Posting in Cities
MEXICO CITY -- A World Bank report calls out Mexico on the size of its informal market. Can labor reform draw businesses into the formal economy?
MEXICO CITY -- It seems the minute the first raindrop falls, someone appears to sell you an umbrella.
Thirsty on a hot day at a traffic light? Chances are someone's hawking bottled water or ice pops.
Juice stands open on thousands of corners in the capital at morning rush hour; makeshift taco stands fire up portable griddles at lunch time to fry beef, onions and spicy peppers; the omnipresent sellers of pens, paper, pocketbooks, panties, nail polish, balloons, toys, trinkets – everything – display their wares on tables roofed with red tarps in a seemingly limitless informal economy.
A cash economy that functions under the table but hardly out of sight, Mexico's informal market is massive: Between 50 percent and 62 percent of all employed workers labor in Mexico’s informal economy, according to the World Bank's recent report World Development Report 2013.
"This rate is considered high given the country's development level and has not shown consistent signs of decline in nearly two decades," according to the report, which attributes the range of estimates to differing definitions of informal employment.
What determines "informality"? The World Bank notes that informal businesses reside in a "gray area" defined alternately by not registering or paying taxes; lacking social security coverage; or working without an employment contract. Economists continue to debate what it means to work in an informal market.
While expanded social programs increasingly cover even those without a job in the formal market, in Mexico more than 20 million workers – out of an economically active population of 50.9 million – toil in jobs that are considered more precarious and lower paid than formal work, according to Alejandro Villagomez, an economist at Mexico City’s CIDE think tank.
"Informal" businesses in Mexico run the gamut, from providers of services such as plumbing or repairs, housekeeping and child care, and goods such as clothing, books, toys or artisan wares. In other words, "informal" isn't the "black" market, although it can also include sales of pirated movies, music or prescription drugs.
Mexico's vast informal market is, perhaps, embodied most visibly in the capital's street food culture. After the juice stands and taco shops close in the evening, the vendors of hot candied sweet potatoes push their stainless steel carts through the streets, pausing to blow steam whistles loud enough to rattle windows. And the ubiquitous peddlers of tamales come out on tricycles outfitted with a recorded message that Mexico City residents hear daily, almost without fail: Oaxacan tamales, nice-and-hot tamales!
Informality is even built into the system of government services: In Mexico City, for every government-paid garbage truck driver, a half dozen other men work as volunteers on the truck, sorting trash in order to earn a share of tips and what is sold for recycling.
The World Bank report cites restrictive labor legislation and weak enforcement as two factors responsible for the large share of employment claimed by Mexico's informal market – ills the administration of President Felipe Calderon wants to remedy with labor law reform.
The reforma laboral – which has generated heated debate since it passed the country's lower legislative house last month – aims to change a labor law dating to 1973. The reform, now being discussed in the senate, proposes an hourly wage and loosens regulations around outsourcing, among other things.
Business leaders hoping to increase flexibility have been pushing reform since at least 1988. The country’s three main political parties all agree that change is needed, but they have yet to strike a balance (to which they all agree) among policies that improve productivity while ensuring worker protections.
"A labor reform isn't sufficient to eliminate all the informality," said Villagomez, the economist. "There is a series of costs that affect the formal market, a consequence of the institutional structure. It's not just what it costs to register (a business) but an entire structure that promotes this kind of informal activity."
Mexico ranks 53 in competitiveness out of 144 nations, according to the World Economic Forum's Competitiveness Index, behind Brazil, Panama and Chile. Reforming the social security system and reducing the costs of creating formal businesses could improve competitiveness and draw more businesses into the formal economy, Villagomez said.
Jose Luis sells homemade potato chips from a cart, a job he has done for 27 years. The vendor, who requested his last name not be used, parks outside a school in Mexico City's upscale Del Valle neighborhood.
"I pay taxes to the government but I don't have the right to social security or anything like that," he said. "While I'm healthy I'm going to keep working and when I can't work anymore, I guess I'll beg. How could I ever retire?"
Photo: Mario Arias/Flickr
Oct 9, 2012
Informal economy is defined as working without an employment contract? That describes every employment-at-will state and company in the U.S.A. This is just another reason I worked as a US street vendor for a few years. The IRS will bill you for self-employment Social Security tax if you file a return so you do get credited for that work time. Since our economy rapidly is degrading into a two-tier Third World model, secure employment is disappearing, and pay declining, Americans may as well use the street model/home-based business model to be loyal to our bottom lines. In America, free enterprise is regulated most at the bottom of the pyramid-those at the top purchase exemptions or the regulators themselves. We need to resist excessive regulation of small startups or zoning exclusions of home-based enterprise.
As governments continue to grow, consume (or redistribute) and regulate greater percentages of nation's income, so will the desire to evade those systems, either out of greed or just plain survival. Personally, I believe that there is an absolute finite percentage that governments can extract, and most of the world's governments have long since passed that limit.
G'morning. Yes it is over due, but it must be done carefully with an eye to the future, and possible unfavorable side cuts, or pitfalls by certain types of employers. Also it must be made clear to all the benifits of their SS system. In our operations in mining and explorations, we pay over scale, 400 pesos daily, plus full room and board, and of course, SS health benifits. We do not pay overtime, but they only work a max no of hours over 8, 'if' the situation demands it, and it rarely does for more than a few days a month.. In the end they earn more under our system which is a constant, predictable alary. Incidently, it is in our contractural agreement as specified by present law. Don Jose de La Mancha
He says he pays taxes but is not eligible for Social Security. I don't know how it works there, but a person in the U.S. working informally could, if they chose to, pay their own Social Security when they filed their income tax. A W2 or 1099 is not required to report income. Most people who have informal income do not want to report it or pay taxes on it, but if it means having Social Security and Medicare benefits some day, and they're not investing for retirement otherwise, they would be wise to report it for the sake of their old age. Can a person in Mexico who has only informal income report and pay taxes on that income, and pay into Social Security?
Thanks for sharing AlanLaRue. There is an important distinction between the social security systems of the U.S. and Mexico, namely that in Mexico "social security" refers specifically to health care rather than a state-sponsored pension system. Thanks for pointing this out!