Informality in Latin America Casual Mondays to Fridays

MORE than half of all workers in Latin America are employed off the books in the informal economy. That share has barely fallen since 2003. Informal workers are excluded from safety-net programmes such as pension plans, unemployment insurance and some public-health services.

A report by the OECD, a club of mostly rich countries, shows one reason why workers remain in the shadows: the cost of formality is too high (see chart). A large share of employees—from at least 20% in Bolivia to at least 80% in Honduras—earn wages that are below their country’s statutory minimum. Social-security contributions, if low-wage workers paid them, would consume much of their incomes. For the poorest tenth, contributions owed by both employers and employees would average three-quarters of their wages (if those workers paid the amount levied on formal employees earning the minimum wage). In five of the 18 countries covered by the report, that share would be more than 100%.

Latin American tax burdens are not excessive by rich-world standards. For workers earning average wages in the formal sector, the tax take is less than 22%. Income taxes begin to bite only at the highest salaries. But for low-paid workers, especially those earning less than unrealistically high minimum wages, the cost of becoming formal is prohibitive.

Even workers who could afford to make social-security contributions are often reluctant to do so. Some doubt that state pension schemes will be solvent by the time they retire. Others are deterred by the poor quality of public health-care programmes. The OECD would like the state to subsidise social-security payments by people who earn the minimum wage or less. That might induce some to join the formal economy. But formality is unlikely to become the norm if the benefits that go with it continue to be so poor.

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