Labour Formalization and Inequality: The Distribute Impact of Labour Formalization in Latin America During the 2000s

Abstract

Inequality and informality are two characteristic features of the labour markets of Latin America. However, since 2000 the region has experienced a trend towards labour formalization and a reduction in wage inequality. This article analyses the inflows to formality in four Latin American countries — Argentina, Brazil, Ecuador and Peru — and assesses their distributive impacts. This aspect is relevant given that the increase in formal wage earners was particularly marked and it is not possible to determine a priori the sign and intensity of the impact of formalization on wage distribution. Therefore, the link between the two dimensions — inequality and formality — is an empirical question. The results of this analysis show that labour formalization had an important equalizing effect in Argentina, Brazil and Ecuador, but that this was not the case in Peru. Most of the existing literature focuses on the distributive impacts of the returns to education. This study complements the existing literature by showing how the improvement of working conditions contributes to explaining the decreasing trend of inequality observed in Latin America since 2000.