Nacional de La Plata), Edwin Goñi (World Bank), Melanie Khamis (LSE), Fernando ... Cardenas (Fedesarrollo) and Sebastia
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INFORMALITY: EXIT AND EXCLUSION
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THE PRINCIPAL AUTHORS OF THIS BOOK ARE AS FOLLOWS:
Overview:
Guillermo E. Perry and William F. Maloney
Chapter 1:
William F. Maloney and Jaime Saavedra-Chanduvi
Chapter 2:
William F. Maloney and Omar S. Arias
Chapter 3:
Omar S. Arias
Chapter 4:
William F. Maloney and Mariano Bosch
Chapter 5:
Pablo Fajnzylber and William F. Maloney
Chapter 6:
Pablo Fajnzylber
Chapter 7:
Andrew D. Mason
Chapter 8:
Jaime Saavedra-Chanduvi
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INFORMALITY: EXIT AND EXCLUSION Guillermo E. Perry William F. Maloney Omar S. Arias Pablo Fajnzylber Andrew D. Mason Jaime Saavedra-Chanduvi
Washington, D.C.
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©2007 The International Bank for Reconstruction and Development / The World Bank 1818 H Street, NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail:
[email protected] All rights reserved 1 2 3 4 10 09 08 07 This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgement on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The International Bank for Reconstruction and Development / The World Bank encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly. For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center Inc., 222 Rosewood Drive, Danvers, MA 01923, USA; telephone: 978-750-8400; fax: 978-750-4470; Internet: www.copyright.com. All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street, NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail:
[email protected]. ISBN-10: 0-8213-7092-8 ISBN-13: 978-0-8213-7092-6 eISBN-10: 0-8213-7093-6 eISBN-13: 978-0-8213-7093-3 DOI: 10.1596/978-0-8213-7092-6 Library of Congress Cataloging-in-Publication Data Perry, Guillermo. Informality : exit and exclusion / Guillermo E. Perry and William F. Maloney ; Omar S. Arias ... [et al.]. p. cm. Includes bibliographical references. ISBN-13: 978-0-8213-7092-6 ISBN-10: 0-8213-7092-8 ISBN-13: 978-0-8213-7093-3 (electronic (13)) ISBN-10: 0-8213-7093-6 (electronic (10)) 1. Informal sector (Economics) I. Maloney, William F. (William Francis), 1959- II. Title. HD2341.P43 330—dc22
2007 2007013736
Cover photo: “Fenómeno” (1962) by Remedios Varo © 2007 Artists Rights Society (ARS), New York / VEGAP, Madrid. Cover design: Naylor Design.
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Contents
Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xv Overview: Informality: Exit and Exclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 The razón de ser of the informal sector: Adding exit to exclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Workers: A mix of opting out and exclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 Firms: Little gain, high costs, or weak enforcement? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 Need for more effective and legitimate institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 Summing up: Policy implications of the report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 Informality and the development agenda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 Chapter 1: The Informal Sector: What Is It, Why Do We Care, and How Do We Measure It? . . . . . . . . . . . . . . . . . . . . . .21 Introduction: What is informality? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 Informality and the relationship between the individual and the state . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 Three margins of informality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25 Measuring the informal sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28 Correlations among measures and trends over time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37 Annex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40 Chapter 2: The Razón de Ser of the Informal Worker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43 Informal work: Adding exit to exclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43 The sectors of informal labor: Characteristics and dynamics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48 Motivations for participation in informal work . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .62 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .74 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .74 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .75 Chapter 3: Informality, Earnings, and Welfare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .79 Compensating differentials, comparative advantage, and informal work . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .80 The question of equal pay for equal work in the informal and formal sectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .85 Informality and self-rated welfare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .92 Conclusions and policy implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .98 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .99 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .99
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Chapter 4: The Informal Labor Market in Motion: Dynamics, Cycles, and Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . .101 Informality through the lens of gross labor force dynamics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .102 Drivers of the increase in informality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .112 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .125 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .127 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .128 Chapter 5: Microfirm Dynamics and Informality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .133 Conceptual framework: Firm dynamics and institutional development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .134 Microfirm dynamics in Latin America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .140 Informality among microfirms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .148 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .153 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .154 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .154 Chapter 6: Informality, Productivity, and the Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .157 Informality among registered firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .158 Firm-level determinants of informality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .160 Impact of informality on firm productivity and economic growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .171 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .175 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .177 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .177 Chapter 7: Informality, Social Protection, and Antipoverty Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .179 Informality and social protection: Why policy makers should care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .179 The state of social protection in Latin America and the Caribbean . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .184 Private risk management and rationale for public social protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .190 Challenges for social protection in the face of informality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .193 Reengineering social protection to protect all citizens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .199 Potential costs of social protection reform: Financing essential cover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .204 Managing the transition from here to there . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .206 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .208 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .210 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .211 Chapter 8: The Informal Sector and the State: Institutions, Inequality, and Social Norms . . . . . . . . . . . . . . . . . . . . . .215 Social norms, the state, and informality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .217 The tax side of the social contract in Latin America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .223 Inequality, taxes, and transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .235 Informality: A reflection of a broken social contract? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .239 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .244 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .245 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .246
Boxes Overview 1 Informal workers in Latin America and the Caribbean: Their profile, motivations, earnings, and welfare . . . . . . . . . .4 2 Government failures in the design of social protection systems in Latin America and the Caribbean . . . . . . . . . . . . . .8 Chapter 1 1.1 The ILO definition of informality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27 1.2 Indirect methods of estimating informality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34 1.3 Schneider and Enste in the new world: Checking MIMIC estimates against Mexican data . . . . . . . . . . . . . . . . . . . .35 Chapter 2 2.1 Home-based work: Exploitation or flexible work arrangement? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52 2.2 Data from rotating panels in Argentina, Brazil, and Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56 2.3 Informal self-employment: Risky and informal, or risky because informal? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60 2.4 Special informal employment surveys: What can we learn from them? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .64
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Chapter 4 4.1 Conceptual issues in gross worker flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .103 4.2 Simulated effects of labor market legislation on the size of the informal sector . . . . . . . . . . . . . . . . . . . . . . . . . . . .106 Chapter 5 5.1 Patterns of entry and exit in industrialized countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .137 Chapter 7 7.1 Social protection—strengthening people’s abilities to manage risk and promoting long-term productivity, growth, and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .180 7.2 The comprehensive insurance framework—providing guidance on social protection policy making . . . . . . . . . . . .182 7.3 Extending health insurance coverage by correctly aligning risk-pooling instruments . . . . . . . . . . . . . . . . . . . . . . .201 7.4 Old-age protection in the new millennium: Chile’s proposed pension reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . .203 7.5 De-linking health coverage from employment status: Spain’s shift to general-revenue financing of essential social insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .207 Chapter 8 8.1 The extreme of informality and exclusion: Being undocumented . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .219 8.2 Local taxation and social norms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .229 8.3 Tax compliance, social norms, and trust in the state: The contrasting cases of Chile and Argentina in the late 1990s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .231 8.4 Earned income tax credits: Transfers that encourage formal employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .234 8.5 Expansion of private security services in Managua . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .242 8.6 Negotiating tax reform and the start of the social contract, Chile, 1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .243
Figures Overview 1 Labor market informality and income per capita . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 2 Trends in informality, by various definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 3 Probability of transition between formal salaried and self-employment in Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 4 Rate of urban employment across sectors, by age in Brazil, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 5 Informal workers across firm size . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 6 Male entry into and exit from self-employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 7 Advantages of formalization reported by IFC-surveyed firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 8 Underreporting of tax and social security contributions, by firm size . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 9 Economically active population contributing to the pension system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 10 Informality versus inequality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 11 Tax morale and state capture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 12 Self-employment and quality of institutions (governance) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 Chapter 1 1.1 Margins of informality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25 1.2 Methods for measuring the informal sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28 1.3 Selected measures of informality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29 1.4 Informality and gender: women versus men (ages 25–64) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31 1.5 Informal salaried workers (legal definition) across firm size and time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32 1.6 Distribution of manufacturing sector firms according to worker registration in Mexico . . . . . . . . . . . . . . . . . . . . . . .33 1.7 Distribution of manufacturing sector firms according to tax compliance in Mexico . . . . . . . . . . . . . . . . . . . . . . . . . .33 1.8 Global correlation of measures of informality with GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37 1.9 Trends in informality by various definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38 Chapter 2 2.1 Relative sector sizes and wages under a nominal wage rigidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44 2.2 Relative sector sizes and wages in the presence of a labor tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48 2.3 Rate of urban employment across sectors, by age . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53 2.4 Probabilities of transition among sectors of employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .54 2.5 Absolute mean duration of labor force status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57 2.6 Propensity to move to self-employment from different sectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58 2.7 Transition between self-employment and out of labor force, by gender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61 2.8 Employment sector allocation by gender, marital status, and parental status in Mexico . . . . . . . . . . . . . . . . . . . . . . .61
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2.9 Propensity to move to informal salaried status from different sectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .62 2.10 International comparison of desired and actual self-employment rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65 2.11 Earnings gain from voluntary movement to informality in Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68 Chapter 3 3.1 Propensity to informal employment by firm size and economic sector, 2005–06 . . . . . . . . . . . . . . . . . . . . . . . . . . . .82 3.2 Propensity to informal employment by education and tenure, 2005–06 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .83 3.3 Propensity to informal employment by age, gender roles, and work preferences, 2005–06 . . . . . . . . . . . . . . . . . . . .84 3.4 Distribution of hourly earnings for workers in urban areas of Argentina and Bolivia, 2005–06 . . . . . . . . . . . . . . . . .86 3.5 Earnings cost of informality in urban areas of Argentina, Bolivia, and the Dominican Republic . . . . . . . . . . . . . . . .89 3.6 Fraction of workers who are income-poor and self-rated poor, by education and occupational group . . . . . . . . . . . . .93 3.7 Impact of informality on self-rated poverty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .94 3.8 Direct impact of having access to social protection through a family member on self-rated poverty . . . . . . . . . . . . . .95 3.9 Differences between actual labor incomes and the level of income needed to avoid self-rating poverty in Argentina . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .97 Chapter 4 4.1 Formal share of the labor force and unemployment, Brazil and Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .102 4.2a Probability of transition between formal salaried and self-employment, Brazil and Mexico . . . . . . . . . . . . . . . . . . .104 4.2b Probability of transition between formal salaried and informal salaried, Brazil and Mexico . . . . . . . . . . . . . . . . . . .104 4.3 Involuntary transition to self-employment in Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .105 4.4 Searching while employed, Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .105 4.5 Decreased availability of formal sector jobs without segmentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .106 4.6 Probability of transition to unemployment (separation rate), Brazil and Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . .108 4.7 Probability of transition from unemployment (job-finding rate), Brazil and Mexico . . . . . . . . . . . . . . . . . . . . . . . .109 4.8 Informal employment reaction to the business cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .111 4.9 Relative sector shares and earnings, real exchange rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .112 4.10a Variation of informality rate (social protection definition) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .114 4.10b Variation of informality rate (productive definition) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .115 4.11 Decomposition of changes in informality (social protection definition) for urban salaried workers . . . . . . . . . . . . . .115 4.12a Labor force participation, rate of formality, and unemployment, Brazil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .116 4.12b Labor force participation, rate of formality, and unemployment, Colombia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .116 4.13 Actual and predicted size of the industrial formal sector, Brazil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .117 4.14 Informality rate for salaried workers in Greater Buenos Aires . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .118 4.15 Informal salaried versus formal salaried, Mexico, relative earnings and sector size . . . . . . . . . . . . . . . . . . . . . . . . . .118 4.16 Evolution of informality across age groups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .120 4.17 Labor legislation and related variables, Peru . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .123 Chapter 5 5.1 Entry and exit into self-employment among men . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .141 5.2 Entry and exit into self-employment among women . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .142 5.3 Job creation and destruction in Colombia, 1977–82 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .144 5.4 Job creation and destruction by entering and exiting versus continuing firms in Colombia, 1977–82 . . . . . . . . . . .145 5.5 Employment growth of microenterprises in Nicaragua . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .146 5.6 Size distribution of microenterprises in Mexico and Nicaragua . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .147 5.7 Informality among Mexican microenterprises by number of paid workers and time in business . . . . . . . . . . . . . . . .150 5.8 Effect of doubling labor productivity on probability of being informal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .153 Chapter 6 6.1 Unreported sales and workers, by firm size . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .159 6.2 Effect of doubling employment size on underreporting rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .159 6.3 Effect of having started informally on underreporting rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .160 6.4 Effect of doubling labor productivity on underreporting rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .160 6.5 Advantages of formalization reported by IFC-surveyed firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .162 6.6 Disadvantages of formalization reported by IFC-surveyed firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .162 6.7 Impact of changes in costs and benefits of informality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .163 6.8 Labor regulations described by firms as biggest obstacle to hiring workers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .169 6.9 Estimated impact of informality on growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .172 6.10 Estimated impact of informality on labor productivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .173
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6.11 Effects of a 10 percent increase in tax and social security evasion at the industry/region level on individual firm productivity (pooled sample) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .174 6.12 Productivity difference between tax-paying Mexican microfirms and informal firms with similar characteristics . . .175 6.13 Productivity and paid employment effects of exogenous increase in formality driven by Brazil’s SIMPLES program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .175 Chapter 7 7.1 Pension coverage rates in Latin America and the Caribbean . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .184 7.2 Social security coverage and GDP per capita . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .185 7.3 Coverage rates in Latin America and the Caribbean, mid-1990s to early/mid-2000s, by quintile of per capita income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .186 7.4 Pension coverage rates in Argentina, by quintile of per capita income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .187 7.5 Pension coverage among the elderly in Latin America and the Caribbean, contributory and noncontributory programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .188 7.6 Coverage of two poverty-targeted assistance programs in Mexico: Oportunidades and Seguro Popular (by decile, 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .188 7.7 Public social protection spending in Latin America and the Caribbean . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .189 7.8 Public spending on social insurance and social assistance in Latin America and the Caribbean, early 2000s . . . . . . .190 7.9 Nonpoor population who fell below the national poverty line due to out-of-pocket health expenditures . . . . . . . . .191 7.10 Distribution of Mexican workers’ years insured by IMSS, 1997–2005, for low- and high-wage workers in IMSS in 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .195 7.11 Density function for years of formal sector work among 60-year-olds in Uruguay (accumulated ages 18–60) . . . . . .196 7.12 Cumulative distribution of years of formal sector service among 60-year-olds in Uruguay (accumulated ages 18–60) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .196 Chapter 8 8.1 Informality and government effectiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .220 8.2 Informality and corruption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .220 8.3 Share of firms confident that the judiciary will enforce contractual and property rights . . . . . . . . . . . . . . . . . . . . . .220 8.4 Share of firms that consider the court system fair, impartial, and uncorrupt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .221 8.5 Informality and state competence indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .221 8.6 Central government tax revenue and GDP per capita . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .224 8.7 Tax revenue of Latin America and Caribbean countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .226 8.8 Average tax rate of Latin America and Caribbean countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .226 8.9 Average VAT and income tax productivity in Latin American countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .227 8.10 VAT productivity and informality indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .227 8.11 Tax morale, state capture, and perception that the government spends taxpayers’ money wisely . . . . . . . . . . . . . . .228 8.12 Tax morale and informality indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .232 8.13 Social spending and taxation by income quintiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .238 8.14 Informality and inequality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .239
Tables Chapter 1 1.1 Correspondence of the “productive” and “legalistic” definitions of informality . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31 1.2 Correlations across measures of informality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36 1A.1 Comparisons of ILO and Gasparini-Tornarolli measures of self-employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39 Chapter 2 2.1 Distribution of formal salaried, informal salaried (social protection/legal definition), and self-employed in urban areas of Latin America (percent) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49 2.2 Distribution of informal salaried, self-employed, and unpaid workers, by firm size (percent) . . . . . . . . . . . . . . . . . . .50 2.3 Characteristics of informal salaried employees in Mexican microfirms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51 2.4 Informal employment and work-life occupational history, Dominican Republic and Argentina (percent of workers) .63 2.5 Preference for independent employment (percent of workers) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .64 2.6 Distribution of the motivations/reasons for being in the current job as an independent worker (percent) . . . . . . . . . .66 2.7 Reported reasons to be informal self-employed in Mexico (percent of workers) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67 2.8 Reported reasons to be informal self-employed in Brazil (percent of workers) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67 2.9 Distribution of the motivations/reasons for being in the current salaried job (percent) . . . . . . . . . . . . . . . . . . . . . . . .69
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2.10 2.11 2.12 2.13
Reported reasons to be informal salaried in Brazil (percent of workers) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .69 Principal reason for working without monetary compensation in the Dominican Republic (percent of workers) . . . .70 Main reasons why the informal do not contribute to social security (percent of workers) . . . . . . . . . . . . . . . . . . . . . .71 Main reasons why workers do not contribute to health insurance (percent of workers) . . . . . . . . . . . . . . . . . . . . . . . .73
Chapter 3 3.1 Unconditional hourly earnings gaps (percent difference in earnings) for formal employees, informal employees, and independent workers in urban areas in Argentina, Bolivia, and the Dominican Republic, 2005 . . . . . . . . . . . . .87 3.2 Impact of informality on earnings in Argentina, estimated log-earnings differences and treatment parameters . . . . .91 3.3 Correlation between income and self-rated poverty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .92 3.4 Impact on the propensity to self-rate poor and be income poor (normalized logit regression coefficients) . . . . . . . . . 95 3.5 Job satisfaction and informal employment in the Dominican Republic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .96 3.6 Job satisfaction and informal employment in Colombia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .97 Chapter 4 4.1 Evolution of informality across firm size and time: Distribution of informal and self-employed workforce . . . . . . .119 4.2 Subcontracting in Mexico, 1992–2002 (percent) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .119 Chapter 5 5.1 Entry probabilities into Mexico’s self-employment sector (percent) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .140 5.2 Exit probabilities from Mexico’s self-employment sector (percent) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .143 5.3 Growth and contraction probabilities of Mexican microfirms (percent) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .146 5.4 Employment size distribution of firms, selected countries (percent) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .147 5.5 Employment size distribution of firms with employees, selected countries (percent) . . . . . . . . . . . . . . . . . . . . . . . .148 5.6 Reasons for starting up, firm prospects, and firm licensing in Brazil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .149 5.7 Informality among Mexican and Brazilian microenterprises by age, education, and previous activity of the owner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .149 5.8 Informality among Mexican, Brazilian, and Colombian microenterprises by paid employment and time in business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .151 5.9 Informality among Mexican, Brazilian, and Colombian microenterprises by age, education, and previous activity of the owner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .152 Chapter 6 6.1 Firm-level correlates of sales and employment underreporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .167 Chapter 8 8.1 Long-run informality relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .222 8.2 Indicators of informality and institutional indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .223 8.3 Comparative perspective of tax burdens and structures (percent of GDP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .224 8.4 Tax structure by region, selected years, 1975–2002 (percentage of total tax revenue) . . . . . . . . . . . . . . . . . . . . . . . .225 8.5 Tax exemptions in Latin America (percent of GDP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .227 8.6 Comparative efficiency and corruption in tax administration: Survey evidence for 2005–06 . . . . . . . . . . . . . . . . . .233
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Foreword
I
countries more generally is partly due to the low opportunity cost of opening a microbusiness, the gamut of measures to increase formal sector productivity (improving the business climate, fomenting innovation, and so forth) and to increase workers’ skills is important. Labor market reform is also essential because part of the rise in the share of workers uncovered by labor protections in the 1990s appears to be due to the increased burden of labor costs and restrictions in several countries. But reform also needs to extend to remedying the poor design of many social protections that workers find of poor quality, inefficient, and of little value. Hence, shifting workers’ cost-benefit analysis toward engagement with the institutions of the state—both through improving the benefits of being formal and through better monitoring—is critical to reducing their often voluntary entry into informality. Relatedly, although experiments reducing the costs of registering businesses have led to relatively little formalization of existing businesses, the impact on those few businesses appears substantial and progress in this area appears important. All of these reforms need to take place in a context of improving the perception of fairness and efficiency of the state, which is often seen as serving the needs of particular elites rather than the needs of the population. In the long run, this is the only way to change social norms of compliance and reduce the “culture of informality.” This is a topic that the Latin America and the Caribbean Region of the World Bank has been working on in a sustained way through various regional studies and reports for more than 10 years. The present volume builds on this work, introduces original data sources collected for the
NFORMALITY IS A WAY OF LIFE IN LATIN
America and the Caribbean, no matter how we measure it. In some countries, the majority of the workforce is not covered by labor protections; the ubiquitous microenterprises found on every street corner are often not registered with authorities and only partially comply with other regulations; and tax evasion by rich and poor alike is the norm. Although these features of the Latin American and Caribbean landscape are not new, their striking increase in some countries has given new life to the debate concerning what informality tells us about how our economies are functioning. Informality: Exit and Exclusion, the ninth in our series of regional flagship reports, explores this very heterogeneous sector from a variety of perspectives ranging from a concern with the protection of workers, to the productivity of firms, to the determinants of tax evasion. The report accepts and sheds more light on the exclusionary character of much informality, which leaves citizens outside formal institutions. However, it especially highlights that there is an important “exit” dimension that has been understressed in the literature: workers, firms, and families, dissatisfied with the performance of the state or simply not finding any benefit to interacting with it, opt into informality. Hence, the discussion ranges from the purely economic analysis of microeconomic incentives to reflection on the soundness of the “social contract”—shorthand for how citizens of the region relate to the state and to each other. It is not surprising, then, that the analysis gives rise to recommendations that span many dimensions of the policy agenda. Because the high level of informality in developing
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FOREWORD
Chief Economist for the Latin America and the Caribbean Region of the World Bank.
project and new statistical techniques to analyze them, and brings together research done in our partner countries. Both its findings and its policy recommendations are thus grounded in detailed analysis of the reality of the region. As a final note, this Flagship is the last undertaken under the direction of Guillermo E. Perry, and I would like to thank him for his leadership, insights, and enthusiasm as
Pamela Cox Vice President for Latin America and the Caribbean The World Bank
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Acknowledgments
I
NFORMALITY: EXIT AND EXCLUSION IS THE PRODUCT OF A COLLABORATIVE EFFORT BY A NUMBER
of professionals from within and outside the Bank. The report was prepared under the direction of Guillermo E. Perry by a core team comprising William F. Maloney, Omar S. Arias, Pablo Fajnzylber, Andrew D. Mason, and Jaime Saavedra-Chanduvi.
Background papers were prepared by Rita Almeida (World Bank), James Alm (Georgia State University), Guillermo Beylis (World Bank), Mariano Bosch (London School of Economics and Political Science [LSE] and University of Alicante), Karla Breceda (World Bank), Monserrat Bustelo (World Bank), Dante Contreras (Universidad de Chile), Barbara Cunha (University of Chicago), Wendy Cunningham (World Bank), Norbert Fiess (University of Edinburgh), Marco Fugazza (United Nations Conference on Trade and Development [UNCTAD]), Sebastian Galiani (Washington University in St. Louis), Rodrigo García-Verdú (World Bank), Leonardo Gasparini (Centro de Estudios Distributivos Laborales y Sociales [CEDLAS] and Universidad Nacional de La Plata), Edwin Goñi (World Bank), Melanie Khamis (LSE), Fernando Landa (Unidad de Análisis de Políticas Sociales y Económicas [UDAPE], Bolivia), Santiago Levy (Brookings Institution), Norman Loayza (World Bank), Leonardo Lucchetti (University of Illinois at Urbana-Champaign), Jorge Martinez (Georgia State University), David McKenzie (World Bank), Truman Packard (World Bank), Esteban Puentes (University of Chicago), Jamele Rigolini (World Bank), Gabriel Montes Rojas (University of Illinois at UrbanaChampaign), Lucas Ronconi (University of California at Berkeley), Claudia Sanhueza (Universidad de Chile), Mariano Tommasi (Universidad de San Andrés), Leopoldo Tornarolli (CEDLAS and Universidad Nacional de La Plata), Federico Weinschelbaum (Universidad de San Andrés), Chris Woodruff (University of California, San Diego), and Patricia Yañez (UDAPE, Bolivia). The report has also benefited from specific contributions or comments by Juliano Assunção (Pontifícia Universidade Católica [PUC], Brazil), Tito Cordella (World Bank), Jean Jacques Dethier (World Bank), Maria Victoria Fazio (World Bank), Gary Fields (Cornell University), Alvaro Forteza (World Bank), Vicente Fretes Cibils (World Bank), Marcelo Giugale (World Bank), Gustavo Gonzaga (PUC, Brazil), Ricardo Furman (International Finance Corporation [IFC]), Luke Haggarty (IFC), Mary Hallward-Driemeier (World Bank), Marco Hernandez (Oxford University), Tom Kenyon (IFC), Peter Lindert (University of California at Davis), David McKenzie (World Bank), Carolina Mejia (Fedesarrollo), Ezequiel Molina (CEDLAS and Universidad Nacional de La Plata), Carmen Pages (Inter-American Development Bank), Georgina Pizzolito (World Bank), Kristtian Rada (IFC), Lauro Ramos (Instituto de Pesquisa Económica Aplicada [IPEA], Brazil), Jose Guilherme Reis (World Bank), Helena Ribe (World Bank), Rafael Rofman (World Bank), Jose Scheinkman (Princeton University), Pablo Suarez (Brown University), Judith Tendler (Massachusetts Institute of Technology), Gabriel Ulyssea (IPEA, Brazil), and Evelyn Vezza (World Bank); and by our peer reviewers Jesko Henschel
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ACKNOWLEDGMENTS
(World Bank), Pierella Paci (World Bank), Stefano Scarpetta (Organisation for Economic Co-operation and Development [OECD]), and Simeon Djankov (World Bank). The project benefited from a data collection grant from the World Bank Development Economics Group Research Support Board to undertake surveys in Bolivia, Colombia, and the Dominican Republic, building on the 2005 survey conducted in Greater Buenos Aires, Argentina, by the Ministry of Labor, Employment, and Social Security and the National Institute of Statistics and Census of Argentina, with support from the World Bank. We very warmly thank Clara Else for her guidance and help in shepherding through the proposal and François Bourguignon for his support. Invaluable collaboration to develop these surveys is acknowledged to Carlos Ignacio Becerra (Departamento Administrativo Nacional de Estadística [DANE], Colombia), Dilia Cruz (Central Bank of the Dominican Republic), Olga Diaz (Central Bank of the Dominican Republic), Pedro José Fernández (DANE, Colombia), Eduardo Freire (DANE, Colombia), Rolando Guzman (PARETO Consulting Group), Oscar Lora (Instituto Nacional de Estadística [INE], Bolivia), Gabriel Loza (UDAPE, Bolivia), Juliana Martinez Cuellar (Departamento Nacional de Planeación [DNP], Colombia), José Ramirez (UDAPE, Bolivia), Carmen Julia Reyes (Central Bank of the Dominican Republic), Guillermo Rivas (DNP, Colombia), Norberto Rojas (DNP, Colombia), Luz Magdalena Salas (DNP, Colombia), Mauricio Santamaria (DNP, Colombia), Romilda Santana (Central Bank of the Dominican Republic), Johnny Suxo (INE, Bolivia), María Fernanda Tellez (DNP, Colombia), and María Eugenia Villamizar (DANE, Colombia). We are also grateful to Mauricio Cardenas (Fedesarrollo) and Sebastian Edwards (University of California, Los Angeles); to participants at the National Bureau of Economic Research workshop on Informality in Bogota; to Hartmut Lehmann (University of Bologna and Institute for the Study of Labor [IZA]) and Stefano Scarpetta (OECD); to participants at the World Bank/IZA Conference on Informality in Bertinoro; and to participants at the annual conference of the Latin American and Caribbean Economics Association for helpful feedback on background work for this report. Finally, Patricia Da Camara, Catherine Russell, and Elena Serrano coordinated the report’s publication and dissemination activities, working closely with Dina Towbin, Andrés Ménèses, and Shana Wagger in the World Bank’s Office of the Publisher.
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Abbreviations
ATE AUGE
BONOSOL BPS DANE ECINF EITC ENAHO ENAMIN ENEU F-I FONAHPO FONASA F-SE GDP ICBF ID I-F ILO IMSS INEGI
ISSSTE
LDC LSMS MAROP
average treatment effect Acceso Universal para prestaciones integrales y Garantías Explícitas (Plan of Universal Access with Explicit Guarantees) Bono solidario Banco de Previsión Social Departamento Administrativo Nacional de Estadística Pesquisa Economica Informal Urbana earned income tax credit Encuesta Nacional de Hogares Encuesta Nacional de Micronegocios Encuesta Nacional de Empleo Urbano formal to informal Fondo Nacional de Habitaciones Populares Fondo Nacional de Salud formal to self-employed gross domestic product Colombian Institute for Family Welfare identity informal to formal International Labour Organization Mexican Social Security Institute Instituto Nacional de Estadística, Geografía e Informática (National Statistical Institute [Mexico]) Social Security Institute for Mexican civil servants at the federal level
MIMIC MPG OECD OLF PASIS PNAD PPP RN RTS SARE SE-F SENA SIMPLES
SME TT TU VAT WDI WFTC WGI
xv
least developed country Living Standards Measurement Survey Mecanismo de Ahorro para el Retiro Oportunidades Multiple Indicator–Multiple Cause Model Minimum Pension Guarantee Organisation for Economic Co-operation and Development out of the labor force Pensión Asistencial Pesquisa Nacional por Amostra Domicilios purchasing power parity Renovación Nacional simplified tax regime Sistema de Apertura Rápida de Empresas self-employed to formal Colombian Training Institute Sistema Integrado de Pagamento de Impostos e Contribucoes as Microempresas e Empresas de Pequeno Porte small and medium enterprise treatment on the treated treatment on the untreated value-added tax World Development Indicators working families tax credit Worldwide Governance Indicators
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