1. NS4540 Winter Term 2019 Latin America: Informality
Reyes and Sawyer, Second Edition chapter 1

2. Overview
Oxford Analytica, Latin America: Labor Informality May Increase, November 15, 2016
Scale of informality in Latin American labor markets widely seen as the main reason for the region’s low levels of productivity
Policy makers are seeking ways to induce a transfer of labor towards the formal sector.
However in spite of a decade of growth in the region, levels of informality have remained stubbornly high.

3. Analysis/Impacts I
A reduction in informality could increase the number of taxpayers and thus revenues
Tighter migration policies in the U.S. could limit options for surplus labor to relocate elsewhere
Lower birth rates will slow the number of new entrants into the labor market overall
The size of the informal sector in Latin America underwent a major increase in the 1960s and 1970s caused by various factors including
Massive migration from rural areas to cities, in some cases accelerated by agrarian reforms that loosened the ties that bound rural workers to landed estates and
An earlier demographic bulge caused by improved life expectancy which caused the labor force overall to grow by as much as 4% annually

4. Analysis/Impacts II
The labor market was unable to absorb these new entrants creating major problems to what was referred as “sub-employment”, a combination of
self-employment,
employment in domestic service, and
micro-scale manufacturing
Large slum cities grew up in and around urban settlements of highly vulnerable populations living in poor physical conditions and lacking the means to sustain the most basic standards of living.
In the absence of social protection, few could afford to be ”unemployed”.

5. Poverty and Informality I
Half a century later
Those urban settlements have become consolidated and achieved access to basic services
Poverty levels have also declined, but
Levels of sub-employment remain high
The commodity “super-cycle” in Latin America that began around 2002 led to significant improvements in the standard of living and reductions in poverty
Increased social spending particularly on health and education while targeted programs have sought to eliminate extreme poverty
However the ten-year boom between 2002 and 2012 (with a dip in 2009 global financial crisis) did not make much of an impact on the labor market
Since 1990 despite sharp slowdown in growth of labor force informal workers increased slightly as a % of total.

6. Country Patterns
Countries with the largest populations in informal sector
Paraguay,
Nicaragua,
Bolivia, and
Peru
Countries with the lowest degree of informality
Uruguay,
Chile,
Costa Rica, and
Panama
In Argentina the main cause of informality is inward migration from neighboring countries such as Paraguay and Bolivia

7. Combatting Informality I
Growth – faster expanding economies should raise labor demand, raise wages and provide incentives for workers to shift from the informal sector to the formal
Problem many countries have capital rather than labor-intensive activities – hard to absorb informal workers
Education – raising quality of education important since informality characterized by low technical proficiency
Problem despite improvements in education and provision over past 20 years impact on raising levels of human capital among informal workers has been disappointing

8. Combatting Informality II
Migration – ability of the underemployed and unemployed to migrate to other parts of the world has eased informality rates, particularly in Central America and the Andean Region
These workers also remit significant income from aborad
Problem – more restrictive practices in developed countries in admitting migrants may close this safety valve
Seems unlikely these three problems will be overcome in next few years.
Prospects are reduced by the fact growth has slowed (or become negative) in some countries – open unemployment is increasing and poverty rates rising.

9. Assessment
Period of lower growth in the short-to-medium term will probably lead to an increase in the size of the informal sector
Job creation faltering in many countries
Specific policy initiatives may help reduce disparities with the formal sector
However structural split within the labor market will endure.