IDB says now is the time to foster labour formalisation in the CaribbeanSaturday, April 03, 2021
WASHINGTON, United States (CMC) — The Inter-American Development Bank (IDB) says now is the time to foster labour formalisation in Latin America and the Caribbean (LAC), stating that there is “an urgent need to reduce labour informality to encourage inclusive growth after the pandemic is over”.
“Labour formality boosts government revenue and targeting of transfers, increasing productivity and curtailing poverty,” said the Washington-based financial institution. “Given that the region has one of the highest labour informality levels in the world, targeting informality is essential.”
Before the pandemic struck, the IDB said between 50 per cent to 60 per cent of LAC workers — some 150 million people — had informal jobs.
It said only Sub-Saharan Africa was in a more critical situation.
Even in countries with lower levels of informality, such as Chile, Uruguay, or the Bahamas, it was still around 30 per cent, twice as much as in Western and Southern Europe (14.3 per cent), the IDB said.
“The COVID-19 pandemic has exacerbated the problem by bringing about across-the-board job losses, especially considering that most of the recovery of employment is expected to be through informal jobs,” it said. “Therefore, today, more than ever, it is vital to implement reforms to recover employment by boosting formalisation in Latin America and the Caribbean.”
The IDB said these reforms should “zero in” on low-income workers, who are the most vulnerable segment in LAC.
Although there are diverse factors leading to informality, the IDB said there three main reasons explain why it is so prevalent in LAC.
It said the first one is the low level and deficient quality of human capital in lower-income countries, hindering workers' entrance into the formal labour market.
The second reason is formal markets' high non-wage labour costs, which discourage employers from hiring workers legally, the IDB said.
In some cases, it said these high costs are associated with elevated social security contributions and other payroll taxes, representing between 11 per cent and 48 per cent of wages (27.3 per cent on average).
The IDB said the third reason is associated with social welfare programmes for workers in the informal sector.
“These well-intended social programmes were developed to bridge an important gap in access to traditional social security, which was only available to formal workers,” the IDB said.
It said many of these transfers were created during the 1990s as non-contributory welfare programmes.
“Although these programmes had a positive effect on reducing poverty and inequality, they have an unintended negative impact on job formality — since getting a formal job leads programme recipients to forfeit the social transfer, they find little encouragement to join the formal workforce,” the IDB said.
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