Informality is a universal phenomenon, which affects some countries more than others. In a general sense, informality exists as a reflection of the fact that the cost of legality It is very high. The prevailing rules of the game in the case of Dominican Republic They encourage citizens to operate outside the legal sphere.
The Dominican is very entrepreneurial and resilient. Consequently, it should not be surprising that, given the inability of the formal institutions To generate a favorable environment for economic activities—with few obstacles and low costs—the labor informality reach 54.6% according to data from the National Continuous Labor Force Survey (Encft). More broadly, our estimates put informality in the economy at around 60%.
According to Encft data, in the last year the number of formal employees increased by 103,203 people. We are referring to employees, not those employed in the economy.
The point to highlight is that of these formal employees, 64,909 were new employees of the State. The remaining 38,294 found work in the private sector. The above indicates that 62.8% of new formal employees in the last year were employed by a state entity. This figure contributed to the fact that the informality or unemployment figures were not higher.
Difficulties of the formal economy
The formal economy presents many difficulties. It is designed so that the majority of employed people have to resort to informality as a means of salvation to be able to earn income.
What does the economic science about informality and its incentives? That taxes and costly regulations drive companies and employees underground. The costs of operating a business, including labor costs, and paying taxes are not trivial. Consequently, they influence people’s decisions about whether to establish a formal operation or informality.
Economic science teaches us that taxes affect employees. Companies pay taxes, but their lower income fall on all the economic agents that participate in their production processes.
Employees generally suffer the most when companies must reduce hiring more staff or to invest.
Investments in the form of machinery, tools, and even intangible assets that help employees be more productive, become scarcer and, as a consequence, employment opportunities are reduced. higher salaries and hiring a greater number of employees.
The non-wage labor costs They also affect the possibilities of companies being able to offer higher salaries for a greater number of employees in formal conditions.
This is a general principle and has been analyzed in different countries: increases in non-wage labor costsand other costs, such as taxes on employees, tend to reduce formal hiring. The study Reducing the Costs and Enhancing the Benefits of Formalitypublished by World Bankoffers evidence on the economic literature in this regard.
Without general productivity gains and after a year of poor economic performance, in February there will be a salary increase by law that will have an effect, at the margin, on formal hiring decisions.
In addition, without a reform that simplifies the tax systemin May the third stage of the electronic invoiceimpacting smaller companies. With a tax system onerous and complex, a relevant impact of this measure on informality should not be expected.
Finally, if a labor reform without reducing the non-wage labor costsin particular the layoffincentives will remain for a significant number of workers and entrepreneurs to continue contracting informally.
From works such as those of Deirdre McCloeskyor the 2025 Nobel Prize in Economics, Joel Mokyrit is understood how the culture that shapes institutions and society allows science and technology to become part of the creation of value in an economy.
This week the authorities announced their strategic projects for 2026. It surprised more than one that the strategy of formal employment is based on technical training.
The teachings of Mokyr himself should have made us reflect on the need to change the conditions of the business climate if we want this training, paid for with citizens’ money, to be used, not only in formality, but in the economy itself.
can be entered inputs in a process, but if the conditions are not favorable, no valuable results will be obtained.
In short, the citizens of the Dominican Republic deserve greater freedom to perform productive activities that allow them to generate jobs and obtain a salary, within formality. Achieving this, thinking in that strategic way, would imply fewer regulationsstarting with tax and labor issues and extending the transformations to sectoral ones.
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A collaboration of the Regional Center for Sustainable Economic Strategies (Crees).
