The Long Shade of Labor Informality

Andrés Álvarez, Oscar Becerra and Manuel Fernandez Sierra

No 2026-6, Documentos CEDE from Universidad de los Andes, Facultad de Economía, CEDE

Abstract: Countries at similar income levels exhibit markedly different rates and anatomies of labor informality. We organize these patterns around three interacting forces: a legal wedge (minimum wages and non-wage labor costs, alongside enforcement), the sectoral productivity and composition, and the private value of formality (coverage, portability, and contract enforceability). A parsimonious model yields sharp “thin-margin” predictions: effects concentrate where earnings cluster near the minimum legal standards. Evidence from a cross-country, country–sector panel supports the framework—legal and enforcement effects are largest where thin-margin exposure is high; higher private value lowers informality and dampens wedge effects; and composition, especially within services, conditions aggregates. The results reconcile disparate findings and imply targeted policy: align enforcement with thin-margin exposure, raise the private value of formality via low-friction administration and portability, and pursue sectoral paths that expand formal-leaning activities.

Keywords: Informal employment; informal sector; minimum wage; non-wage labor costs; sectoral composition. (search for similar items in EconPapers)
JEL-codes: H55 J31 J38 J46 O17 (search for similar items in EconPapers)
Pages: 45
Date: 2026-01
New Economics Papers: this item is included in nep-iue
References: Add references at CitEc
Citations:

Published in Documentos CEDE - Universidad de los Andes

Downloads: (external link)
https://repositorio.uniandes.edu.co/bitstreams/han ... 149/dcede2026-06.pdf
https://repositorio.uniandes.edu.co/bitstreams/han ... 149/dcede2026-06.pdf

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:col:000089:022171

Access Statistics for this paper

More papers in Documentos CEDE from Universidad de los Andes, Facultad de Economía, CEDE Contact information at EDIRC.
Bibliographic data for series maintained by Universidad De Los Andes-Cede ().