Labor Markets, Social

Protection and the

Informal Economy in Latin America

Ángel Melguizo

The Challenge of the Informal Economy for

Latin America

LACEA, Mexico City - November 1, 2013

Labor Markets, Social Protection and the Informal Economy

in Latin America

Better pensions, better jobs? Bosch, Melguizo and Pagés (2013)

The missing middle: pension savings and the middle class

OECD (2010); Carranza, Melguizo and Tuesta (2012); Daude, De Laiglesia and Melguizo (2014)

Do informal workers save?

Bosch, Melguizo, Peña and Tuesta (2014)

Concluding remarks

Better pensions, better jobs?

Low pension coverage: 4/10 Pop 65+ don’t get a pension

Better pensions, better jobs? - 47%-60% of Pop 65+ (up to

83M) will not have an adequate pension; consequences:

Social: Families will need to devote greater effort to the care of the elderly.

Political: Adults 65 + will make up between 20% and 30% of the potential voters.

Fiscal: Lack of coverage represents (also) an implicit fiscal cost.

Economic: How coverage gaps are closed can have an impact on productivity growth.

(IDB projections based on the historical elasticitiy of formality to GDPpc

and national legislation)

Better pensions, better jobs? - The labor market at the

epicenter of the challenge

130 million informal workers in LAC-19

Labor Markets, Social Protection and the Informal Economy

in Latin America

Better pensions, better jobs?

The missing middle: pension savings and the middle class

Do informal workers save?

Concluding remarks

The missing middle - Pension savings are low for non-

wage earners, workers in small firms, or low-income …

The missing middle - … but also evident for the

emerging middle class

The missing middle - Low pension savings for the

middle class reflect (and impact) the labor market

Many/most middle-class workers do not have a written contract

(2/3 in Colombia, Mexico and Peru; 1/3 in Chile)

Non-agricultural middle income workers in Chile, Colombia, Mexico and Peru by occupation (Percentage of total non-agricultural workers – 14 to 64 years old)

Source: OECD (2010), Carranza et al. (2012) and Daude et al. (2014)

0.0

0.2

0.4

0.6

0.8

1.0

2009 CHL 2009 COL 2010 MEX 2010 PER

With written contract Self-employed with tertiary education

Non-agricultural informals Non-agricultural self-employed

20.5 million middle-income workers, with labor income well

above poverty – savings capacity (?)

The missing middle - (Middle-income) Workers without

a written do not contribute to pension schemes

Middle-income workers contributing to the pension system by occupation in Chile, Colombia, Mexico and Peru (Percentage of total

non-agricultural workers – 14 to 64 years old)

-

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

100.00

With written contract Self-employed with tertiaryeducation

Non-agricultural informals Non-agricultural self-employed

2009 CHL 2009 COL 2010 MEX 2010 PER

Source: OECD (2010), Carranza et al. (2012) and Daude et al. (2014)

Labor Markets, Social Protection and the Informal Economy

in Latin America

Better pensions, better jobs?

The missing middle: pension savings and the middle class

Do informal workers save? Preliminary results!

Concluding remarks

Formal savings: though financial institutions and pension funds,

using the IDB Social Protecion Survey 2008

Do informal workers save? – One third of informal

workers in Mexico DF save informally

Percentage of savers among workers in Mexico City, 2008

0

10

20

30

40

50

60

70

Savings in financialinstitutions

Formal savings Total savings

Informal workers Workers

Source: Bosch et al. (2014)

Group 1: Male, high-

income (QIV-V), self-

employed workers,

working longer hours

and in the same

business

Group 2: Female, low

educated (primary),

low-income workers,

and dependent worker

in small firm (up to 5)

Cluster analysis using over 20 socio-economic variables

Do informal workers save? – Mexican DF informal

workers are not alike…

Source: Bosch et al. (2014)

Do informal workers save? – … and their savings

behavior differ

Source: Bosch et al. (2014)

39% of informal

workers in Group 1

save (vs. 14% in

Group 2);

mostly to finance

their retirement or

their business (Group

2 have not thought

about it)

Do informal workers save? – Barriers to formal savings

do not appear to be income-related (!)

PROBIT analysis – (very) preliminary results

Socio-economic variables affect similarly the probability to save

in Groups 1 and 2.

Labor income is not significant (neither the proxy of total

income).

Labor satisfaction and having friends contributing to pension

schemes boost formal savings among informal workers.

Age and confidence in the future increase savings through

financial institutions among informal workers.

Labor Markets, Social Protection and the Informal Economy

in Latin America

Better pensions, better jobs?

The (old) new missing middle: pension savings and the middle class

Do informal workers save?

Concluding remarks

Concluding remarks - Informality is not an incurable disease

It is the outcome of:

Designs: Systems exclude (de jure or de facto) non-wage earners.

Incentives: Provided by the state in labor markets.

Value: Placed by workers and firms on social security.

All this can be changed with adequate policies.

Concluding remarks - The time is now: financial and

political economy challenges can be overcome

Demography: The region is still young but the window of opportunity will rapidly close.

Improvement in formal employment and productivity: Pension reform is central to achieve both.

Funding: Pension reform requires an increase in resources allocated to these policies, preferably from alternative sources (VAT, commodities).

Political economy: Formal employment is a central aspiration of the middle classes.

Concluding remarks - Reforms should be bold and

innovative

Traditional financial instruments (e.g. non-contributory pensions, social contributions subsidies).

Engaging the emerging middle class.

Innovation in channels (not just prices/income): Experiment, evaluate and then (re)design.

Main references

Bosch, M., A. Melguizo, X. Peña and D. Tuesta (2014), The interplay between savings

and the informal economy: an analysis based on Mexico and Peru surveys. Work in

progress.

Bosch, M., A. Melguizo and C. Pagés (2013), Better pensions, better jobs. Towards

universal coverage in Latin America and the Caribbean. InterAmerican Development

Bank, Washington DC.

Carranza, L, A. Melguizo and D. Tuesta (2012), “Matching contributions in Colombia,

Mexico, and Peru: experiences and prospects”, in R. Hinz, R. Holzmann, D. Tuesta and

N. Takayama (eds.), Matching Contributions for Pensions, pp. 193-213. World Bank,

Washington DC.

Daude, C., J. de Laiglesia and A. Melguizo (2014), “Covering the uncovered: Labor

informality, pensions and the emerging middle class in Latin America”. In J. Dayton-

Johnson (ed.) Latin America’s Emerging Middle Classes. Macmillan Publishers Limited,

Hampshire.

OECD (2010), Latin American Economic Outlook 2011: How middle-class is Latin

America, OECD Development Center, Paris.

http://www.iadb.org

The Inter-American Development Bank Discussion Papers and Presentations are documents prepared by both Bank and non-Bank

personnel as supporting materials for events and are often produced on an expedited publication schedule without formal editing or

review. The information and opinions presented in these publications are entirely those of the author(s), and no endorsement by the

Inter-American Development Bank, its Board of Executive Directors, or the countries they represent is expressed or implied.

This presentation may be reproduced with prior written consent of the author.