Informality and social security

Over the years much has been said about the lack of coverage, and the failure of social security, in countries of Latin America and the Caribbean. Serious economic research has analyzed the causes of informality. Up today there are two competing theories: the theory of segmented markets and the theory of non segmented markets. The first theory argues that there are two labor markets: one, the informal sector, composed of less skilled workers that are waiting an opportunity in formal sector; and the formal sector, that offers better remunerations for same skills. The second theory argues that markets are not segmented and workers will choose the work in the market in which they get the most benefits (including, net wage –productivity in the specific sector less contributions to social security in the case of formal sector-, social security benefits, and other characteristics of the job, such as flexibility). The empirical validation of the theories is very important given that each of them should lead to different public policies. For example, if markets are not segmented, any public policy that reduce the value attached to social security benefits, such as public provided health insurance or universal pensions, could lead to a des-formalization of labor markets; effect that will not happen if markets are segmented. There are some studies that have tried to prove how labor markets in some Latin America countries work. We will talk about some of them tomorrow.