Informality is one of the most important aspects of the labor market, especially in developing countries — and in all Latin American nations. It has dire consequences on the ability of local economies to grow, and on the quality of life of workers, as it tends to exacerbate social inequalities.
From the perspective of entrepreneurs and professionals, however, informality is not altogether detrimental. Some of its aspects, such as the ability to adjust to changes in the macro and microeconomic scenarios, help understand why organizations outside the market are resilient.
That was the context when, on September 20th in the city of São Paulo, Insper held the conference called “Informality and Wage Setting Policies in Latin America”, which featured David Card, one of the 2021 Nobel Prize winners in Economics, Professor at the University of California, Berkeley and Director of the Center for Labor Economics, and Penny Goldberg, Professor of Economics and Global Affairs at Yale University, who also served as Chief Economist at the World Bank from 2018 to 2020.
The event was a collaboration among Insper and the Georgetown Americas Institute, the Georgetown University Global Economic Challenges Network, the Center for Microdata Methods and Practice (Cemmap) and the Econometric Society, an institution that emerged in the 1930s and brings together 7,000 members of 85 countries. The conference was broadcast live, and the content is available in full.
“Informality helps explain the low productivity we have in our region,” said Sergio Firpo, Instituto Unibanco Professor of Economics at Insper. Penny Goldberg defined being informal as being invisible to governments and institutions that study different aspects of the economy, such as universities. “Informality is the result of multiple distortions. And it is poorly studied, because there are no data or conceptual frameworks to investigate it,” Goldberg explained.
Because they are outside the market, informal businesses rarely grow. “They don’t die, but they don’t grow. On the one hand, they are flexible and adaptable. On the other hand, they do not pay taxes, which keeps associates away from all social protection mechanisms,” Goldberg pointed out. Despite the trouble in accessing data, it is estimated that 60-70% of the labor force work informally in developing countries. In Brazil, 48 out of 100 workers have informal jobs.
Banning informal businesses would only deteriorate the social landscape, Goldberg said, as it is twice as easy to move from unemployment to informality than it is to move from no work to a formal job.
“Informal employment is more valuable to workers than to public policy makers, because it does not generate taxes”, added Brenda Samaniego, Professor at the University of California, Santa Cruz. “Informality has costs and benefits. When it is too high, the costs outweigh the benefits,” said Mauricio Cárdenas, a researcher at Columbia University who served as finance minister of Colombia from 2012 to 2018.
Be that as it may, as argued by Gabriel Ulyssea, a professor at University College London, it is advantageous to encourage formalization. “The increase in the number of legalized businesses may come from the regularization of marginalized initiatives”, Ulyssea said.
“David Card has been a professor to all of us. He has shown the way in the revolution of economics over the last 40 years. It is impossible to exaggerate the influence he has had on economics.” The introduction of the 2021 Nobel Prize winner, given by Insper Professor Rodrigo Soares, set the tone for the afternoon activities of the conference. In addition to sharing his ideas for an hour, Card participated in the panels that followed for the remainder of the agenda.
After sharing an overview of the academic research on wage determinants and their impact on companies and society — an area that has advanced mostly since 1932, when the line of academic research that studies labor economics emerged — Card cited a concept that had fallen into disuse in the 1960s, but that has re-emerged in recent decades: individual companies have great influence over the factors that define the value of workers’ wages.
According to Card, when a market structure called monopsony is established, where a single buyer substantially controls the market in which it operates, the labor market is directly impacted. Card mentioned a study that looked at the merger between two Brazilian pharmacy chains. “The operation ended up having an impact on the job market,” he said.
For the future, the economist made a case for an investment of time and effort in the development of theoretical models to address the issue. “The future of this area is in using new theoretical models supported by the intensive use of data.”
Sergio Firpo shared a recent survey that addresses income volatility in a context of informality in the labor market. “Workers who move from unemployment to informality have greater income volatility than those who remain employed in the formal market. This phenomenon is entirely driven by the increasing volatility after the first time a worker leaves the formal sector,” Firpo said.
Laura Muller Machado, an economist and Insper professor, who is currently head of the Secretary of Social Development of the State of São Paulo, shared data from a survey that reveals a new profile of poverty in the country. According to her, in the last ten years, the profile of poor Brazilians has shifted from the precarious income of informality to the complete lack of income. “Brazil is facing a new type of problem. Until a decade ago the poor were employed, albeit informally, now most of them do not have any activity whatsoever. They are unemployed.”
According to Ilan Goldfajn, former president of the Central Bank of Brazil and current Director of IMF’s Western Hemisphere Department, informality can impact the stabilization of inflation in a scenario of recession and high global inflation in the labor market of the future. “The pandemic has left deep marks on the labor market, especially in developing countries. Most of the population that is excluded from formal employment tends to get hit harder by inflation, to the same extent that it will be harder for countries where informality prevails to bounce back”, he said.