On the Doorstep of Formality: Different solutions for Different Informalities
Informality is a corrosive phenomenon for taxes, production, competitiveness, and society I general, but it is also the only livelihood option for some population groups. This report analyses how informality affects inclusive growth, studying informality by different socio-economic groups, and presents policy recommendations for each of these groups.
In the case of Colombia, informality is very heterogeneous so it must be addressed through various strategies ranging from better education in the poorest segments, to more flexible formal jobs, to the implementation of better monitoring and control of higher income independent workers. Faced with restrictions on entry into the formal sector in Colombia, we found that the reduction in 2013 in payroll taxes was a successful policy. However, further reductions in these contributions must consider their impact on tax collection, given the difficult fiscal situation in the country.
- Voluntary Informality must be addressed by reducing the incentives to be informal e.g. making formal work more flexible, allowing for health and pensions plans, flexible hours and part-time workdays, but also by increasing control and inspections at high-income independent workers’ worksites.
- Subsistence Involuntary Informality must be addressed by increasing levels of education and/or skills. For instance, Brazil’s increased supply of skilled labour resulted in a ten-point reduction in the informality rate (Haanwinckel and Soares, 2014).
- Induced Involuntary Informality can be addressed by reducing the barriers to enter the formal market. Discrimination against women can be dealt with by controlling discriminatory behavior, through the provision of child care services in order to promote mothers’ work and affirmative action. Given the size of induced informality in the country, reducing payroll taxes was the right policy to reduce informality in a country such as Colombia.
Other ELLA knowledge materials relating to ECONOMIC DEVELOPMENT:
GUIDES AND BRIEFS
LEARNING ALLIANCE HIGHLIGHTS