Costs and bureaucracy, two barriers that keep labor informality stagnant

When talking about labor informality in Colombia, there are generally two points of view that prevail among unions, the Government, and economic study centers. On the one hand, this indicator has remained at the same levels for several years, very close to 55%, but on the other hand, it is reported that this figure translates into five out of every 10 people who have a job in the country do not receive all the legal benefits.

Although unemployment has been at better than expected levels and has not has skyrocketed, as was warned at some point, among analysts there is special attention to the records of informal workers, since one effect of the slowdown is that they increase, because companies are unable to pay the high costs and decide to reduce their personnel plants.

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A recent report from the Organization for Economic Cooperation and Development (OECD) points out that currently in the local context there are three factors that do not allow informality to be reduced, the causes of which begin in the rules of the game and extend to the lack of preparation with a view to generating a trained workforce in accordance with the demands of the market.
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Stagnation in the fall

For this organization, 2012 was perhaps the best year that Colombia had in the fight against this scourge, although they recognize that their accounts show a considerable contraction during the last decade and explain that, if you look at go back and investigate the actions implemented, perhaps there will be success stories to replicate.

However, they also emphasized that informality continues to be higher than in many other large countries in the region and even than in Latin America and OECD countries in general, although they recognize that it decreased from around 70% at the beginning of the 2010s to 56% in the second quarter of 2024, as a result of better education, the reduction of non-wage labor costs and a series of measures to facilitate the formalization of workers and companies.

“In particular, the 2012 tax reform, which involved a reduction in taxeson payroll and employer health contributions, resulted in an estimated 2 to 4 percentage point decrease in the informality rate. Although informality decreased in both urban and rural areas, the reduction was much slower in rural areas, where it remains very high, reaching 84% of rural employment by the end of 2023,” the report says.

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They also highlight that the decline in informality accelerated its pace between 2019 and 2023, falling 4 percentage points, and 10 percentage points among women, driven mainly by the strong post-pandemic recovery and unemployment subsidies, introduced during the pandemic and extended until 2026. by the current government, which offer aid of 30% of the minimum wage for young people, 20% for women and 10% for men.

Expensive formalization

Now, making it clear that there is progress and the task has been done well in In recent times, the OECD also puts on the table that informality has shown little progress in the last two years, remaining around 55% or 56%, mainly due to three factors that contribute to stagnation.

Informality.

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First of all, Álvaro Pereira, chief economist of the organization for Latin America, mentions that the costs associated with formal hiring of workers are high, including social and tax charges that discourage many companies, especially small ones, from formalizing their employees.

“We have to work on the labor side, we have to work on the social side to lower social charges, we have to reduce the costs of formalizing workers compared to informal workers, we have to combat the bureaucracy of the companies that they want to formalize, reduce the costs of formalizing companies and you also have to work on the tax part,” said Pereira.

Another factor that impacts informality according to the OECD review is that the formalization process, both for companies and workers, is plagued by bureaucratic procedures and this dissuades many companies from moving to the formal sector, since they consider that the benefits They do not compensate for the administrative and financial effort.

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“Reducing informality requires a comprehensive strategy through better enforcement of tax and labor laws, and a reduction in non-wage labor costs, particularly for low-income workers. The effectiveness of current employment subsidies in Colombia in formalizing workers underscores the need to reduce non-wage labor costs, particularly for vulnerable and low-income workers,” they explained.

For these experts, it is not about Colombians earning less, but rather that both companies and the Government look for alternatives other than money as remuneration, so that quality of life is not lost, when seeking competitiveness and attractiveness. so that new jobs are created.
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Labor reform

Taking advantage of the presentation of the report, OECD experts took advantage to warn that some aspects of the labor reform under discussion could increase hiring costs and, in the process, affect formalization. In this sense, they maintain that although it is good that they want to give greater protection to formal workers, they point out that increasing costs would have a negative effect.

The simplified tax will cause the burden to vary according to the average profitability of each sector.

Private file.

Paula Garda, senior economist at the organization, believes that the reform has good things, such as greater protection for workers who are already formal today, but at the same time that can have an impact and we must be very careful in terms of informal employment and policies must be put in place so that this reform, if it goes ahead, mitigates the impact on informality.”

These experts closed by saying that in Colombia the minimum wage is very close to the average wage, which explained in another way means that the vast majority of workers in the country earn little, and this situation could translate into barriers to formal hiring, especially in sectors less productivelimiting the ability of companies to modernize their workforce.