Latin America and the Caribbean face a labour-market contradiction that has persisted for decades: policies designed to protect workers can sometimes make formal employment more expensive, leaving millions outside the systems intended to support them.

The Inter-American Development Bank is calling for a broad redesign of labour regulation, social protection and workforce training across the region. Its report, Making Labor Markets Work: Improving Productivity and Workers’ Welfare in Latin America and the Caribbean, argues that governments do not have to choose between higher productivity and stronger worker welfare. Better policy design, it says, can deliver both.

Informal employment remains closely tied to low productivity, unstable incomes and persistent inequality, while ageing populations, technological disruption and slow economic growth are placing additional pressure on labour markets. The debate is therefore no longer simply about creating more jobs. It is about whether economies can create formal, productive work that raises wages without excluding the people most in need of protection.

The Cost of Formality Is Keeping Too Many Workers Outside

Formal employment should provide workers with greater stability, legal protection and access to benefits. Yet when healthcare, pensions and other protections are financed mainly through payroll contributions, every formal hire carries additional costs for employers and workers.

The IDB’s concern is that this structure can create a disincentive to formalisation. Businesses may avoid registering workers, remain small or rely on employment arrangements that sit outside conventional labour systems. Workers may accept informal jobs because formal opportunities are scarce or because the immediate deductions associated with registered employment outweigh benefits they may receive much later.

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