The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. Policy Research Working Paper 8551Too often, academics and policy makers interpret formality as a binary choice and formalization as an irreversible process. Yet, formalization has many facets and shades on the business and labor fronts, and firms may not be able or willing to formalize all at once. This paper explores the joint process of business and labor formalization, using a unique panel data set of Peruvian micro enterprises. The paper finds that business formality does not imply labor formality, and vice versa. Further, there is significant churning in and out of different dimensions of formality within a relatively short period. Using an instrumental variable approach, the paper infers that business formalization affects labor formalization but not the other way around, and that enforcement is a key driver of formalization. Overall, the analysis shows that formalization is a gradual and reversible process, with small entrepreneurs weighing their possibilities in each pathway to business (often) or labor (less often) formalization, but rarely both at the same time.
In a dramatic change of trend, labour formalization took place in Peru in the period covered by this study. The context was one of economic growth accompanied by a labour market reform that created a special regime for micro and small enterprises, thereby reducing employment costs, and introduced improvements in workplace inspections. A panel of subnational regions is used to analyse the role played by these factors in the formalization process. In the first place, this study confirms that the composition of growth matters to formalization. A combined analysis of economic factors (growth and sectoral growth) and recent institutional changes shows that the former accounted for the bulk of formalization in the period analysed and that growth in labour-intensive sectors adds explanatory power, while the institutional changes, far-reaching though they were, did not have a significant effect.
RESUMENCambiando drásticamente de tendencia, se ha observado un proceso de formalización laboral en el Perú, en un contexto de crecimiento económico, durante el cual también se impulsó una reforma laboral que creó un régimen especial para micro y pequeñas empresas -lo que redujo los costos laborales-y se introdujeron mejoras en la inspección del trabajo. Mediante un panel de regiones subnacionales se analiza el papel cumplido por estos factores en el proceso de formalización. En primer lugar, se confirma que la composición del crecimiento importa para la formalización. Al analizar de manera conjunta los factores económicos (crecimiento y crecimiento sectorial) y los cambios institucionales recientes, se encuentra que -en el período analizado-dichos factores explican la mayor parte del proceso de formalización y que el crecimiento de los sectores intensivos en empleo agrega poder explicativo, mientras que los cambios institucionales no incidieron significativamente a pesar de su magnitud. PALABRAS CLAVECrecimiento económico, empleo, mercado de trabajo, sector informal, modelos econométricos, estudios de caso, política laboral, Perú CLASIFICACIÓN JEL J08, J46, 017, 040 AUTORJuan Chacaltana es Especialista en economía laboral de la Oficina Regional de la Organización Internacional del Trabajo (oit) para América Latina y el Caribe.
This paper explores the relationship between economic growth and informality and highlights the role of GDP growth and its composition in the level and evolution of informality, using country data from 1991 to 2019. The analysis reveals a weak relationship, although with important differences across regions and income levels. Coefficients are higher in middle-income countries. This means that the same growth rate generates different impacts on informality depending on the country, probably due to pre-existing levels of informality, the economic structure or institutional and other variables. Economic structure appears to be the key determinant of informality, even after controlling for endogeneity, using different proxies of informality or including institutional variables. These results confirm that the economic structure and pattern of growth matters for formalization. This calls for policies that promote changes in the productive structure, including a broader, more diversified base and more economic complexity and technological sophistication, to ensure inclusive growth.
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