Informal Employment in Latin America and the Caribbean: Causes, Consequences and Policy Recommendations

Index Introduction 1 Description of Latin American and Caribbean Informal Sector 3 Extent and composition of the informal sector 3 Determinants of informal employment 9 Determinants of wage differentials 10 Policy Issues: The causes of informal employment 16 Labor market rules and regulations and the Informal Sector 16 Macroeconomic Policies 22 Policy Issues: The consequences of informal employment 26 Poverty, Inequality and Mobility 26 Training Programs 28 Social Protection 30 Conclusions and Recommendations 36 References 45 Annex 51 Informal Sector in Latin America and the Caribbean / Freije 1 1. Introduction Next year will be the thirtieth anniversary of the ILO Kenya Report that started the debate on the Informal Sector (ILO, 1972). These three decades have seen a large literature, both theoretical and empirical, trying to explain the characteristics, causes and consequences of the phenomenon. The period has also seen the expansion of the informal sector, rather than its reduction. Today, informal activities are pervasive in the developing world and are seen in some parts of the developed world. Consequently, the subject is still a matter of concern for researchers and policy makers alike. The definition of the informal sector has been subject to controversy from its beginnings, but as De Soto 1989 states: " The informal sector is like an elephant we may not be able to define it precisely, but we know when we see it ". 1 Despite differences in definition, the academic community has been able to identify what are the causes and consequences of informal activities. Rules and regulations, on the one hand, and macroeconomic performance, on the other, are mentioned as the main causes of the size of the informal sector. Lack of social protection and low productivity are the consequences for workers who engage in informal activities. Almost by definition, informal economic activities are related to the compliance, or lack thereof, to rules and regulations about land use, labor contracts, pollution control, corporate taxes, social security contributions and many others. The extension of informal employment can be argued to be the consequence of excessive regulations, which make formal economic activities unaffordable by small entrepreneurs. It can also be said that it is the lack of enforcement of existing regulations which promotes informal economic 1 Cited by Mead and Morrison (1996). Informal Sector in Latin America and the Caribbean / Freije 2 activities such as street vending, garbage collection and disposal and barrios …