had the need and availability to work more hours, given the low salaries and job volatility. Furthermore, unfortunately, gender gaps persist: in June 2023, the labor participation rate for men stands at 75.9%, while only 46% of women are in this group.
“To analyze Mexico's problem, it would be necessary to analyze which sectors were the ones that drove GDP growth, since there are some that have greater formality than others. If, for example, the greatest growth comes from the price of commodities such as oil or minerals such as silver, which are formal industries in Mexico, you will not necessarily see a decrease in informality. On the other hand, if it is manufacturing or services, which need labor for its growth, probably yes,” analyzes Marchesi.
THE POSSIBLE PLAN OF ACTION
Given this not very optimistic outlook that is spreading across the continent, the expert proposes adapting success stories as a long-term solution. “The main challenge to promote labor formalization is ideological. This issue, like several others, must be approached from a technical point of view, seeking to replicate successful models from other countries and adapt them to our reality. It is clear that more flexible labor regimes, with lower economic burdens and that allow greater labor mobility, favor the growth of formal employment,” he maintains.
Marchesi uses as an example the special agrarian regime that existed in Peru until 2020. From his perspective, this system contemplated lower labor costs and a lower income tax rate than the general regime. Consequently, during its validity, not only the number of agricultural companies grew, but also formal employment in the sector. According to INEI figures, the formal sector in the agricultural sector almost doubled between 2005 and 2015: it went from 467,000 to 733,000 jobs and grew at an average annual rate of 4.6%.
“However, this regime was repealed a few years ago and all these workers were transferred to the general regime of private activity, with agricultural companies now having to absorb higher costs. Why try to fix something that wasn't broken?” asks Marchesi.
On the other hand, the expert assures that States must consider that the greatest liability of labor informality is not the loss of taxes, but the difficulties that workers experience every day, such as the absence of social and medical protection.
In that sense, Marchesi asserts that several policies must come into play, such as the creation of incentives so that informal companies can formalize. “One of the biggest problems in this sector is financing. Many times these companies turn to parallel banking where the interests are very high.”
An alternative to this financing would be to create a system similar to Reactiva Perú that operated in the Andean country during the COVID-19 pandemic. This would be a model where the State grants guarantees to private banks so that they in turn grant “soft” loans to SMEs, where the only admission requirement is a certification from the tax administration.
This recognition would involve the company being up to date in paying taxes, for example. “By applying these types of policies, under trial and error, we will see which ones work to apply them massively and which ones don't,” says Marchesi.
