Why Labor Informality Persists: Self-Employment and Job Quality in Latin America and the Caribbean

Drawing on new data and modeling approaches, Rationalizing Informality: Social Protection, Job Quality, and Growth offers a fresh view of the nature and raison d’ ê tre of the informal sector. Rather than portraying it as the disadvantaged sector of dysfunctional labor markets, the book emphasizes the continuity of worker behavior and labor force structure across the development process. While acknowledging that a minority of workers is rationed out of formal sector jobs, the evidence shows that the majority engage in the same job calculus as their advanced-country counterparts. In particular, the self-employed who form the backbone of the informal sector weigh amenities such as independence and flexibility against the costs and benefits of formality when selecting sectors. The volume introduces the first measures of these nonwage dimensions of job quality and finds that workers value them greatly, while valuing formal sector benefits far less than their cost to firms and workers. Bringing these insights together, Rationalizing Informality offers a unified model that incorporates both the forces pushing workers into informality and those pulling them toward it, and it quantifies the impact of policies meant to alter those forces. Ultimately, the book argues that attaining social progress, better jobs, and growth requires looking beyond informality and embracing a comprehensive set of reforms to strengthen both worker’ s and entrepreneur’ s skills, raise the dynamism of the formal sector, and better align social protection systems with worker and firm needs.