Transitions from the formal to the informal sector in Latin America

Abstract

It has been widely discussed whether informality is an exclusionary state or reflects voluntary decisions resulting from the attractiveness it might have. This paper contributes to this discussion by analyzing the main patterns and characteristics of those who transition from formal to informal sector jobs and the effects of these movements on relative earnings by examining data from household surveys for Argentina, Brazil, Mexico, and Peru. The main findings suggest that the composition of the flows of those moving to informal self-employment is more compatible with the exclusionary perspective, while those transitioning to become informal employers tend to have a profile similar to those who remain in the formal sector, aligning with the voluntary view. The behaviour of earnings also supports the heterogeneity view: those becoming self-employed workers experienced a relative loss of income, while those moving to a position as an employer generally experienced a relative increase, in comparison to those who remained in the formal sector.