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The Long Shade of Labor Informality

Author

Listed:
  • Andrés Álvarez

    (Universidad de los Andes)

  • Oscar Becerra

    (Universidad de los Andes)

  • Manuel Fernández

    (Universidad de los Andes)

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.

Suggested Citation

  • Andrés Álvarez & Oscar Becerra & Manuel Fernández, 2026. "The Long Shade of Labor Informality," Documentos CEDE 2026-6, Universidad de los Andes, Facultad de Economía, CEDE.
    • Handle: RePEc:col:000089:022171
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    More about this item

    Keywords

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    JEL classification:

    • J46 - Labor and Demographic Economics - - Particular Labor Markets - - - Informal Labor Market
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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