Financial inclusion transitions in Peru: The role of labor informality.

Developing countries, typically characterized by a high degree of labor informality (LI), have broadly adopted financial inclusion (FI) as a policy goal. Using 2015-2018 survey data from Peru, we examine how LI affects FI (measured as the access to bank accounts/payment cards) from a dynamic perspective by investigating the relationship between LI and FI transitions. First, we find that LI reduces the probability of entering formal financial system by 8 percentage points (pp) and increases that of exiting it by 9.3 pp. As to transitions in the labor market, we find that relative to workers who get stuck with informal jobs, those who have and stay with formal jobs have a higher probability of gaining access to a bank account/payment card by 9 pp and a lower probability of losing access to these financial products by 12 pp. Workers who move into formal jobs are more likely to enter the formal financial system by 9.7 pp and less likely to exit from it by 7.1 pp. These results on the relationship between transitions in the labor and financial markets should help design policies for promoting financial inclusion.