Measuring the Informal Economy in Latin America and the Caribbean

IMF Working Papers, April 1, 2008

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This paper estimates the size of the informal economy for 32 mainly Latin American and Caribbean countries in the early 2000s.
Using a structural equation modeling approach, the paper finds that the following are key factors in determining the size of the informal economy:
- a stringent tax system and regulatory environment
- higher inflation
- dominance of the agriculture sector
The results also confirm that a higher degree of informality reduces:
- labor unionization
- the number of contributors to social security schemes
- enrollment rates in education

Tax and regulatory stringency, inflation control, and structural composition of the economy (notably the share of agriculture) are central determinants of informality, suggesting that policies addressing these areas can influence the size of the informal economy.
Higher informality is associated with weaker labor organization, lower social security participation, and reduced education enrollment, implying social protection and human capital challenges in high-informality contexts.

Disclaimer: "This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate."

IMF Working Paper — "Measuring the Informal Economy in Latin America and the Caribbean", Guillermo Javier Vuletin, April 1, 2008.