Labor Informality in Uruguay Fell 17 Points in the Last Decade, According to an ECLAC Study

The informality rate in Uruguay dropped 17 points in the last decade, to 23.5% in 2014 from 40.7% in 2004, according to a new study by the Economic Commission for Latin America and the Caribbean (ECLAC), which indicates that this decline coincided with a period of economic growth and stability and with the implementation of diverse policies that could have influenced the formalization process, directly or indirectly.

The document The Process of Formalization in the Uruguayan Labor Market (only available in Spanish), published by ECLAC’s Office in Montevideo, is based on data from the Continuous Household Survey (ECH in Spanish), which, since 2001, has inquired into whether workers make contributions to social security. These contributions are compulsory for everyone, whether they are salaried employees or independent contractors.

In 2001, informality—understood as the percentage of workers not registered for social security—affected 36.0% of the total; it reached its highest level (40.7%) in 2004 and then began a sustained decline until settling at 23.5% in 2014. According to the study, this drop in informality was mainly due to the fall in the informality rate among private salaried workers and to the reduced importance of self-employment without business premises (workers who carry out their activities without having a physical workplace or investments in machinery and equipment).

During a period of a sustained increase in employment starting in 2004, this drop in the informality rate implied a rise in the number of formal workers: in urban areas they totaled 1.1 million in 2014, up from around 645,000 in 2003. Meanwhile, the number of informal workers declined to 340,000 in 2014 from 458,000 in 2004. In this way, job creation in the last decade was centered on the formal sector of the economy.

According to the study, the decline in informality was similar among men and women and occurred in all sectors (with the exception of the gas, electricity and water industries) as well as in small, medium and large companies, although the biggest fall was seen in businesses with 5 to 9 employees.

The document highlights that the reduction in informality occurred in a favorable context, with eleven uninterrupted years of economic growth and declines in the unemployment rate, which reached 6.9% in 2014 compared with 13.1% in 2004 and 15.3% in 2001. In conjunction, policies were implemented in that period that could have influenced the formalization process, directly or indirectly.

Among them, the document cites the resumption of tripartite collective bargaining negotiations in 2005, which had been abandoned in the 1990s; the strengthening of the minimum wage, which grew 180% between 2005 and 2012; the tax reform of 2007, which included incentives for productive investment to foment formal job creation; and the health reform of 2008, which extended health coverage to the families of workers who make contributions to social security.

Changes were introduced in unemployment insurance, the retirement scheme, maternity and paternity leaves, and the single tax, or monotributo, law (a simplified system of unified contributions that include social security contributions and taxes). Specific measures were also implemented for domestic workers, such as their incorporation into collective bargaining negotiations and the promulgation of a law that regulates working conditions.