NCPA - National Center for Policy Analysis

INFORMAL ECONOMY PROVES HARD TO CONTROL

February 15, 2007

Tens of millions of Latin Americans are part of the informal economy. They pay no business or sales taxes, but also get no paid vacations, have no health insurance, receive no labor or consumer law protections and don't have access to bank credits, says the Miami Herald.

Most economists say that the high level of informality discourages growth, limits investment in new technology and encourages corruption.  For example, according to the World Bank study, on average, setting up a business takes five days in the United States.  In Mexico it takes 27 days, Peru 72, and Brazil 152.

As a result, some, most notably Peru, have taken stabs at bringing more businesses under government purview, says Bridges:

  • In 2005, then-Labor Minister Juan Sheput tried to change a law that allowed workers to receive a month of vacation after being on the job only a year and when they leave their jobs, receive a month's wage for every year of employment.
  • While this may sound good for workers, Sheput argued that it had the opposite effect -- losing so much productivity from vacationing workers and having to pay a big bill when laying off employees discourages companies from expanding their workforce, putting the workers on the books and making them eligible for vacations, overtime and health benefits.

But Sheput has had to face powerful leftist labor unions and their allies in Congress who claim his reforms are "anti-worker."  "The union aristocracy defends the small percentage of workers who have work in the formal sector,'' Sheput said, "and they forget the millions of Peruvians in the informal sector.''

Despite the union claims, numbers gathered by the Peruvian Economic Institute seem to buttress Sheput's point, says Bridges.  Of the 13 million Peruvians of working age, 2.3 million work in the private sector formal economy.  Some 1 million work in the public sector formal economy and nearly 10 million work in the informal economy.

Source: Tyler Bridges, "Informal economy proves hard to control," Miami Herald, February 11, 2007.

 

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