Informe Nº: 15/11/2013
According to INDEC, the incidence of unregistered employment remains above a third of the total workforce. This is a phenomenon, with very negative social impact that deserves special attention. There is no chance of inducing the formalization of small businesses if the administrative burden to register a worker is not simplified and the tax burden is not moderated. Therefore, the creation of a “special tax system for micro-enterprises” can provide solutions since almost all of informal employment is generated by micro-enterprises.
INDEC updated the information about the employment situation for the second quarter of 2013. A very significant fact is that 34.5% of salaried workers remain unregistered. The incidence of unregistered employment fell from 48% in 2004 to 37% in 2008. But, since then, five years have passed since the unregistered salaried employment rate remained, with minor variations, around 35%.
This trend is explained mainly because until 2008 the real wage level (i.e., adjusted by inflation) was well below the historical average due to the impact of the 2002 mega-devaluation. But since wages recovered the level they had prior to 2002, the reduction of unregistered employment stagnated, staying well above a third of the total workforce.
Multiple factors explain the high propensity to create jobs outside the law. But in terms of importance, a crucial feature is the strong relationship between informality and size of businesses. Thus, data from INDEC for the 4th quarter of 2012 shows that:
· 60% of private sector unregistered employment is generated by companies with fewer than 5 employees.
· Another 19% of private sector unregistered employment is generated by companies that have between 6 and 10 employees.
· Therefore 79% –or nearly 8 out of 10– of private salaried unregistered workers work in businesses with fewer than 10 workers.
This official information is convincing enough in showing that the informality is a phenomenon strongly concentrated in micro-businesses. Many factors explain this particularity, but without doubt the most important one is the high level of social security taxes and bureaucracy to be tackled in order to have formal employees. Of the total labor cost paid by an employer, less than two-thirds reaches the workers pocket, the rest goes to taxes and service charges. Under these circumstances, small businesses –where productivity levels and wages are lower– operating illegally remains the only alternative for survival.
According to newspaper leaks, the Ministry of Labor will be creating a “special tax system for micro-enterprises”. This will be a special system to reduce the administrative complexities and the burden of social security taxes in micro-enterprises. If this news were to be confirmed, it would be taking a major step in addressing one of the major scourges of the labor market.
Anyway, it should be noted that a good design is crucial. In this regard, it would be advisable to capitalize the experiences gained with the “monotributo” (a small taxpayer regime). For example, it is necessary to provide automatic mechanisms that update the parameters with inflation and to establish a set of rules that do not discourage businesses growth. The latter is a very important issue because if a company goes beyond the limit imposed by the special tax, it is required to pay taxes for all its employees, and this is likely a disincentive to grow or to bypass the norm. In this sense, a highly recommended rule would be that companies pay social security for the general regime only for the workers that outnumber the maximum allowed to belong to the special tax regime.
The recent experience shows that strategies based exclusively on enhancing regulations and controls often fail. Medium and large firms react by reducing the creation of employment and the small ones react by not obeying the law (thus creating informality). Therefore, it is a highly positive sign that the government changes its strategy and bids to simplify and reduce the tax burden. If it’s done with an intelligent design, relevant and desirable social and economic impacts can be achieved.
