A needed structural reform.

Author:Ramirez, David

A well-educated and productive labor force is a condition for development. Will reforms in Colombia, Mexico and Brazil be sufficient?

If there is a topic that should lead a new wave of structural reforms in Latin America it's the labor market. There is an agreement among economists that it must be deeply transformed, to foster job creation, to reduce informality and to bridge the education gap in the region. In sharp contrast with the faster progress of the 90s, the pace and scope of structural reforms in Latin America declined over the past decade. In fact, a 2012 report authored by researcher Eduardo Lora for the Inter-American Development Bank (IDB, Structural reforms in Latin America: What has been reformed and how to measure it), shows that labor was the area where the least reforms were made in 2000-09.

Another IDB document published at the beginning of 2013 (Rethinking reforms: How Latin America and the Caribbean Can Escape Suppressed World Growth, coordinated by Andrew Powell) ratifies the need to implement profound changes to the labor market. Taking into consideration the now uncertain and somewhat pessimistic world economic outlook, the report recommends increasing productivity through changes in the labor regime that address structural problems, such as informality.

As Andres Fernandez, economist from the IDB's research department and coauthor of the Rethinking Reforms document, told Latin Trade, "there is a significant statistical relation between low productivity levels and high informality, which justifies reforms in this area." According to Fernandez, increasing formality requires, among others, to tackle phenomena such as credit access and the size of firms.


The IDB emphasizes that the solution package must consult the particular needs of each country. In this context, Fernandez highlighted a recently approved reform in Colombia that lowers payroll taxes paid by employers, which is expected to reduce the high levels of informality in that country, which according to local authorities exceeds 65 percent.

There are disincentives to labor formality, paradoxically, coming from progress in other social areas. Workers prefer to remain in the informal sector where they get subsidized state-provided health, with similar benefits to the ones formal employees get. The difference, formal workers have to pay their health plans through contributions and copayments.

Other conditions of the...

To continue reading