Innovation and the future of work

Globalization brings both good and bad job news. The bad news for high-wage developed countries is that jobs will be outsourced into lower-wage locations as soon as the associated economic activity becomes mechanized and predictable. The good news is that globalization creates opportunities that can be realized by people bold enough to transform new ideas and knowledge into innovations. In that way, entrepreneurs will play a vital role in creating the jobs of the future by transforming ideas and knowledge into new products and services, which will require skilled workers and will provide a competitive advantage for advanced economies.


Do post-prison job opportunities reduce recidivism?

Increasing the availability of high-quality job opportunities can reduce recidivism among released prisoners

Elevator pitch

The majority of individuals released from prison face limited employment opportunities and do not successfully reintegrate into society. The inability to find stable work is often cited as a key determinant of failed re-entry (or “recidivism”). However, empirical evidence that demonstrates a causal impact of job opportunities on recidivism is sparse. In fact, several randomized evaluations of employment-focused programs find increases in employment but little impact on recidivism. Recent evidence points to wages and job quality as important determinants of recidivism among former prisoners.

Employment and labor force participation:
                        Released prisoners vs low-skill average

Key findings


Improvements in aggregate labor market conditions are associated with decreases in aggregate crime rates.

Recent evidence suggests that increases in wages for low-skilled workers and opportunities in sectors that pay higher wages to low-skilled workers can reduce recidivism among individuals recently released from prison.

Providing employers with information on offender rehabilitation and relief from potential liability can expand employment opportunities for ex-offenders.


Released prisoners face substantial obstacles such as substance abuse, mental health disorders, and social and family problems that dwarf any potential impact of employment on recidivism.

Several randomized evaluations of employment-focused re-entry programs report increases in post-prison employment rates that are not associated with large changes in recidivism.

Employment opportunities for released prisoners are scarce due to low levels of education and limited work experience as well as an aversion among employers to hire them.

Author’s main message

Individuals who face limited job opportunities are more likely to commit a crime. A criminal record diminishes the quantity and quality of labor market opportunities, which perpetuates a cycle of unemployment, crime, and incarceration. Recent studies find that improvements in wages for the low-skilled and growth in industries characterized by higher wages for low-skilled workers can help reduce recidivism. Future re-entry evaluations should therefore focus on policies and programs that increase post-prison wages and stable work opportunities, including initiatives that encourage more employers to consider rehabilitated ex-prisoners as applicants.


Employment is often mentioned as an important turning point in the lives of former criminal offenders. The fact that over two-thirds of ex-prisoners in the US are rearrested within three years of release is commonly linked with an inability to find stable work.

Surveys of individuals about their post-prison labor market experiences paint a bleak picture, especially in the US. Among a sample of male prisoners released in Ohio, Illinois, and Texas in the early 2000s, only 45% were employed eight months after their release. Moreover, the typical ex-prisoner’s earnings from employment and other sources was well below the 2005 federal poverty level of $795 per month for a single-person household (Figure 1). The labor market challenges of other adults with low levels of educationpale in comparison with those of released prisoners.

Employment experiences of released
                        prisoners compared to low-skilled adults

As many communities struggle with the increasing number of prisoners transitioning back into society, there is a renewed interest in employment programs and labor market policies that can reduce high rates of recidivism. But what causal evidence is there that poor labor market prospects are an important cause of recidivism among released prisoners? Which programs and policies have been effective in improving labor market opportunities and reducing recidivism?

Discussion of pros and cons

Framework for analysis

The relationship between labor markets and crime receives a great deal of attention from researchers in the fields of economics, sociology, criminology, and public policy. The standard framework used by economists to think about this relationship is a model developed by Gary Becker [1]. The Becker model predicts that individuals for whom the costs and benefits of crime are close in expected value (they are “on the margin”) will choose to commit less crime as their legal (or “legitimate”) labor market opportunities improve. In other words, illegal activity becomes less attractive as the expected returns from legal activity grow.

This framework can be used to understand recidivism patterns and predict the responsiveness of released prisoners to changes in employment opportunities. For example, an individual who previously chose crime over a legal alternative can be expected to make a similar choice in the future if the expected costs and benefits from illegal activities remain relatively stable. As labor market opportunities improve, some are expected to switch to the legal alternative. However, many former criminals will not respond to labor market fluctuations since their perceived gains from crime are much greater than the expected costs (e.g. they are not close to the “margin” where a change in behaviour can be expected).

Individuals who go to prison may, for several reasons, be even less responsive to employment opportunities compared to criminals who avoid incarceration. First, prison can act as a “school for crime” that increases the returns from illegal activity through increases in criminal skills and criminal connections while incarcerated. Second, incarceration can deteriorate the skills and experience relevant to the legitimate labor market, limiting the returns from legal activity. Both of these mechanisms increase the likelihood of criminal offending and decrease the responsiveness to changes in employment opportunities among the formerly incarcerated when compared with individuals without a prior incarceration experience. While these impacts could be fully anticipated by a forward-looking prospective criminal, there is increasing evidence that the incidence or type of incarceration changes the future behavior of affected offenders.

In contrast, other factors can decrease the likelihood of recidivism and increase ex-convict responsiveness to job opportunities. For example, closely monitoring the behavior of individuals released from prison likely boosts the detection of criminal behavior, thereby increasing the expected costs of recidivism. On the other hand, a rise in job-relevant skills through participation in education and training programs during incarceration can increase the returns from legal work and thus the responsiveness to employment opportunities.

All of these important, and often opposing, factors that influence the costs and benefits of crime for the formerly incarcerated create ambiguity when determining how effective employment opportunities are at reducing recidivism. The complexity of criminal behavior highlights the need for high-quality empirical evidence across multiple settings.

The evidence base

While it is tempting to evaluate the relationship between employment opportunities and recidivism through a simple comparison of recidivism rates among released prisoners who work versus those who do not, many confounding factors invalidate such a comparison. Lower rates of recidivism among released prisoners who find a job could be due to the effect of employment alone on recidivism, but could also be caused by unobserved differences (e.g. motivation) between the employed and unemployed. Recent empirical research directly addresses such issues of causality in two separate ways: First, several studies focus on the impact of fluctuations in the availability of relevant employment opportunities that are, arguably, unrelated to unobserved attributes of released offenders; second, researchers have isolated the causal effects of transitional employment opportunities by using randomized control trials (RCTs) to evaluate re-entry programs.

Labor markets and recidivism

While a rich literature documents a negative relationship between labor market conditions and criminal activity in general (see [2] for a recent review), research to date has found only very small effects of local unemployment rates on recidivism among released prisoners [3]. This result is surprising since improvements in wages and employment opportunities for a prospective criminal will increase the opportunity cost of crime and, therefore, should be associated with a reduction in criminal activity. However, several possible explanations for the observed small effects of local unemployment rates on recidivism exist. First, aggregate labor market fluctuations may have little to do with employment opportunities that are relevant to this specific population group, for reasons that will be discussed below. Second, improvements in labor markets can increase the payoffs of crime as communities become wealthier—in fact, a recent study finds a rise in recidivism following the introduction of high-quality construction jobs in Texas that prohibited applicants with criminal records [4].

Aggregate fluctuations in employment conditions capture the overall variation across many different types of jobs. This variation likely does not affect ex-prisoners since they are ineligible for many job openings due to their low education levels and lack of work experience. Making matters worse for released offenders, there are laws in many countries that restrict the employment of individuals with criminal records in certain types of jobs, such as those at schools and hospitals that require work with vulnerable populations. Depending on the type of incarceration, the experience in jail or prison can further limit opportunities by eroding skills and connections valued in the legal labor market and/or by imparting skills and connections valued in illegal markets.

Two recent studies suggest that incarceration has a causal effect on long-term labor market outcomes [5][6]. However, the impact of incarceration differs substantially across the two systems analyzed. Evidence from Texas suggests a large negative effect of incarceration on future employment and earnings [5], but a similar research design using data from Norway finds improvements in labor market outcomes among formerly incarcerated individuals compared to similar individuals who were not incarcerated [6]. These differences could be driven by the stark contrast in incarceration rates in the US compared to Norway (Figure 2). Moreover, the typical prison experience in Norway is very different from that in Texas. It focuses on rehabilitation and devotes substantial resources to health, education, and employment programs. Incarceration in such a system can therefore increase the quality of employment opportunities through the transmission of skills valued by prospective employers. In contrast, incarceration without access to extensive health, education, and/or employment services likely decreases the quality of legitimate work opportunities for prisoners compared with criminal offenders who do not get incarcerated.

Incarceration rates (per 100,000
                        residents) in North America, Europe, and Oceania, 2014

Even in sectors that do not impose legal restrictions on the employment of former offenders, employers are either not willing or very hesitant to consider applicants with a criminal history in countries where background information is readily available to hiring managers (Figure 3). This employer aversion to individuals with criminal histories is generally perceived as a major obstacle for ex-prisoners across the US. While distaste for employees with past involvement in crime is documented in surveys of employers, it is also evident in the recent response to the implementation of “Ban-the-Box” policies in the US, which prohibit questions about criminal backgrounds on employment applications. Researchers find that employers adjust to the removal of this information by discriminating against applicants with demographic characteristics (such as race) associated with higher rates of crime to avoid applicants with criminal records [7].

Employer willingness to consider different
                        types of applicants (in %)

Taking into account these stark differences in employment opportunities for ex-prisoners compared with those for people without any incarceration, three recent studies develop more convincing labor market measures and clearly demonstrate a decrease in recidivism associated with an improvement in relevant employment opportunities for released prisoners in California [8], 43 US states (including California) [9], and France [10] respectively.

The first of these studies tracks outcomes for 1.7 million prisoners released in California between 1993 and 2008 and finds that an increase in the number of job opportunities for low-skilled applicants in construction and manufacturing is associated with significant reductions in recidivism [8]. Interestingly, the availability of food service and retail jobs at the time of release does not have a similar positive impact despite such jobs typically being accessible to individuals with criminal records. While the types of opportunities differ across a number of characteristics, one of the most striking differences is in the average wage for a low-skilled, newly hired worker: The expected monthly salary for an applicant without any college education who gains a construction job in California is above $2,000, whereas the expected salary in food services is around $1,000 [8]. Hence, the fact that lower-wage work opportunities do not have a measureable impact on recidivism suggests that these jobs do not offer a strong enough deterrent to crime among released prisoners.

The second study estimates a drop in recidivism associated with an increase in average low-skill wages at the time of release for more than four million offenders who exited prison between 2000 and 2013 [9]. The magnitude of the estimated effects implies a 5–10% increase in recidivism risk associated with the decline in low-skill wages following the 2007 global financial crisis. In this study, labor market opportunities are captured by the average expected wage for a low-skilled worker [9], while in the previous study on California opportunities are captured by the number of new low-skill hires in a particular industry and county during the quarter of re-entry [8]. Both studies find the largest effects from changes in labor demand within the construction and manufacturing industries.

Finally, there is also evidence that French prisoners released during 2009 and 2010 are less likely to reoffend if re-entering society when relevant job opportunities are more abundant [10]. Using unique data capturing daily online postings on job openings and closings, the findings also suggest that released offenders respond positively to news of job creation, regardless of the actual change in employment opportunity.

As expected from the standard Becker framework previously discussed, these studies suggest that the type of job and the expected earnings from legal work affect the success of re-entry. This is not a new insight; researchers and practitioners have long asserted the importance of job quality in reducing crime and have documented strong correlations supporting this hypothesis. The primary contribution of this new evidence is its use of large administrative datasets, quasi-experimental research methods, and measurements of labor market conditions that are relevant to released offenders to provide evidence of the causal relationship between relevant employment opportunities and recidivism.

Employment-focused re-entry programs

Given the new evidence that released offenders do respond to changes in employment opportunities, what can be determined about the causal impact of employment on recidivism from the evaluation of re-entry programs that either provide jobs or help offenders find jobs? Using the “gold standard” of program evaluation, RCTs, researchers find that employment-focused re-entry programs increase employment but, in general, do not appear to have a large or consistent impact on recidivism (see Table 1 in [11] for a summary of notable RCT evaluations). These results are surprising given the frequent attribution of re-entry failure to an inability to find work. Potential explanations for these disappointing results include the possibility that employment is a minor factor relative to other causes of recidivism as well as questionable quality of employment provided through typical re-entry programs.

Researchers and practitioners propose that typical re-entry programs in the US do not address the primary challenges associated with re-entry, such as family relations, criminal networks, and substance abuse problems. These other challenges could impede the effectiveness of employment-focused re-entry programs. Moreover, assistance delivered after an offender’s transition back into the community may not be as effective as services provided prior to release. To test this hypothesis, a recent RCT evaluation combines a wide range of services coordinated by a social worker prior to release with a post-release employment program for ex-prisoners in Milwaukee, Wisconsin [11]. This study finds a large impact on employment but, again, little impact on recidivism [11].

The employment-focused re-entry programs evaluated typically help offenders find work through the provision of transitional jobs or transitional aid. These transitional jobs can be generally characterized as providing temporary minimum wage employment to help offenders reintegrate into society and the local labor market. But, even the most successful program participants in the recent Milwaukee evaluation were not earning enough to lift a household above the poverty line [11]. In light of the evidence previously discussed concerning the relationship between labor market conditions and recidivism, these programs may thus not have a significant impact on recidivism due to the low quality of the employment opportunities provided. A minimum wage job (often working alongside other ex-prisoners) just may not be enough to deter crime among released offenders.

Limitations and gaps

Three major gaps emerge when evaluating the evidence on the relationship between work opportunities and recidivism that limit the degree to which the existing evidence can inform policy.

First, RCT evaluations of programs that experimentally vary the type of transitional job opportunities or aid are needed to further investigate whether the low quality of employment provided by prior programs potentially explains their small effects on recidivism.

Second, little is known about the degree to which aggregate labor market conditions impact the employment outcomes of released offenders. This link is important to better understand the mechanisms through which local job opportunities affect recidivism since there could be several channels that are not directly related to an ex-prisoner finding a job. For example, an increase in work opportunities can enrich the lives of friends and family and therefore provide a more supportive post-prison environment for individuals, which may reduce recidivism independent of the released offender’s employment status. Future projects that link information on local labormarkets, employment, and recidivism at the individual level will permit a detailed investigation into the channels by which post-release labor markets influence recidivism.

Third, the evidence on the causal relationship between employment opportunities and recidivism covered by this article is largely specific to the US. This focus is not surprising given the scale of incarceration in the US relative to other countries (Figure 2); however, much more can be learned about the fundamental relationship between legitimate employment opportunities and crime by comparing similar analyses in countries with varying institutional settings. For example, incarceration in Norway (which, as mentioned above, exposes individuals to health, education, and employment programs) impressively increases employment and decreases offending among those who were unemployed prior to incarceration [6]. Could the implementation of a similar program in a US prison help to break the cycle of unemployment, crime, and incarceration?

Summary and policy advice

Recent empirical research that measures the impact of employment opportunities on recidivism emphasizes the importance of considering job quality in the design of employment-focused re-entry programs and policies. As discussed in a study from 2015, it is now important to evaluate the impact of “a bigger ‘dose’ of legitimate opportunity” given the disappointing recidivism rates to date [11]. An important question for policymakers thus arises: How can society increase the quantity and quality of legitimate work opportunities for released prisoners?

Employment applications in the US often ask applicants to check a box if they have any prior felony convictions. The provision of this information can dramatically decrease the probability that an ex-convict is invited for an interview after the initial filtering of applications. Many policymakers in the US hence advocate “Ban-the-Box” policies that are designed to improve employment opportunities for job applicants with criminal records by providing them with an opportunity to discuss their records with prospective employers during an interview. While these policies appear to have an unintended negative impact on certain individuals without criminal records, an in-depth investigation as to whether these policies improve employment outcomes for former criminals is still needed. Such evaluations would provide information about any potential benefits that arise from policies that limit the visibility of criminal histories to potential employers.

A more promising direction may be the implementation of policies and programs that do not limit, but rather enhance, the information provided to potential employers. There is growing discussion about the potential positive impact that information about program completion and good behavior in prison can have on expanding the set of employment opportunities available to released offenders [12]. Exciting new evidence suggests that providing employers with “certificates of relief” that indicate when an ex-offender is rehabilitated and relieve the employer of any future liability associated with hiring such an applicant can improve labor market outcomes [13]. Investigating the degree to which these policies increase the “dose” of good jobs enough to discourage recidivism in a variety of settings is an important next step.


The author thanks two anonymous referees and the IZA World of Labor editors for many helpful suggestions on earlier drafts. Previous work of the author contains a larger number of background references for the material presented here and has been used intensively in all major parts of this article [8].

Competing interests

The IZA World of Labor project is committed to the IZA Guiding Principles of Research Integrity. The author declares to have observed these principles.

© Kevin Schnepel


«Danos hoy nuestro pan de cada día»

26 10 17 — Brenda Lemus

La erradicación de la pobreza y obtener un trabajo decente son dos de los objetivos de desarrollo sostenible que plantea la ONU. ¡Menudo reto se han propuesto! Es un tema bastante complicado: necesitamos tener empleo digno, pero no todos estamos en total capacidad para desempeñarlo. Nuestra educación pública es visiblemente deficiente porque la mayoría de maestros que nos educan no poseen una formación universitaria. No obstante, si un docente estudia tres años en la universidad, obviamente preferirá trabajar en un almacén por un salario mínimo que laborar por contrato en una aldea a 300 kilómetros de la capital.

Así pues, estamos ante un dilema entre educación y salario. Supongamos que un trabajador gana Q600 al mes. Pensemos que este tiene un hijo en edad apta para empezar a trabajar, según acostumbramos. Si el joven aportara económicamente, el hogar contaría con el doble de ese ingreso mensual. Pensemos ahora que ese mismo muchacho quiere estudiar y logra persuadir a la familia de cubrir sus gastos mensuales de Q100 en educación. La familia quedaría con Q500 para subsistir, de manera que invertiría en educación más de la mitad de su potencial.

En comunidades rurales, el dinero circulante es restrictivo. Las personas no encuentran trabajo fácilmente. Y si lo obtienen, raramente gozan de condiciones dignas. Igual les sucede a un maestro rural trabajando por contrato institucional —algunas veces sin prestaciones de ley— y a un campesino que trabaja por un salario de Q30 diarios, sin tener siquiera el derecho a pago del séptimo. De hecho, en el casco urbano, una mujer pocas veces logra conseguir empleo, así sea de lavandera o en una tortillería, trabajando de lunes a domingo por Q10, en jornadas de hasta 14 horas diarias que la mayoría de las veces no incluyen almuerzo ni día de descanso.

Al ver la foto del niño imaginé a las personas trabajadoras de Purulhá, especialmente a las madres solteras, quienes con menos de Q10 pasan el día haciendo malabares para poder elegir si compran una candela o una barra de jabón. De ese modo, si para ellos comer un huevo es un lujo, ni qué decir de la grandiosidad que supone conseguir un lápiz o una pasta dental. No obstante, son madres que dejan la vida misma trabajando intensas jornadas para que sus hijos estudien y logren superarse. Esos mismos hijos, egresados ya del ciclo básico o diversificado, no siempre consiguen comprender bien lo que leen, tienen dificultades para hacer cálculos o no son muy competentes atendiendo una llamada telefónica. En consecuencia, terminan trabajando en el campo, como si nunca hubieran estudiado. Claramente, si tuvieran un mejor salario, asegurarían una mejor educación para sus hijos.

El índice de desarrollo humano mundial parece sugerir que estamos mejorando. A pesar de ello, existe una distribución inequitativa del progreso en dicho indicador, especialmente respecto de los ingresos. Muchas personas han quedado excluidas del desarrollo humano por pertenecer a grupos específicos como resultado de que existen barreras sistemáticas que refuerzan esa exclusión.

Con base en lo justo, la canasta básica vital demarca el límite económico indispensable para la supervivencia de una familia. Considerando bienes y servicios de menor calidad, está en Q7 479.20. Según la ley, el salario mínimo en el campo es de Q2 893.21. Esto no representa siquiera la mitad de lo que sería lo justo. Por si esto fuera poco, numerosos empleadores, por grandes que sean, evaden sus responsabilidades patronales negando al empleado el salario mínimo, incluso el acceso a seguro social, con lo cual abren una brecha infranqueable que niega las condiciones justas e imprescindibles para que una familia pueda subsistir dignamente. ¿Quién vive en estas condiciones por elección?

Estamos muy lejos de que alimentarnos dependa solamente de una plegaria. Debemos analizar a quién se está dejando atrás y por qué. Debemos suponer prioritaria la atención laboral justa a estos grupos a fin de garantizar un desarrollo humano para todos.


Ese era el título de una fotografía de mi amiga Sue en la cual se veía un niño debajo de un semáforo haciendo malabares con machetes. Me hizo entender que comer o tener un salario digno no depende solamente de trabajar duro.

Formación técnica sigue siendo insuficiente

En Costa Rica, “de los 126.000 graduados con título que dice técnico, entre 2014 y 2016, la gran mayoría fueron en el nivel más bajo de calificación.”


Las cifras del más reciente Estado de la Educación en Costa Rica, siguen mostrando las graves deficiencias del sistema educativo, no solo a nivel técnico y universitario, sino, peor aún, en Primaria, donde se supone que deben consolidarse los conceptos básicos que sirven de cimiento para la educación secundaria y universitaria.

El problema es tan grave que ya no se resume a la incapacidad del país para producir personal técnico con las habilidades necesarias para insertarse en el exigente mercado laboral, sino que se revela también en las graves carencias con que los niños graduados de sexto grado de escuela ingresan a Secundaria.

Sobre la debilidad que tiene el país en la formación de técnicos medios y de educación superior, Jorge Vargas Cullel, director del programa Estado de la Nación, comentó a que “… Es tan débil que le doy una cifra: de los 126.000 graduados con título que dice técnico, entre el 2014 y el 2016, la gran mayoría de esos técnicos fueron en el nivel más bajo de calificación. Básicamente son obreros calificados. Están así casi el 70% de ellos.”

Existe entonces “… un desfase, ese es nuestro principal problema. Está desencajado, desconectado. Por el lado de la oferta, la gran debilidad es que una parte minoritaria tiene condiciones para aprovechar esas oportunidades. En técnicos medios y superiores producimos muy poco. Se pueden venir cuellos de botella. Si se instala una empresa y necesita de 2.000 técnicos y no hay.”

Sobre el estado de la educación primaria, “…Este Informe también llama la atención sobre la necesidad de volver la mirada hacia la educación primaria, donde hay otras tareas pendientes, como la universalización del currículo en todos los centros educativos: solo el 5% de las escuelas del país imparte todas las materias previstas en el programa de estudios. Además falta articulación entre los ciclos Primero y Segundo, particularmente en la enseñanza de la lectura. En este ámbito los resultados de las pruebas Terce, de la Unesco, evidencian una ruptura importante entre ciclos educativos: los niños y niñas aprenden a leer en el Primero, pero en el Segundo tienen serios problemas para avanzar en la comprensión lectora, y siguen arrastrando esa deficiencia hasta la secundaria (Tercer Ciclo y Educación Diversificada).”

Al respecto, un artículo en reseña: “…En sexto grado no saben resolver problemas matemáticos con fórmulas básicas, reconocer figuras literarias o utilizar téminos científicos.

“… Incluso, en Matemáticas y Lectura, en la última medición, del 2013, los niños mostraron retrocesos con el estudio anterior hecho en 2008.”

“… En comprensión lectora, los resultados de Terce evidenciaron “una grave deficiencia de los niños al finalizar primaria”, pues no reconocen expresiones en lenguaje figurado, sinónimos, pronombres, ni la función de conectores, verbos y signos ortográficos.”

Ver informe “Estado de la Educación 2017

Ver artículos de “Director de Estado de la Nación:´País es débil en producir técnicos” y “Niños salen de la escuela con apenas destrezas básicas“.

Fighting employment informality with schooling

Labor force composition is critical for understanding employment informality in developing countries

Elevator pitch

Developing countries have long been struggling to fight informality, focusing on instruments such as labor legislation enforcement, temporary contracts, and changes in taxes imposed on small firms. However, improvements in the labor force’s schooling and skill level may be more effective in reducing informality in the long term. Higher-skilled workers are typically employed by larger firms that use more capital, and that are more likely to be formal. Additionally, when skilled and unskilled workers are complementary in production, unskilled workers’ wages tend to increase, adding yet another force toward reducing informality.

Changes in informality rates across
                        selected Latin American countries, 2000–2010

Key findings


Informality is strongly responsive to the composition of the labor force.

A labor force with higher levels of schooling generates incentives for firms to grow and formalize.

A more-educated labor force increases the relative wages of low-skilled workers, reducing their incentives to work in the informal sector.

In the long term, human capital investments may be more effective tools to fight informality than labor market policies focused on particular institutions.


The composition of the labor force does not respond to policy changes in the short term.

The effect of schooling is driven primarily by the entrance of new and better-educated cohorts; thus, immediate changes in informality may be hard to achieve.

Human capital has a strong effect on informality only when the minimum wage is binding and/or initial unemployment is high.

Further research is needed because most existing theories of informality exclude the schooling channel in their basic assumptions (e.g. wages of informal, unskilled workers do not respond to aggregate schooling levels).

Author’s main message

Many Latin American countries have recently shown sustained reductions in informality among employees, without experiencing major changes in labor regulations, minimum wages, or enforcement. For Brazil, for instance, evidence shows that a change in labor force composition, toward a higher share of more-educated workers, was the main driving force behind reduced informality rates. In general, additional expansion in skill levels is likely to further reduce informality, though less so if the minimum wage is non-binding and unemployment is reduced. This suggests that expanded schooling should become central in future labor market policy debates.


Labor informality is undesirable for three main reasons. First, informal firms can decrease a country’s productivity because they have incentives to remain small, have less access to public goods, such as the legal system, and impose unfair competition on firms who comply with regulations. Second, poor workers employed informally fall outside of the social safety net, which may thus fail to protect those who need it the most. And third, informal employment and informal firms evade the payment of taxes, reducing the resources available to the state and imposing an excessive burden on formal firms and workers.

Unfortunately, reducing informality in developing countries is not straightforward, and it is not easy to ascertain the welfare implications of potential policies when informality is prevalent. While some claim that excessive regulation and minimum wages should be avoided because they cause informality, others say that such measures are needed to protect vulnerable workers and reduce poverty. Similarly, some argue for increased enforcement of regulation and punishment of firms that hire informal workers, while others contend that such recommendations would ultimately result in unemployment—especially of poor workers and entrepreneurs who cannot easily access the formal sector. These measures might also reduce the efficiency of the productive sector. Finding policies that reduce informal employment without significant collateral damage is thus a central challenge for policymakers.

Examining how various countries have attempted to address informality may provide evidence on potentially effective policies. However, this exercise is harder than it may appear at first glance. For each case, there are many competing explanations but only one historical time series to analyze. Basic comparisons of data across different countries are of limited use for generating trustworthy scientific evidence, since differences in institutional settings and other country characteristics limit what can be learned from simple correlations. One alternative is to focus on a specific country and model the behavior of its labor market in detail, and then, from that, try to uncover what candidate factors seem more likely to be able to explain the observed reduction in inequality, as is done in [2].

Discussion of pros and cons

The Brazilian case: Why did labor informality fall?

Brazil experienced one of the sharpest declines in informality in Latin America during the 2000s, but the reasons behind this change remain elusive. Informality for salaried workers in Brazil is defined as not having a labor ID card (carteira de trabalho) signed by the employer. Registration of the employment relationship via signature of the labor ID card is required under Brazilian law, and it implies that a worker’s employment status is recorded in the tax database and that the employer will pay labor taxes and contributions.

As the left panel of Figure 1 shows, the informality rate among salaried workers has fallen by more than ten percentage points since its peak in 2002, after having risen throughout the 1990s. Consistent with the idea that informality and unemployment are interrelated phenomena in developing economies [3], a similar pattern is seen in the unemployment rate, although the fall in informality seems more pronounced. Moreover, during the period from 2002 to 2012, a substantial reduction in income inequality between wage earners with high and low educational levels occurred, as well as a reduction in the wage gap across formal and informal sectors. The right panel of Figure 1 shows changes in real wages according to basic schooling achievement and formality status. Overall, wages declined from 1995 through 2003 and recovered after that year. But the decline in the first period was less severe for unskilled workers, and the increase in the second period more pronounced for them. Within each education group, informal wages outpaced formal wages from 2003, reducing the wage penalty associated with the informal sector.

Evolution of informality, unemployment,
                        and real wages for salaried workers, Brazil

Labor regulation may have been a cause of the increase in informality in the 1990s, but it is unlikely to explain the decline after 2002. The Brazilian 1988 Constitution substantially increased labor protection and has been cited as an important factor behind the upward trend in informality observed in subsequent years [4]. In addition, the minimum wage increased steadily after the stabilization of the Brazilian economy in 1994. But there was no major reversion along these dimensions after 2002, so it cannot explain the reversal in the incidence of informality. Since then, there have been few changes to labor regulation: total payroll taxes, including all contributions, decreased only slightly, from 72.1% to 71.4% of each worker’s wage. And, more importantly, the minimum wage continued to rise: from 2003 to 2012, it increased by 61% in real terms, more than twice the rate of growth of per capita gross domestic product (GDP).

Changes in overall productivity, aggregate demand shocks, or increases in enforcement could explain the decline in informality, but they are unlikely to account for the differential wage patterns seen in the data. There are many macroeconomic factors that could have affected the Brazilian labor market since 2003, such as improvements in productivity or increases in aggregate demand following the expansion of government spending and cash transfer programs. In addition, there could have been shocks to specific sectors leading to lower unemployment and informality, such as changes in terms of trade. However, there are two reasons why these factors can only partially explain the Brazilian story. First, the increased formalization of the economy was widespread across sectors and regions, and thus localized shocks are unlikely to be an important cause. Second, it is not clear why shocks to productivity or aggregate demand would have decreased wage inequality across educational categories and between formal and informal sectors, as is seen in the data. Given that recent technological changes are usually thought to benefit more-skilled workers, this looks even more unlikely. A similar argument can be made in relation to the hypothesis that enforcement of regulation is the key factor behind the reduction in informality rates. Many different models predict that increased enforcement should depress informal wages (see, for example, [3]), contrasting with data from the Brazilian case.

Brazil has experienced a substantial increase in schooling over the last decades, but it is not clear how this has affected informality. From 2003 to 2012, the share of the Brazilian workforce with less than basic schooling (that is, less than eight years of education) declined from 33.8% to 20.9%. At the other extreme, the share with a college degree increased from 12.5% to 18.9%. The increased supply of skilled workers could explain the differential patterns in wages for skilled and unskilled workers, but it is not immediately obvious how it would affect informality. While it is clear that a worker’s level of schooling is correlated with their formality status, this cross-sectional pattern need not imply a causal relationship at the aggregate level. If the supply of formal job vacancies is determined by structural reasons unrelated to education, one would still see a positive correlation between formality and education due to sorting. However, in such a case, an increase in average schooling for the whole workforce would not cause a reduction in informality. It is plausible, however, that an increase in the supply of skilled workers could provide incentives for firms to grow and formalize, thus leading to a decrease in informality.

A realistic model of the Brazilian labor market

While there are many theoretical models of informality in the literature on development and labor economics, it is not easy to find one that would be suitable to guide the discussion here. In order to help address the policy question raised, a model must be both realistic, in the sense that it can reproduce the main features of the labor market, and sufficiently simple, in the sense that it can be effectively used to simulate specific policies. If one wants to analyze which of the many potential factors was the driving force behind the decline in informality in Brazil, then all such factors must be in the model in the first place, otherwise important alternatives are omitted by assumption. The model must also allow for the reproduction of all relevant outcomes: wages by skill level, unemployment, and informality.

A key aspect of such a model is that the modeling of firms’ and workers’ decisions must be well-grounded in the data. Some theoretical approaches to informality state that poor workers are trapped in the shadow sector: a structural barrier prevents them from reaching the legal part of the labor market, which is assumed to be intrinsically more productive. This view is not consistent with the fact that transitions into and out of informality are in fact very common. Other models restrict attention in the informal sector to unskilled workers, because most informal employees fall into this category. While this may be a reasonable assumption for some research questions, it is not useful when considering the interplay between education and informality. In 2003, for example, more than 17% of Brazilian salaried workers with a college degree (not including self-employed professionals) were employed informally, and they were paid the same on average as their counterparts in the formal sector. This fact is extremely important because it shows that one cannot assume that well-educated workers are automatically employed in the formal sector. It also shows that firms hiring informally are not necessarily subsistence establishments with inferior technology. They may well be reasonably sophisticated, and simply find it more profitable to stay in the shadow economy.

Relying heavily on patterns observed in the data, a recent study develops a model of the Brazilian labor market where both firms and workers sort themselves into the formal and informal sectors based on incentives provided by regulatory restrictions (taxes, social benefits, and labor regulations) and labor market conditions [2]. The model allows for two types of workers—skilled and unskilled—and a large number of firms, which differ in productivity but are not intrinsically connected to any sector. Decisions related to formality status are the result of a labor market equilibrium where each agent is choosing optimally. Unemployment is included by assuming search frictions in the labor market: it takes time for firms to find the ideal unemployed worker for its vacancy, and this time depends on how tight the labor market is. The model incorporates many features of Brazilian labor law: payroll taxes, mandated benefits, and the minimum wage. Finally, it also includes an informality penalty that increases with firm size to account for the risk of being caught by labor inspectors and for the eventual punishment. The informality penalty can also capture lack of access to public goods, such as courts, and the inability to reach certain markets, such as exports.

The model is able to reproduce several patterns in the Brazilian labor market, especially those related to labor informality, even though it does not impose structural differences across sectors. Less productive firms self-select into the informal sector because it is easier for them to hide and because they are the ones that suffer the most (in relative terms) due to minimum wages, as they tend to select a higher proportion of unskilled workers. This leads to an informal sector that is characterized by lower productivity, small firms, lower wages, and less human capital, and is thus very similar to what is observed generally in developing economies [5].

Whether workers are indifferent between sectors or rationed out of formal jobs depends on their skill level. Skilled workers are just as well off in the informal as in the formal sector, which means that their wages are actually higher in the informal sector to compensate for the loss in mandated benefits. Unskilled workers, on the other hand, strictly prefer to work in formal firms if they can find a job. The reason is the binding minimum wage, which pushes formal compensation for low-skilled workers above that observed in the informal sector. Even so, low-skilled workers do accept informal jobs, as remaining in unemployment while searching for a formal job is costly. This heterogeneity within the informal sector is consistent with evidence showing that the informal sector is composed of distinct tiers [6][7] and that the difference between formal and informal wages decreases as one moves along the wage distribution [8][9].

A quantitative version of the model—where parameters are set to values that reproduce empirical patterns observed in the data—is used to analyze the changes in informality observed in Brazil between 2003 and 2012 [2]. First, the model is calibrated to replicate the Brazilian economy around 2003. Then, observed changes in all potentially relevant factors between 2003 and 2012 are input, including minimum wages, payroll taxes and contributions, mandated benefits, enforcement of regulation, schooling, and overall productivity. From this exercise, the model generates predictions for 2012 for wage differentials, unemployment, and the informality rate. All of the model’s predictions are found to be consistent with the data, and are reasonably accurate in quantitative terms.

The role of education as a determinant of informality

The conclusion from the model outlined above is that increased schooling is the most important factor in explaining the decline in informality observed in Brazil between 2003 and 2012. If the schooling composition of the labor force had remained the same as in 2003, but all other factors had changed according to what was observed during the period, there would have been an increase in the informality rate instead of a large decrease. In the model, increased schooling alone is able to generate a large decline in informality rates, suggesting that education is a key determinant of formalization. In addition, education is also crucial to explaining why the wage gap between skilled and unskilled workers declined over the period. Though increased productivity also reduces informality, it is not able to generate the reduction in the wage gap between skilled and unskilled workers, or between the formal and informal sectors. In other words, without incorporating increased schooling, the model is unable to match all the observed labor market changes simultaneously.

Two main forces influence the relationship between skill composition and the skilled–unskilled wage gap. The first is a simple supply and demand story: as unskilled workers become scarcer relative to skilled workers, their wages rise and skilled wages fall. The second is related to productivity. On average, firms will hire a higher proportion of skilled workers after the shift in the composition of the workforce. This fact results in an increase in the productivity of unskilled workers, given that they are complementary to skilled labor. As the productivity of unskilled workers increases, they can demand higher wages in the bargaining process.

In a scenario with a binding minimum wage, the upward pressure on unskilled wages is one reason why increased schooling translates into less informality. Increased unskilled wages due to scarcity and increased productivity result in higher wages in the informal sector. However, if the minimum wage is high enough, then unskilled wages in the formal sector do not reflect bargaining or scarcity, but rather the regulatory constraint. Thus, unskilled wages in the formal sector do not increase due to a change in schooling, but do still increase for informal firms. Given that one important reason for firms deciding to operate in the informal sector is that they can pay lower wages to unskilled workers, this effect reduces the attractiveness of informality to some marginal firms. If the change in schooling is so large that minimum wages cease to be binding, then one may expect to see an increase in unskilled wages in the formal sector too. However, even in this case, wages will increase more for the informal sector, thus providing incentives toward formalization, albeit to a potentially lesser degree.

The second channel through which education affects informality is by stimulating increases in firm size. As the composition of the workforce changes, firms tend to hire more skilled workers, who become more abundant and relatively cheaper. This incentive is stronger for larger firms, which have more capital, since capital is complementary to skilled labor. At the same time, firms also want to hire more unskilled workers, since they are also complementary to skilled labor and, therefore, these workers become more productive. As a result of the increased incentive to grow, formal firms hire more workers and, simultaneously, firms operating at the margin of informality find it profitable to move into the formal sector (since it is difficult to hide in the informal sector if a firm becomes too large).

Statistical evidence from Brazil supports the prediction of this line of argument and the quantitative implications of this model. One study uses a simple counterfactual simulation exercise with no explicit economic model to show that changes in the composition of the Brazilian labor force alone can account for a majority of the reductions in informality observed in recent years [10]. Further evidence shows that increases in education across micro-regions in Brazil are significantly correlated with reductions in informality [2]. In addition, this correlation is shown to go beyond the mechanical individual level correlation between schooling and formality status, meaning that individuals with a given level of schooling are more likely to be formal when the average educational level of the workforce in their local labor market is higher. This evidence provides further support to the arguments presented here.

Changes in informality elsewhere and their causes

Brazil is not unique in having experienced formalization during the 2000s. As the Illustration shows, this pattern was also seen in most Latin American countries, though there were also cases where informality rose, with Mexico featuring prominently among the latter.

The hypothesis that formalization is an inescapable consequence of economic development is not warranted by the data. The link between growth and informality is investigated in a study from 2014 [11]. Using a sample of 68 countries during the period 1990–2012, the authors find that doubling per capita GDP is associated with a five percentage point decline in informality (in their case, including self-employment). Even if this panel regression reveals a causal effect, it is too small to bridge the formality gap between rich and poor countries. In other words, one cannot focus on growth and hope that informality will subside by itself once high levels of income per capita are achieved. In the particular case of Latin America, the hypothesis of economic development as the primary driver of formalization is further weakened by noting that informality was on the rise throughout the 1990s, at a time when most economies were also expanding. Economic theory also casts doubt on the notion that growth is enough to fight informality. For low-income countries, economic development leads to formalization as the labor force moves away from agriculture. But this is not the case for middle-income countries with a rising services sector.

Another possibility considered in the literature is that the ups and downs of informality in Latin America reflect business cycles. This channel is present in any theory where workers might resort to informal employment as an alternative to unemployment. One study explicitly investigates this issue for a sample of Latin American countries [1]. It finds some evidence of a counter-cyclical response of informality in most of the examined sample, but does not quantify its relative importance. Notably, informality is not found to be counter-cyclical in Peru, the country with the most dramatic formalization episode in the recent past.

In principle, schooling may have played an important role in many of the Latin American experiences. It may not be a coincidence that the decrease in informality over recent decades in the region goes hand in hand with a steady progress toward universal schooling. Figure 2shows the share of the adult population with at least basic schooling in the early 2000s and 2010s, for the same countries presented in the Illustration. Even the smallest change is a positive 7.1 percentage points (for El Salvador). Brazil and Paraguay had the largest increases at 17.2% and 13.8 percentage points, respectively. Further work is needed on the link between schooling and informality in other countries, but there are informative correlations found in other studies. Using a sample of 1,090 regions from 71 countries, one such study shows that more-educated regions have more formal establishments and more formal employees per capita (in regressions with country fixed-effects) [11].

Share of adults (25 to 65 years old) with
                        at least eight years of schooling (%)

Mexico deserves special mention because it is an important counterpoint to the arguments above. It is the country with the largest increase in informality among those shown in the Illustration. GDP per capita growth has been small in Mexico (averaging 0.4% per year in the 2000s), but still positive. There were recessions in the beginning and at the end of the 2000s, but the informality trend is essentially unchanged. Most importantly, the increase in primary schooling coverage was substantial, at 10.9 percentage points.

A complete discussion of the Mexican case is beyond the scope of this article, but there are potential explanations for its exceptionality. One candidate is Seguro Popular, a program that facilitated access to health insurance for people who are not formally employed. Implemented in 2002, it allowed Mexico to achieve near universal health coverage by 2010. One study of the program finds that it had deleterious effects on formal employment [12]. Another study focused instead on regulations, arguing that Mexico imposes the highest costs on formal employers among a group of similar countries [13]. Finally, Mexico may have been particularly vulnerable to competition from Chinese exports due to its trade relationship with the US, facing displacement of workers from manufacturing jobs (which are more likely to be formal than the average job). According to data from SEDLAC, the share of the workforce employed in manufacturing in Mexico fell by 2.7 percentage points between 1998 and 2012, while it increased by 1.2 percentage points in Brazil and 1.6 percentage points in Peru over the same period.

Limitations and gaps

The analysis discussed in this article concentrates on the status of the relationship between employees and employers. Another important dimension of labor markets in developing countries relates to self-employment. Self-employed workers are not employees, but at the same time, are not employers either. Though this category also includes highly educated professionals—such as lawyers, accountants, and medical doctors—in developing countries, the vast majority of self-employment refers to precarious labor conditions, typically associated with street vendors and other low-skilled service providers. It is therefore often argued that this should also be seen as a type of informality. The dynamics and determinants of self-employment differ compared to employees, and these would have to be explicitly taken into account when trying to understand the effect of schooling on informality. Though it is likely that education might also increase employment prospects for the typical low-skilled worker in self-employment, analyses focused on this specific context should be developed in order to clarify whether the types of effects discussed in this article would also be present in the new case.

Another important limitation that must be recognized is that the effect of schooling on informality is likely to operate only over a longer horizon. So, the types of forces discussed here do not help much when considering the formulation of policies to fight inequality in the short term. In the end, these short-term goals must resort to the use of labor market policies focused on more specific regulations, for which there is very little evidence regarding effectiveness.

Finally, the effectiveness of schooling as a tool against informality needs more study. Among theoretical research on informality, the potential effects of schooling are usually ruled out in favor of simpler models. On the empirical side, most of the research in the area focuses on the Brazilian case. Policymakers would benefit from more academic discussion of the effects of schooling on education, as well as from high-quality evidence from other countries.

Summary and policy advice

A long-term commitment to reducing inequality without imposing increased distortions on the economy should entail increased focus on educational policies. The link between the educational composition of the labor force and informality has gained increased theoretical and empirical support in recent years; however, this argument remains almost entirely absent from the public policy debate. Such structural determinants of informality seem to play a very important role and appear very difficult to counteract with short-term policies focused on particular features of labor market regulations.

A longer-term view of the subject should bring the discussion to investments in education, increased incentives for education in developing countries, and how to shape formal schooling to respond to skills that are demanded in the labor market.


The author thanks anonymous referees and the IZA World of Labor editors for many helpful suggestions on earlier drafts. Previous work of the author contains a larger number of background references for the material presented here and has been used intensively in all major parts of this article [2].

Competing interests

The IZA World of Labor project is committed to the IZA Guiding Principles of Research Integrity. The author declares to have observed these principles.

© Daniel Haanwinckel and Rodrigo R. Soares


Capacitación técnica inútil

Solamente el 25% de los egresados del Instituto Nacional de Aprendizaje de Costa Rica logra emplearse en la especialidad en que supuestamente recibió capacitación.

Sendos artículo en alertan de una gravísima situación que afecta no solamente a los jóvenes que pierden su tiempo estudiando lo que no les sirve para conseguir empleo, sino que la demanda de las empresas por personal capacitado tampoco es satisfecha, disminuyendo la competitividad de la economía costarricense, y tirando abajo la mentada superioridad del capital humano del país sobre el resto de la región.

En su artículo el analista Juan Carlos Hidalgo señala que en los últimos 7 años el presupuesto del Instituto Nacional de Aprendizaje (INA) aumentó un 45%, mientras que la cantidad de egresados disminuyó 40%.

Por su parte Nuria Marín Raventós escribe “… El estudio  Modernización de la formación profesional en Costa Rica reveló que apenas un 25 % de los graduados del INA obtienen empleo en sus áreas de estudio y  el 60 % de los que ingresan a estudiar luego no consiguen colocarse.

Y destaca “… el sector productivo tiene faltantes de talento en áreas estratégicas, lo cual evidencia que se gastan recursos sin una visión estratégica de desarrollo del país, se brinda formación de cuestionable calidad y existe un divorcio entre la oferta y  la demanda laboral.

Como cereza de la torta, el presidente ejecutivo de la institución que ya tiene tres años en el ejercicio del cargo, declara sin verguenza alguna que “… no sabe por qué sus graduados no logran conseguir trabajo.


Poco importa el dominio del inglés en Centroamérica

Según el English Proficiency Index de Education First, Costa Rica y El Salvador no han sido capaces de elevar el nivel de dominio del idioma en los últimos 5 años, mientras que Panamá y Guatemala, que entre 2014 y 2015 mejoraron su desempeño, en 2016 volvieron a caer al nivel “Muy bajo”.

El índice que la empresa global de enseñanza del inglés Education First publica cada año define tres niveles de dominio del idioma en 72 países del mundo. En la clasificación mundial, Costa Rica, Guatemala, Panamá y El Salvador se ubicaron en las posiciones 38, 53, 50 y 63, respectivamente.

Respecto a los resultados de 2015, Panamá empeoró, al pasar del nivel “Bajo” a “Muy bajo”, mientras que Costa Rica se ha mantenido desde 2011 en el nivel “Bajo”, sin registrar mejoras.

El Salvador, por su parte, se ubicó en la posición 63 a nivel mundial y en último lugar en Latinoamérica, en el nivel “Muy bajo”, donde ha estado desde 2012. Solo en el año 2011 se reportó el nivel “Bajo”.

Comparado con los demás países latinoamericanos, Guatemala es el tercer país con el peor nivel de inglés, solo superado por El Salvador y Venezuela. El nivel según el ranking 2016 es “Muy bajo”, y reportó una desmejoría respecto a 2015, cuando se ubicó en el nivel “Bajo”.

Nicaragua y Honduras no están contemplados en el estudio.

Ver estudio completo de EF Education First.