Informality, Low Productivity, and AI: IDB Warns of the Triple Labor Challenge in Latin America

Labor productivity in Latin America and the Caribbean is growing at a rate below its potential while informality prevails. According to a study by the Inter-American Development Bank (IDB) published this Monday, a key aspect to reversing this trend is regulatory reforms and decoupling benefits from employment status.

It is important to note that, according to the IDB, productivity in the region corresponds to only 26% of that of the United States, and real income in this area increased by just 18% between 1995 and 2024, compared to 31% in OECD countries.

David Kaplan, the lead researcher, indicated that "a diagnosis based on the analysis of three decades of indicators in the region points to the urgency of action." He also added that although improvements have been observed, they have been very slow, with "practically no progress" in the last decade.

The report details that only 46% of workers in Latin America and the Caribbean have formal jobs with social security coverage and reveals that informality has fallen by just eight points in twenty years.

It is noteworthy that if this trend continues, experts warn that it would take the region more than 80 years to reach the level of Uruguay, with a labor informality rate around 21%.

On the other hand, the study records that more than 40% of Latin American and Caribbean workers lack the basic arithmetic and literacy skills required for their positions and warns about the increase in the "potential exposure of jobs to AI" from 5% to 35% in the next ten years.

This increase in the penetration of artificial intelligence, which already concerns governments and entities, will force workers to adapt to this new reality, emphasize IDB experts.

The report proposes several actions to address the slow growth of productivity and the rise of inequality, without having to prioritize productivity over the well-being of workers, seeking a kind of middle ground.

The IDB indicates that this could be achieved through reforms aimed at improving labor regulation and its enforcement, social protection, collective bargaining, job training, and active policies that can simultaneously boost growth, improve wages, and reduce informality.

Postponing this agenda for change will become increasingly costly in a region characterized by an aging population, rapid technological transformation, and still insufficient regional economic growth, warns the study.

Among the proposals of the IDB report is the suggestion to decouple part of social protection from individuals' labor conditions.

Kaplan detailed that "in particular, the study recommends financing healthcare and protection against poverty in old age with funding from general taxes instead of payroll contributions that act as a tax on formal employment."

The IDB analyst stated that to implement this change without harming public accounts, it should be understood that this "is not just a fiscal expense but an investment in productivity and labor formality" and its implementation "could be very gradual" or partial.

"It is better to advance gradually and partially towards that goal, than to not advance and continue living with the consequences of a labor market with high informality and very low productivity," Kaplan pointed out.

The analysis also insists on the importance of training and recommends modernizing labor regulation to expand protection for workers transitioning from one job to another, as well as adapting these laws to an increasingly diverse reality, with different forms of work and less stable trajectories.