Informal Work in Latin America

Why around half of Latin American workers lack formal jobs, what that means for workers and productivity, and how governments try to formalise work.

In much of Latin America, around half of all workers are in informal employment, according to the International Labour Organization. They work without formal contracts, social security contributions or legal protections. Informality is one of the region’s most persistent economic challenges.

What informality looks like

Informal workers include street vendors, domestic workers, small shop owners, construction labourers, farm workers and many self-employed people. They often lack health insurance, pensions, paid leave and unemployment benefits. Their earnings tend to be lower and less stable.

Why it persists

Economists identify several causes:

Costs of formality: taxes, social security contributions and regulations can make formal hiring expensive for small firms.
Low productivity: many small businesses are not productive enough to pay formal wages and taxes.
Weak enforcement of labour and tax laws.
Limited benefits of formality: if workers do not value the social security they would receive, they may prefer higher take-home pay.
Social programmes that are only available to informal workers can sometimes discourage formalisation.

Why it matters

Informality affects the whole economy:

Informal firms tend to stay small and have low productivity, holding back national growth.
Governments collect less tax.
Workers are vulnerable to shocks. During the COVID-19 pandemic, informal workers lost income quickly with no safety net.
Pension systems cover only part of the population, leaving many older people without adequate income.

The street vendor's choice

A street vendor earns enough to support her family but has no pension or health insurance. Registering her business would mean paying taxes and social contributions that could take a large share of her small income, and the paperwork is confusing. For her, staying informal makes sense in the short run, even though it leaves her unprotected in old age or illness.

Formalisation efforts

Governments have tried several approaches:

Simplified tax regimes for small businesses, like Brazil’s Simples Nacional and its individual microentrepreneur programme, which lets small self-employed workers register cheaply.
Lower social security contributions for low-wage workers.
Digital registration and payment systems.
Better enforcement.

Evidence suggests simplification helps, but informality falls most when productivity and formal job creation rise.

Thinking informal workers are avoiding their duties

Many informal workers would prefer formal jobs with protections but cannot find them. Informality often reflects a lack of productive formal jobs and high costs of formality for small firms, not simply a desire to avoid taxes.

Key takeaways

Around half of Latin American workers are in informal employment.
Costs of formality, low productivity and weak enforcement sustain informality.
Informality lowers productivity, tax revenue and workers' protection.
Simplified regimes like Brazil's microentrepreneur programme help, but rising productivity matters most.