Bad public policies are encouraging labor informality - IDESA

Report Nº: 91111/05/2021

Bad public policies are encouraging labor informality

The high wage taxes and the proliferation of welfare plans mean that many people earn more working informally than for a company complying with all the labor regulations. With such perverse incentives, it is not surprising that informal labor surpasses registered salaried employment.

Workers’ Day prompted unanimous speeches highlighting the importance of formal employment as a social progress tool. This is in contrast with the evidence that in Argentina salaried workers registered in private companies and the public sector represent only 47% of the employed. In other words, less than half of the labor market. The rest is made up of 30% of self-employed workers and 23% of unregistered salaried workers, also known as “black” employees. Although some self-employed workers are formalized, the vast majority are also informal. 

Why is informality so massive? Within the multiplicity of explanatory factors, a telegram, to which IDESA had access, of a worker from Tucumán sent to his employer asking for his job termination is very suggestive. It reads as follows: “I hereby submit my resignation in an indeclinable manner as well as I urgently request the immediate cancellation of my labor registration as it means a damage to my economy, as I cannot access certain benefits such as welfare programs and other allowances”.

Although the document authenticity could not be determined, it is relevant to analyze its consistency with reality. For this purpose, taking INDEC data referring to the 4th quarter of 2020, the following calculation can be made:  

  • An employer, in order to hire a worker, has to pay a total labor cost of about AR$ 67 thousand per month.
  • The worker receives as pocket salary, i.e. net of contributions, about AR$ 45 thousand.
  • Working informally, he/she would earn about AR$ 20 thousand and another AR$ 20 thousand with welfare programs summing up about $ 40 thousand.

These data are approximated but show that to obtain better incomes in the informal sector than in formal employment is very feasible. It should be taken into account that a person with low qualifications, if he/she obtains a formal job, it will probably be with a lower than average formal salary. In addition, the calculation does not take into account other assistance welfare programs administered by different national, provincial, and municipal agencies whose requirements are also not to have a formal job. In other words, the incentives to work informally are much stronger than those calculated in this example. The data confirm a reality faced by many people, especially the most vulnerable.

With a deficit-prone public sector, which imposes bad taxes and provides low-quality services, the business climate is not favorable for investment and high-quality jobs. This produces insufficient good quality jobs and low wages. High wage taxes, which increase labor costs and lower out-of-pocket wages, is a concrete and illustrative example of how bad public policies stimulate informality. 

In this context, poverty becomes chronic, massive, and structural, which gives rise to the growth of social assistance. But, far from being a solution, it becomes a factor that contributes to the sustainability of poverty. In the first place, because welfare programs provide palliatives, but they do not replace formal employment as a tool for the well-being and dignity of families. Secondly, because they generate clientelism. The latter explains the proliferation of welfare programs whose main objective is to show a politician giving away something to a vulnerable family. 

It is very important to organize welfare in order to avoid people’s manipulation for political purposes. But social progress depends crucially on boosting high-quality employment. To this end, a friendlier context for business is essential. This requires a comprehensive reorganization of the public sector. It is impossible to achieve economic growth to lift people out of poverty with a disorderly State that is the source of instability and impoverishment. 


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