COVID-19 Exposes Labor Informality in Latin America

Daniela A. Maquera Sardon
Digital Editor

For years, informal work has sustained nearly a third of Latin America’s growing economies. Unlike illicit economies, informal labor consists of economic activity without criminal intent that skirts the law because it is more convenient or the only choice. Although identifying who falls under this basket depends on each country’s parameters, experts say that informality does not provide a solution for poverty eradication. With the economic slump created by the COVID-19 pandemic, informality is a big driver behind the expected two-decade economic regression in Latin America.

Informality has affected more than half of all occupations by impeding access to financial services and wealth accumulation – a large number of cases can be found in Central American nations. The informal economy can be divided into two sub-sectors. The first consists of informal waged work which derives from outsourcing of formal jobs for cheaper labor. A small, medium, or large-scale company—for instance, a hotel cleaning contractor—may hire people off the books and pay them under the table. Keeping labor informal serves the interests of corporations, as those employees lack legal protections to be granted basic services like medical care, a minimum wage, and retirement pensions.

The other sub-sector is informal self-employment, which appears in the agriculture, industrial, and service sectors. Regardless of their categorization, informal workers have historically faced hazardous job conditions and precarious labor arrangements where bargaining power is deficient. While some may work as maids, street vendors, or retail sellers, they all depend on their employers alone to compensate them fairly and grant them added benefits.

As of 2018, the informal employment rate in Latin America reached 54.8 percent of the total workforce, with women occupying a slight majority. Unlike their male counterparts, women tend to earn significantly less and thus concentrate in lower-income strata. While the debate continues over the dynamics that sustain the informal economy, it is unlikely that it is through people’s free will. The long and continuing history of inequality and exploitation in Latin America has left people seeking survival by any means possible. With limited education, individuals—especially in the middle-income and upper level of low-income strata—have struggled to climb the human capital ladder and pursue jobs in the formal sector. As informality continued expanding and its root causes were insufficiently addressed, formalization became the faster remedy.

The International Labor Organization passed provision no. 204 in 2015, suggesting that a transitionom the informal to the formal economy would prompt inclusive development and decent work for all. This recommended that member nations adopt a series of programs and policies aimed at promoting entrepreneurship by improving access to financial services and reducing compliance costs by introducing simplified tax assessments, among other measures. Various Latin American governments approved the suggestion and followed through with action. In Peru, where 73 percent of employed work was informal – and mostly done by women – before the pandemic, the government pushed for the regularization of one of its biggest outlying markets, namely the Gamarra textile market.

Through “Formaliza Peru,” a program spearheaded by Peru’s Ministry of Labor and Employment Promotion, workers and owners of micro-enterprises received technical and skills-development training. Other countries, like Brazil, had to only expand existing efforts towards formality. The Brazilian program SIMPLES, enforced in 2007, broadened its tax-reduction policies to a larger group of micro-enterprise owners. These initiatives’ overall goal was clear-cut: bolster productivity to acquire a greater capacity for absorbing the costs of formalization.

Experts, believing that these recommendations would secure economic growth, predicted a possible spillover effect: poverty decline. In reality, while GDP in Latin America rose by an average of 0.3 percent per year from 2014 to 2019, the percentage of the population living in extreme poverty increased from 7.8 to 11.3 percent while wider poverty increased from 27.8 to 30.5 percent. The process of formalization, while encouraging investment and entrepreneurship, could only do so much in tackling labor informality and poverty on the surface level. Now, in 2021, COVID-19 has unmasked the precarious balance in the labor market and exacerbated its dysfunction.

Over a year ago, Brazil identified the first case of COVID-19 in Latin America. Soon after, the pandemic forced Latin American countries to implement lockdowns and restrictions. Millions had to stay at home; unemployment rose to the double digits to almost 13 percent. The severity of the virus’s impact differed between sectors; commerce, hotels, and restaurants were the hardest hit. About four million jobs were lost. The number of informal workers who became unemployed, which has been difficult to measure given the lack of regulatory mechanisms, can only be equal or higher.

Countries in the region reacted to the sharp drop in production activities by announcing social protection measures to offset part of the lost income. These measures included transfers of cash payments, food, face masks, and medication, and the suspension or exemption of payments for accessing basic services. Had governments not implemented these measures, employment, and labor income would have spiked and increased poverty by an additional 7 percent. However, months into quarantine, government savings dissipated while cash transfers became limited to certain groups.

Most individuals who held informal jobs did not qualify for the generous government policies and programs. Unlike their counterparts—a minority of labor ‘insiders’ with salaried jobs—hairdressers and waiters, among others, lacked access to unemployment benefits and furlough schemes. Initial cash payments only compensated for a mere fraction of the lost income of these labor ‘outsiders.’ Many of them were even forced to backtrack on their socio-economic progress. This was the case of women self-starters in Colombia. Although they had entered the sewing and washing business two years ago to escape unstable jobs, the pandemic forced them to return to their previous jobs as nannies and recycling collectors.

The setback affecting primarily informal workers has added to Latin America’s continuing health crisis. The flooding ICU units, unsparing deaths surpassing 1.65 million people, and unequal lockdown repercussions revealed that the system cannot go hand in hand with informality. Despite the beliefs of many, ‘fixing’ informal workers by turning them into formal ones will be ineffective in stimulating growth and reducing poverty. The pandemic has shown that what people need is easier access to social protection regardless of their work status. While easing access to loans and expand micro-enterprises encourages production, a universal provision of social protection with a guarantee of welfare rights can permit an actual shift in informality.

Increasing access to quality education, health, or dignified working conditions will allow the large population of informal workers to shed the constraints they currently face when pursuing job opportunities. For Latin Americans to shift toward formal and stable jobs, they must be provided with the tools, the training, and the platforms to succeed. This can come especially through a primary and secondary education that trains students with relevant skills in today’s technology-driven society. Latin American countries must target their populations at their earliest development stage and ensure growth to bridge the gap between the skills that economies require and those provided by schools and universities. After all, economic sustainability can be better achieved when it grows from the bottom up.

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