12.83 Million Colombians Work in Informal Economy

Colombia had a minimal reduction of informal work, 2.5%, during 2023, although this reality continues to affect 55.5% of workers. This can be seen from the data provided by the National Administrative Department of Statistics (DANE), on the September-November quarter of last year, when it was known that this kind of employment affects 12.83 million Colombians. The cities with the highest incidence are Sincelejo (68.4%), Valledupar (64.3%), Cucuta (62.8%), Santa Marta (62%) and Riohacha (61.7%).

This is one of the most important problems of the Colombian labor market, included among the government’s priorities in the labor reform currently underway in the country’s legislature. It is a sensitive issue because this important number of workers is not affiliated to the social security system, so in addition to not having access to the health system, they are not contributing to the pension system. In the first case, health, Colombia offers options to access health care subsidized by the State, as it is a constitutional right. However, not paying social security contributions means not being able to retire once the legal retirement age has passed, which in Colombia is 57 for women and 62 for men.

High Social Security costs

For some experts, the high rates of informal employment, a reality that affects all of Latin America, can be explained, among other factors, by the high costs of social security for independent workers. Although in Colombia a person who earns a little more than the minimum wage is allowed to contribute, as an independent worker, only for the minimum wage, it currently means paying almost 30% of that minimum wage between health and pension.

In figures, and taking into account that the Colombian minimum salary for 2024 has been set at 1,300,000 pesos, for a self-employed person who wants to contribute from that minimum wage, the amount to be paid would be 370,500 pesos, including health (12.5%) and pension (16%). This means contributing 28.5% of the salary.

For the independent person who actually earns more than the minimum, it may be an option to guarantee a pension once he/she is over the age of retirement, but for someone who has an informal job and earns the minimum or less, the challenge of managing to survive by giving up 370,500 pesos each month is a chimera.

Controversy over labor reform and informality

Despite the fact that the government and the parties that support it in Congress think that with its labor reform proposal, to be fixed this year, informality rates should be reduced, other economic sectors warn that the opposite will happen.

The National Association of Financial Institutions (ANIF), for instance, warned a few months ago that the government’s proposal would in fact reduce the capacity to create formal employment, and consequently there would be a greater number of self-employed workers.

“Normally self-employment is associated with higher levels of informality and lower labor income. In this sense, we consider that the reduction of unemployment, compensated by the creation of formal jobs, requires the reduction of non-wage costs, since the higher barriers to hiring usually leave the most vulnerable population of the country outside the formal activity”, warns the report of the ANIF think tank.

Thus, according to them, the labor reform project “could result in a lower capacity for the creation of formal employment and, consequently, in a greater number of people in self-employment, as well as a greater informality in the composition of private employment”.

According to the report, “a reform that is alien to the dynamics of the Colombian labor market could have negative repercussions on formality and employment, especially for the most vulnerable and low-income people”.