15 Given that reality, the informal economy will, at least for the foreseeable future, continue to play a singularly critical role in providing opportunities to less-skilled and less-educated workers. Many in Argentina’s urban and rural populations do not have access to education and have limited opportunities in the formal sector. Although Argentina’s secondary school enrollment rate is the second highest in Latin America, at 83.2%, a disproportionate number of residents who do not attend secondary school work in the informal sector (World Bank, 2019). These less-educated residents are kept afloat and above the extreme poverty line through these informal jobs, which is one reason why the sector plays an important role and is likely to continue to do so at least in the near future. Over time, however, formalizing a greater share of jobs would be better not only for those workers and their families but also for the health of the overall economy. The goal should be to improve the lives and working conditions of current informal workers, while creating initiatives to move them to the formal economy. Such a transition in employment sector would give informal employees opportunities to have health care, social security, and higher wages. Barriers to Formality Why is the informal sector so large in Argentina? Argentina has many barriers to formality, restricting much of the population from entering the formal sector. The most pressing barriers are (1) the tax burden, (2) rigid labor laws, and (3) tax complexity (World Bank, 2008). The tax code was reformed, resulting in reduction of the corporate tax rate from 30% to 25% in 2020. Given that many employers operate in the informal sector to avoid high corporate taxes, when corporate taxes are reduced, the informal sector may decrease in size as some companies choose to move into the formal sector. Employers must pay the previously mentioned corporate tax, a 17% to 21% social security tax, and a 6% health care tax for each employee, while employees must pay a 14% social security tax and a 3% health care tax (KPMG, 2020a). These taxes contribute toward retirement and health care benefits for formal workers in Argentina. For comparison, Argentina has the highest social security tax burden for employers in Latin America and the second highest burden for employees in the region (Laboris, 2018). This is a leading factor in limiting the number of people joining the formal sector. In addition to those laborrelated taxes, businesses face a value-added tax (VAT) on sales of business-to-business goods, such as circuit boards and processed grains, and business-to-consumer goods, such as bicycles and dining tables. Argentina’s standard of 21% is the second highest VAT rate in all of Latin America, second only to Uruguay’s, at 22% (CIATData, 2018), limiting the number of businesses that purchase goods legally in order to either sell them or use them to make products. Individual informal workers are likely not paying attention to these tax laws directly, but it is probable the businesses they are working for cannot survive in the formal sector because of high tax rates. Decreasing the tax burden is necessary for transitioning informal workers and companies to the formal sector. Strict labor laws that include extensive employee benefits are also a barrier to entry to the formal sector. By law, employees inArgentina have 15 public holidays off work annually plus a mandated bonus, equivalent to one month of their salary (i.e., a thirteenth month), and overtime cannot exceed 30 hours per month and must be paid at 50% above normal salary. In addition to these laws, employees are entitled to a minimum number of required vacation days, and that minimum increases as their tenure at a company increases. They also must be eligible for extended sick leave, and employers who choose to fire an employee must pay a severance equal to one month’s salary (at the highest past salary rate) for every year the employee worked at the company (L&E Global, 2020). Argentina’s severance pay is the highest in Latin America and far higher than that of the average developed country (OECD, 2021). These labor laws make it expensive for employers to hire and fire people in the formal sector. Within the informal sector, none of these requirements must be met, benefiting the employer but to the detriment of the employee. Argentina has strong unions that have influenced and pushed the government toward these labor laws. Reducing these benefits, although difficult and controversial, is a necessary measure to
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