Abstract
This paper analyzes the dynamics of the labor market in Latin America during the COVID-19 pandemic. After a decade of a virtuous circle of growth with the creation of formal jobs, the pandemic has had an considerable impact on the region’s labor market, generating an unparalleled increase in the proportion of the inactive population, considerable reductions in informality, and, in contrast, smaller fluctuations in formal jobs. In this context, the formal sector, given its lower flexibility, became a "social safety net" that preserved the stability of employment and wages. Based on the findings presented in this paper, it is projected that, starting in 2021, informality will grow to levels higher than those of the pre-COVID-19 era–with 7.56 million additional informal jobs–as a result of the population returning to the labor market to compensate for the declines in incomes. According to the simulations presented, postponing or forgiving income tax payments and social security contributions conditional on the generation of formal jobs could reduce the growth of informality by 50 to 75 percent. Achieving educational improvements has the potential to reduce it by 50 percent.
Highlights
Since the onset of the COVID-19 pandemic in Latin America in early March 2020, most countries in the region implemented containment actions that have included confinement measures, mobility restrictions, and partial or total closures of economic activity, among other actions
This paper has estimated the possible impact of the economic contraction associated with COVID-19 on the labor informality rate for 16 Latin American countries
Preliminary data for 2020 show a substantial contraction in employment and informal employment, while the formal sector seems to have functioned as a safety net for workers with access to contributory social security
Summary
Since the onset of the COVID-19 pandemic in Latin America in early March 2020, most countries in the region implemented containment actions that have included confinement measures, mobility restrictions, and partial or total closures of economic activity, among other actions. A few studies document the types of general policies introduced in developing countries [1,2,3] This has had serious consequences in the region, including declines in gross domestic product (GDP) of 7.4 percent in 2020, according to projections by the International Monetary Fund [4]. Since before the pandemic Latin America has had levels of labor informality above 50 percent on average, implying that large sectors of the population were exposed to and unprotected from vulnerabilities in the face of unexpected fluctuations in the labor market. For this reason, the pandemic crisis is expected to generate high welfare costs in the region. Data from sources used for this paper show that most of the informality occurs through self-employment activities, there are countries such as Mexico and Argentina where practically half of those in this group are employees who receive a fixed remuneration
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