From 2015-2019, informality across LatAm, which was previously declining, rose from 49.9% to 51%.
The informal economy has been one of the defining characteristics of Latin America’s economy. Approximately half the region’s labour force is employed outside formal arrangements. These workers include self-employed vendors, domestic workers, and employees in small firms. Although the informal labour sector is shrinking in size in many LatAm countries, progress remains uneven and fragile.
For decades now, these countries have been making every effort to formalise the economy. Between 2003 and 2014, this informality declined visibly due to the commodity boom, improved access to education, and favourable policies that promote the formalisation of salaried workers, own-account workers, and informal production units.
However, since the mid-2010s, this trend appears to have faded away. The commodity prices boom and GDP growth both took a downturn, while poverty levels appeared as an upward-sloping graph. From 2015-2019, informality across LatAm, which was previously declining, rose from 49.9% to 51%. Economists analysed that this increase is due to the short-lived nature of the formalisation efforts the governments in these countries had introduced, coupled with a stagnating regional economy.
The Covid-19 pandemic also triggered an acute labour market crisis in Latin American countries, with employment rates and labour market participation plummeting. The highly informal nature of employment has been identified as the reason for the labour market suffering more in LatAm, as opposed to other regions in the world.
As a result of the dense informal labour market, the region’s cash economy has also persisted for so long. For the informal sector, the scope of access to the banking sector, capital, digital economy and government services is limited. Therefore, this informality also exempts them from the governments’ tax base.
While LatAm’s cash use has declined over the years, from 57% in 2022 to 37% in 2025, the digitisation of the economy alone does not signify growth. The economies in this region are digitising, but informality persists. Furthermore, in nations like Guatemala and the Dominican Republic, where the informal economy contributes to almost half of GDP, cash accounts for over half of consumer spending. With over 8.5 million, or 63% of all small enterprises in the market, Mexico is the biggest centre for unauthorised small businesses. These make up a fraction of Mexico’s more than 12 million independent workers, 76% of whom operate outside of an established workplace, demonstrating their informal and migratory nature.
The limited uptake of POS devices and the general acceptance of digital payments by small businesses can be attributed to this sticky informal category. Accepting cards requires a bank account, appropriate business registration, and tax authorities’ supervision. It also implies that, in addition to costs associated with the POS terminal itself, every transaction will cost at least 3%. Since formalisation is viewed as having little benefit, small enterprises avoid these expenses as well as the higher tax burden. The expenses are not greater than the perceived benefits.
As the world moves towards higher rates of digital adoption, there is a downside to pushing too much digitisation too soon. In Uruguay, it was reported that when digital wage payments were mandated, some firms chose to exit the formal sector rather than comply. This shows that while digital adoption is a step in the right direction, poorly designed interventions can have the opposite effect than the one originally intended. Trust in the governments to ensure data security is also important for widespread adoption.
SMEs play an important role in the regional economy, accounting for 99.5% of businesses, as almost 9 out of 10 companies fall into the SME category. In Latin America and the Caribbean (LAC), SMEs provide 60% of formal productive employment. Therefore, policymakers in the LAC are prioritising SME development.
Economic advisors have recommended that, although LAC countries have monitoring and evaluation processes for their financial support programs, they lack monitoring of broader SME policy frameworks and initiatives. Therefore, it is key to introduce measurable performance indicators into policy documents, making government activities transparent and accountable.
To formalise the SME sector, the governments can also push for more linkage between SMEs and large enterprises, to facilitate a supply chain where these large firms could be potential customers, innovation partners and advisors to SMEs.
The informal sector across LatAm, despite accounting for a majority of the economy, has been denied the recognition it deserves. To ensure the sector’s contribution is not overlooked, these governments need to work with cooperatives to increase collaborative efforts and increase the workers’ bargaining power. These skilled informal workers must also have a strong say in policy matters concerning the informal sector and must be given more opportunities to upskill.
The Organisation for Economic Co-operation and Development (OECD) has warned that 2026 places the LatAm economy in a vulnerable position, as global tensions and risks continue to mount. Financial inflows will also be inconsistent, given the volatile nature of the international economy. Therefore, the best course of action for LatAm to remain sustainable and resilient during these uncertain times is to strengthen its informal sector by rightly acknowledging its contributions to the regional economy and facilitating its growth through strong policies and regulations.
