The informal sector and poverty in Latin America

Abstract

Informal economic activities are an important source of jobs in the region. The question as to how this phenomenon should be interpreted and the nature of its implications are, however, a subject of controversy. Some analysts regard the existence of the informal economy as a consequence of insufficient economic growth; they contend that it represents a survival strategy and, as such, an involuntary refuge for the poor. Others argue that it is the result of changes in the labour market brought about by government regulation and see it as offering attractive job alternatives that may yield a higher income than many wage-earning positions. The aim of this article is to set forth information that will help determine whether poverty really is associated entirely with the informal sector or whether the wage-labour sector also contributes to poverty in the region and, if so, to what extent. An effort is also made to ascertain what proportion of informal workers are in fact poor. For purposes of this analysis, members of the informal sector are defined here as own-account workers and unpaid family workers, workers in microenterprises (defined as production units that employ no more than five people);, and people who perform domestic work. One of the main conclusions presented in the article is that while most poor people belong to the informal sector of the economy, this does not mean that all informal workers are poor.