Latin America and the Caribbean has spent nearly two decades with 55% of its workers in informality. Yet informality is not a homogeneous block. It brings together informal wage workers—typically young, with short job tenure and more exposed to distortions such as minimum wages and high hiring costs—and the self-employed, who tend to be older and remain in the sector for years. Each group follows a different logic.
Traditional approaches assume these workers are shut out of formal jobs. But the report "Rationalizing Informality: Social Protection, Job Quality, and Growth" shows that this is only part of the story. Informal wage workers do show signs of exclusion, but the bulk of the sector, self-employment, follows a different logic: that of a rational choice. We explain it in three data stories.
"Being the boss of your own arepa stand may be preferred to the monotony of washing dishes as a salaried worker in a formal restaurant."
The three data stories that follow show (1) that some informal workers value flexibility and autonomy; (2) the true cost of formal benefits; and (3) how growth can generate demand for more formal employment.
1. The value of being your own boss
For millions of workers in the region, the calculation that tips the scale toward informal self-employment includes something that never shows up on a pay stub: control over their own time and the freedom to be their own boss.
This can be seen in the data. A new analysis conducted for this report in seven countries in the region (Argentina, Brazil, Chile, Colombia, Ecuador, Mexico, and Peru) asked workers to choose between hypothetical jobs that varied in pay, hours, and degree of independence. Their answers reveal that self-employed workers value the flexibility, independence, and other advantages of self-employment so highly that they would be willing to give up as much as half their income to hold a job with these features.
2. A hidden tax
How much is the promise of formality really worth? A good job is more than an income: it is dignity, purpose, and the surest path out of poverty. The social protection that comes with formal employment should be part of that package. But in Latin America those benefits can cost far more than workers value them—partly due to a lack of information, and partly because they don't always serve them well.
That gap between cost and valuation works like a hidden tax on formality: it makes formal hiring more expensive and, in many workers' calculations, tips the scale toward informality.
Eliminating that tax on formality would help lower the cost of formal hiring and improve the business environment. But policies that only seek to formalize workers or simplify business registration have limited impact. Real progress requires investing in skills and helping productive firms grow.
3. The challenge is growth
The level of self-employment is not a Latin American anomaly: it is part of the development process. Its share of the labor force falls steadily as larger formal firms become more productive and offer better jobs. The biggest obstacle to growth and the creation of good jobs is not the existence of informal microenterprises: it is the limited dynamism of those larger formal firms.
What reduces informality in a lasting way is the growth of those entrepreneurs—in sectors such as agribusiness, tourism, manufacturing, and energy—and the conditions that make it possible: better skills in the workforce, a regulatory environment that lets the best firms reach their potential, and social protection systems that workers genuinely value.
When that happens, the result is measured in people: more and better jobs, more stable incomes, and real opportunities in the communities where people live.