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Symposium 2010

Solution for Escaping the Informal-Employment Trap in Developing Countries

The Challenge

Informality of employment is a way of life throughout the developing world. In poor Sub-Saharan African countries, the informal sector employs the vast majority of the nonagricultural labour force ...

Informality of employment is a way of life throughout the developing world. In poor Sub-Saharan African countries, the informal sector employs the vast majority of the nonagricultural labour force. Informal jobs continue to account for a high share of employment in the middle-income Latin American countries, The global economic crisis is likely to cause a further surge of informal employment because of job losses in the formal sector.

Replace tax incentives for firms to invest in physical capital with incentives for firms to invest in human capital via formal employment.

A number of developing countries, particularly in Latin America, are characterized by high payroll taxes. At the same time, a series of tax exemptions have been adopted aimed at reducing the cost of capital. This creates strong incentives to invest in capital rather than labor, severely limiting the prospects for the generation of formal employment.

A viable option is simply to reverse the structure of incentives—to replace the current tax deductions on investment by deductions on the payroll tax paid by businesses. Columbia is currently implementing a fiscally neutral scheme along these lines. The scheme will entail a substantial reduction (about 25 percent) in the labor costs of all private firms that generate new formal employment.

    Related Solutions

    Solution
    Symposium 2010

    Invest in training and skills development tailored to the needs of the formal sector—which requires market-driven and market- recognized certification of skills.

    Invest in training and skills development tailored to the needs of the formal sector—which requires market-driven and market- recognized certification of skills.

    Invest in training and skills development tailored to the needs of the formal sector—which requires market-driven and market- recognized certification of skills.

    Business
    Solution
    Symposium 2010

    Use new information and telecommunications technologies to formalize employment and support enterprise.

    Use new information and telecommunications technologies to formalize employment and support enterprise.

    Use new information and telecommunications technologies to formalize employment and support enterprise.

    Business, Civil Society
    Solution
    Symposium 2010

    Simplify labor laws and tax legislation without sacrificing basic social standards.

    Simplify labor laws and tax legislation without sacrificing basic social standards.

    Simplify labor laws and tax legislation without sacrificing basic social standards.

    Polity, Business, Civil Society
    Solution
    Symposium 2010

    Where there is wage discrimination, give informal workers a stronger voice and remove the stigma attached to informal employment.

    Where there is wage discrimination, give informal workers a stronger voice and remove the stigma attached to informal employment.

    Where there is wage discrimination, give informal workers a stronger voice and remove the stigma attached to informal employment.

    Polity, Business, Civil Society