The Dangers of Informality

If you have ever received direct cash for babysitting, you may have participated in the shadow economy, a network of paid work and transactions unregulated by national governments. In 2018, the global shadow economy, also known as the informal sector, employed over 60 percent of all workers, amounting to a total of 2 billion people. Though the global shadow economy represents a slew of unregulated economic activity, these jobs are not inherently criminal. The services that informal workers provide are often legal, but informal arrangements often involve tax evasion or a lack of a formal contract outlining laborers’ rights. In the United States, an estimated 16 percent of full-time workers operate within the shadow economy. However, these informal arrangements are much more prevalent in developing regions, where unpopular perceptions of government performance, coupled with limited opportunities for economic mobility, push workers into the unregulated sector. In Latin America, approximately 57 percent of non-agricultural workers, such as street vendors, hawkers, waste collectors, and domestic workers, tend to operate within the informal sector. Given the unregulated nature of the shadow economy, most countries have historically refused to extend social protections, including health care and unemployment benefits, to their informal workers. Throughout the COVID-19 pandemic, various Latin-American countries have left their informal workers unacknowledged in the design of social protection disbursement.


Unlike the 2008 economic recession, which harmed employment in male-dominated fields such as construction and manufacturing, the initial stages of the COVID-19 pandemic have wreaked havoc on women’s economic stability. Generally, where women have fewer opportunities in the formal labor market, they compose a larger share of the informal sector. As of 2018, women were more integrated into informal employment than their male counterparts in 75 percent of Latin-American countries, with such employment tending toward more domestic, exploitative, and unpaid work. In July 2020, the International Labor Organization estimated that, globally, 42 percent of female informal workers were engaged in nonessential sectors, leaving them incredibly vulnerable to the employment limitations imposed by social distancing recommendations initially demanded by the pandemic. As revealed in recent months, Latin America has been home to several major COVID-19 hot spots. The region is characterized by underserved health care systems. Estimates from 2016 reveal that about 30 percent and 21 percent of the population lacked health care access for economic and geographical reasons, respectively. Generally, those with lower incomes are more likely to be informally or semi-formally employed. As early as April 2020, Latin-American officials knew that COVID-19 would most heavily impact such workers who could not rely on employment benefits or who needed to work day-to-day in order to survive. As wealthy Latin Americans returned home from travel abroad in early 2020, their informal domestic workers bore the brunt of the initial spread of the virus. Informal domestic workers, a majority of whom are women, were forced to risk infection in order to maintain some semblance of financial stability for themselves and their dependents. Additionally, the COVID-19 pandemic contributed to the rise of a global domestic violence pandemic. In April 2020, the United Nations Entity for Gender Equality and the Empowerment of Women warned that COVID-19’s negative economic impacts might disproportionately obstruct women in the informal sector’s responses to domestic violence. Violence against women and girls in the region did, in fact, worsen, with countries such as Argentina and Colombia seeing a 40 percent and 90 percent increase in calls to domestic violence hotlines in June 2020, respectively.


Household heads who hold informal jobs often rely on sending their children to work in the informal sector during unstable financial periods. In times of economic insecurity, parents in the informal sector cannot rely on social protections or employment contracts to sustain themselves, so they turn to child labor to maintain a living income, bringing children into a pipeline of informal labor. Various countries, most notably Argentina, Brazil, Chile, Costa Rica, Ecuador, El Salvador, Guatemala, Panama, Peru, and Trinidad and Tobago, implemented some social protections for informal or semi-formal workers during the beginning of the COVID-19 pandemic. Under its Plan Protejer announced in Spring 2020, Costa Rica promised to distribute about $211 in direct economic aid to individual informal workers, though the plan only covered workers above the age of 15. Other social protection extensions during that time to informal workers in the region failed to address the permanent nature of the issue, with many of the benefits extended being temporary direct cash transfers. Despite their efforts, numerous Latin-American policymakers have failed to adequately address the underlying causes of informality, leaving citizens trapped in a cycle of working informally to meet their basic needs. Given widespread desperation for economic relief, the dangers of the informal sector are now more apparent than ever. Latin America’s leaders have an obligation to address the systemic inequities inherent in economies with majority informal workers.


Generally, these countries finance health care through direct taxation, a fact that leaves countries with large informal sectors unable to fund adequate health care for their citizens. Alternative methods of financing health care, such as regressive indirect taxation, would only further threaten Latin Americans’ trust in their governments. The region should prioritize bringing its informal workers into the formal sector through reestablishing perceptions of trust. Addressing social protections can help to facilitate an informal-formal transition. According to a recommendation from Panama’s former Vice President, Isabel Saint Malo de Alvarado, governments must address the needs of the vulnerable groups most often affected by informality. Among the steps forward to consider are the provision of social support to these groups, the calibration of minimum wages, and the simplification of tax regimes as mechanisms by which to entice informal workers to join a more protective formal sector.


Through actively investing in informal workers and expanding their prospects for social protections in the formal sector, Latin-American governments will also advance efforts to end poverty and reduce widespread inequality in the region. Doing so would not only help to reduce child labor and educational attrition but it would also bring female domestic workers who currently lack significant legal protections in their employment arrangements to a new stage of economic empowerment. Addressing the vulnerabilities of informal workers and integrating them into the formal sector will grant workers greater autonomy over the positions they take and the benefits that ensue. The region has a chance to work toward a new vision, one in which they can rebuild relationships with vulnerable citizens who are outraged by histories of mass corruption. There is no better time than now for Latin America’s leaders to realize that vision.

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