To grow is not sufficient to reduce informality

This paper studies the relationship between labor informality and economic growth in Peru at the regional level. The study uses both, the regional urban unemployment rate and electricity consumption as indicators of economic activity in a discrete choice model of informality at the worker level. The results show that the informality-growth elasticity is statistically significant but small, thus, the contribution of an increase in economic activity to reduce informality is also small. It is suggested that economic growth affects informality via net job creation in formal sectors. These jobs are more productive than jobs in the informal sector. Also, formal jobs have higher wage returns than jobs in the informal sector. Though, this latter gap is shrinking since the onset of current decade and so, incentives to formalize jobs are fading.