By Paula Garda, Jens Arnold, Luca Marcolin, OECD Economics Department
Around half of all workers in Latin America are in informal jobs – a reality that keeps productivity stagnant and inequality high. These were the central themes of the 2025 Ministerial Conference on Productivity and Informality held on 30 October 2025 in Lima, Peru. Ministers, senior policymakers, academics, and representatives from international organisations met for the ministerial conference “Towards Productive Economies: Confronting Informality in Latin America”, co-organised by Peru’s Ministry of Economy and Finance, the OECD Economics Department and Global Forum on Productivity and the Inter-American Development Bank. The event brought together over a hundred participants to exchange experiences and lessons about which policies have worked, which have not, and how to redesign the rules of the game for more productive and inclusive growth.
The meeting tackled a central question: how can Latin America break the vicious cycle of low productivity and high informality? The figure below captures this relationship vividly, showing that countries with higher informality rates tend to be those with lower labour productivity. This blog summarises the main messages that emerged from the discussions to help turn reflection into policy action.
Where informality is high, productivity is low
The region’s firm structure reinforces informality
Discussions highlighted that Latin America’s productivity challenge is not so much related to what the region produces, but more to how production is organised. The region’s firm structure is strikingly skewed towards microenterprises: around 60% of workers are employed in firms with fewer than 10 employees, compared with less than 20% in OECD economies. In Latin America, self-employment accounts for more than a third of total employment, more than double the OECD average. Half of all jobs remain informal.
This dominance of tiny, low-productivity units reflects structural challenges but also policy weaknesses — low human capital, limited innovation, weak technological diffusion, scarce access to credit, and poorly aligned labour and business regulations. These factors both stem from and reinforce informality, trapping economies in a cycle of low productivity and high inequality.
Addressing these weaknesses requires a comprehensive strategy: In the longer run, improving education quality and lifelong learning is key to strengthen transversal and job-specific skills, while innovation policies should support technology adoption, digitalisation, and knowledge transfer across firms. Access to finance must also be expanded so that firms can invest and scale up. In the shorter term, barriers that reinforce informality — such as contribution-based social security systems, high minimum wages relative to productivity and in some cases stringent labour regulations — should be addressed. Policies that create incentives for firms to remain informal and small, including size-dependent special tax or regulatory regimes, should be used with extreme caution.
Informality as a symptom of policy incoherence
Informality is less a cause than a consequence of poorly aligned policies. Even in contexts of macroeconomic stability, strong growth, and open markets, productivity can stagnate when incentives protect small, low-productivity firms instead of enabling dynamic ones to expand. Mexico’s experience illustrates this paradox: despite sustained growth and export success, aggregate productivity flatlined as many low-productivity firms stayed in the market, and those inefficient firms that exited were replaced by others that were just as unproductive.
Simplified tax and labour regimes targeted to small enterprises — such as monotributos or related schemes — may induce more firms to join the formal sector, but often discourage them from growing. Instead, social and productivity objectives must advance together. To create a level playing field, access to core social protection should be clearly separated from labour market status and financed preferably through general tax revenues rather than payroll-based contributions. Such a shift would align the cost of creating formal and informal jobs, allowing firms to compete on equal terms and enabling workers to move safely between jobs without losing protection.
Protecting workers and boosting productivity can go hand in hand
A new OECD report, Expanding Social Protection and Addressing Informality in Latin America, shows that social protection systems can be designed to promote both inclusion and productivity. The key is to provide access to basic protection irrespective of formal labour-market participation, financed mainly through general tax revenues, and complemented by progressive contributory schemes. Such systems can lower non-wage labour costs—especially for low-income workers— and reduce the extra cost of formalisation, while supporting firm growth and efficient resource allocation. Universal, portable, and fiscally sustainable protection can thus foster formal job creation, improve equity, and strengthen resilience. The estimated fiscal cost of such reforms (1–4% of GDP, depending on the country) is manageable and likely small relative to potential gains in inclusion, productivity, and resilience. The new OECD report also includes country chapters for Argentina, Brazil, Chile, Colombia, Costa Rica, Mexico, and Peru, providing tailored policy recommendations and fiscal assessments to guide reform implementation.
Strong governance and trust: hidden driver of informality
Countries with lower informality often also display stronger governance, higher trust, and less evidence of state capture. It is no coincidence that the most productive countries are also the most transparent and predictable. The erosion of trust in the state — its inability to deliver quality public goods such as education, justice, and infrastructure — undermines legitimacy and pushes millions into informality. Productivity agendas should integrate a governance dimension to foster business investment and sustained growth.
Lessons from country experiences: what has worked and what hasn’t
The Lima conference was also an opportunity to highlight the reform efforts of selected countries in the region, as there are no one-size-fits-all solutions.
- Brazil is implementing an ambitious tax reform, replacing five complex consumption taxes with a dual VAT system that will harmonise rules, broaden the base, and reduce compliance costs. This reform is expected to boost competitiveness and productivity by removing distortions that penalise firm growth and investment.
- Chile highlighted that informality fell when growth was strong and business support institutions were consolidated. The National Productivity Commission is studying how to sustain the reduction of informality in a context of weaker growth.
- Costa Rica focused on becoming a true “ally of small firms.” Its strategy combines regulatory simplification with active business support — helping micro and small enterprises formalise, access financing, and strengthen managerial skills.
- Peru stressed the need for a comprehensive approach across policy areas. The National Competitiveness and Productivity Plan 2024–2030 aims to address institutional policy fragmentation by modernising public services, investing in human capital, expanding credit access, and promoting innovation. Recent efforts also aim at generating a deregulatory shock to simplify administrative procedures and reduce the regulatory burden on firms, with the goal of facilitating formalisation and business growth.
Bridging productivity and social objectives
The message from Lima is clear: tackling informality is not just a good idea, it’s essential to foster productivity and more inclusive growth. Promoting productivity and ensuring social protection can be mutually reinforcing objectives. Better education and training, tax systems that encourage firm growth, labour institutions that foster labour mobility, and social protection schemes that are universal can enhance productivity by supporting reallocation of both labour and capital, encouraging investment in skills, and reducing distortions that keep firms small and unproductive.
Incremental reforms in the right direction matter, but they will not be enough to break the vicious circle of informality and low productivity. Achieving sustained and inclusive growth will require deep, coordinated reforms that align tax, labour, education and social protection systems — and rebuild the trust needed to make them last.
FOR MORE INFORMATION
OECD (2025), Expanding Social Protection and Addressing Informality in Latin America, OECD Publishing, Paris, https://doi.org/10.1787/86c1fd38-en.
OECD Global Forum Productivity webpage