The informal economy: is economic growth making it smaller?

By: Fernando Prada


The Latin American region’s GDP has been growing above four percent since 2004. Despite -1.8 percent growth in 2009 due to the global crisis, regional GDP growth will be positive again in 2010. In the same period, inequality has receded in most countries: the Gini coefficient has gone down from 0.56 in 2002 to 0.50 in 2008, whereas it remained around 0.55 during the 1990s.1 Have these positive trends been consistent with improvements in labor market conditions and contributed to reduce the size of the informal economy? The International Labor Organization (ILO) defines informal economy as “the group of small, low capital and low productivity production units that mostly employ independent workers or family members, who receive low salaries and work in unstable and precarious conditions”.2

During the 1990s, policies to make labor markets more flexible caused an increase of precarious jobs and thus, of the informal economy. The ILO estimates that informal employment relative to total employment increased from 50.1 to 52.8 percent from 1990 to 1999, but that it slightly improved to 52.2 percent by 2006. Moreover, it calculates that almost 70 percent of new jobs created during 1990-2005 are related to the informal economy.3 On the other hand, microeconomic data from national surveys suggests that labor market indicators have improved in line with GDP growth: formal employment has grown more than 35 percent between 2000 and 2008, and visible underemployment, a proxy of informal employment, has fallen (Table 1). Nevertheless, countries use different methodologies and criteria to estimate these indicators, which makes it difficult to compare them (see notes to Table 1).4

A growing economy that fails to significantly improve labor market conditions (including pensions, unemployment insurance and working hours adequately remunerated) is likely to generate social unrest. In addition, implementing policies to reduce the informal economy by improving the labor conditions of microenterprises, family businesses and independent workers can effectively reduce inequality. Moreover, the potential tax revenue from the shadow economy in Latin America was calculated at US$43 billion in 2005, which can significantly increase domestic resource mobilization for social policies.5 Nevertheless, the divergences in the criteria to determine what is formal employment or underemployment contribute to obscuring the fact that labor markets in the region are still precarious and economic growth is not significantly changing this situation. Determining the ways in which economic growth can improve the situation of workers and reduce informality is a pressing issue in the region.









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1 CEPAL (2009a), Panorama Social 2009.



2 Organización Internacional del Trabajo. (1991), “El dilema del sector no estructurado”, Memoria del Director General, Conferencia Internacional del Trabajo, 78° Reunión, Ginebra.



3 Bacchetta, M.; Ekkehard Ernst and Juana P. Bustamante (2009), Globalization and informal jobs in developing countries, Geneva: International Labour Office and the Secretariat of the World Trade Organization, in http://www.ilo.org/wcmsp5/groups/public/---dgreports/---dcomm/documents/publication/wcms_115087.pdf; and OIT (2006), Trabajo decente en las Américas: una agenda hemisférica, 2006-2015, Informe del Director General, Decimosexta Reunión Regional Americana, Brasilia, mayo de 2006.



4 For different methodologies to estimate the size of the informal economy in the region, see http://www.oit.org.pe/WDMS/bib/publ/panorama/panorama06%5Bart-3%5D.pdf.

5 Cobham, A. (2005) "Tax evasion, tax avoidance and development finance", QEH Working Paper Number 129, Oxford: Queen Elizabeth House (p.19).