Latin American Labor Productivity Lags Potential Amidst Persisting Informality

Labor productivity in Latin America and the Caribbean is growing at a pace well below its potential, hampered by persistent informality, a new study from the Inter-American Development Bank (BID) reveals. The region's productivity stands at just 26% of that of the United States, with real income increasing by a mere 18% between 1995 and 2024, significantly trailing the 31% growth seen in OECD countries.

David Kaplan, lead specialist for the research, described the findings as a "diagnosis based on the analysis of three decades of indicators in the region" that "points to the urgency of acting." While improvements have been noted, they have been exceedingly slow, with "practically no progress" in the last decade. The report highlights that only 46% of workers in Latin America and the Caribbean hold formal jobs with social security coverage. Informality has decreased by only eight percentage points over twenty years, suggesting that at the current rate, it would take the region over eighty years to reach Uruguay's informality rate of around 21%.

The study also points to significant challenges, including non-wage costs for formal hiring averaging 51% of the salary. Furthermore, over 40% of workers lack basic arithmetic and literacy skills for their roles. Experts warn that the "potential exposure of jobs to AI" could rise from 5% to 35% in the next decade, necessitating adaptation from the workforce.

To address these issues, the BID proposes a series of actions aimed at simultaneously boosting growth, improving wages, and reducing informality. These include reforms to labor regulation and enforcement, social protection, job training, and active labor market policies. The bank cautions that delaying these changes will become increasingly costly for a region grappling with an aging population, rapid technological transformation, and insufficient economic growth.

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This is a diagnosis based on the analysis of three decades of indicators in the region and points to the urgency of acting.