 |
| Medicine Bottle: "Tax - For the Growth of Mexico" "For Mexico's healthy growth, always have on hand ... Tax" CIDAC: "Use of this Product is Everyone's Responsibility" |
Translated by Stuart Taylor
On February 29 of this year, the Secretary for Labor and Welfare, Alfonso Navarrete Prida, announced the relaunch of the “Program for the Formalization of Employment” (PFE) on a national level. The Program seeks to reduce informal employment by 1% each year. According to the International Labor Organization (ILO), in 2013, 54% of Mexican workers were informal workers.
MV Note: Informal employment refers to work performed on a cash basis, without benefits (health, unemployment, pension, etc.).In this sense, informal employment has been a challenge for the Mexican economy both in terms of tax collection and in boosting productivity. Given this problem, the Federal Government of Mexico has favored, for the most part, programs that maintain a punitive focus toward informal employment, as well as awareness campaigns for individuals to join the formal employment sector voluntarily. However, it is important to recognize that this focus has been insufficient and has not managed to meet the high fiscal, regulatory and logistical costs hindering the transition toward the formal sector. The discussion needs to be redirected toward schemes that make the employment market more dynamic, and to increase the obligations and benefits for all the key economic players.
Informal Labor Market Inefficiency
From the perspective of the public and private sector, the informal labor market represents a rather inefficient balance for the functioning of the economy. The sheer size of the informal market is one of the main challenges for national public finances. This is due to the fact that the vast majority of informal business operations causes effective tax collection to be concentrated on a minority of businesses. As a result, tax collection in the public sector is vulnerable to contractions of the formal economy and the reduction of income derived from oil, such as the current situation presents.
 |
| Graphic 1: Latin America: 2013 Rates of Informal Employment Percentage of Informal Employment Countries in Latin America |
Although the informal sector provides employment to a significant number of Mexicans, this work is inefficient, since a high proportion of workers are involved in activities of low added value. While 58% of jobs are in the informal sector, it generates only 24% of the economy’s added value, whereas the formal sector, with only 42% of jobs, generates 76% of the added value.[1] Additionally, productivity is around 4.4 times greater in the formal sector. As Graphic 2 shows, in Mexico's various federal states, there is a significant relationship between low productivity and size of the informal economy.
 |
| Graphic 2: Relationship Between Productivity Levels and Informality [Informal Employment] in Federal States |
Formal Sector Drawbacks
Key economic players choose to belong to the informal sector due to the excessive regulation and high costs involved in operating within the formal sector. While in countries of the OECD [Organization for Economic Cooperation and Development], the process of starting a business costs on average 3% of an entrepreneur’s income, in Mexico City that figure is around 19%. Furthermore, for those companies that go through this process and manage to establish themselves in the formal sector, the regulatory burden is substantial. The time required to prepare, present and pay taxes for a company equates to an average of 286 hours per year, which is 60% more than in OECD countries.[2]
The costs also become apparent when it comes to the lack of flexibility in the formal labor market. One of the obvious examples is the current saturation in resolution of labor disputes, which makes the process for granting a binding award in arbitration, and receiving the payout, take about two and a half years.[3] On top of that, workers see fewer incentives for belonging to the formal sector in Mexico, due to the creation of non-contributory social security schemes, like the so-called “Seguro Popular” [People’s Health Insurance], which functions as a subsidy to the informal sector since it relies on funds obtained from the tax-paying minority in the formal sector.
Formalization Programs Lack Results
Current schemes such as the Program for the Formalization of Employment (PFE) simply promote the benefits of formal work through awareness campaigns and by encouraging more people to be registered as a salaried subordinate employee with the IMSS [Mexican Social Security Institute]. The program has a punitive component of work inspections for SMEs (in the previous version of the program, almost 73,000 inspections were carried out)[4]. However, although the PFE may increase workers affiliated to the IMSS, it does not deal with the important challenges mentioned earlier, such as: high startup costs, slow access to public services, complicated processes for paying taxes and resolving conflicts. Given the delimited scope of the PFE, a positive, long-term effect on the reduction of informal employment is unlikely, which can be appreciated in the downward trend of the rate of labor formality shown in Graphic 3.
 |
| Title: Evolution of Formal Labor and Social Security Affiliation Yellow [Percentages, Left]: Rate of Formal Labor Green [Percentages, Right]: Affiliation Rate |
In addition, the Secretariat of the Treasury (SHCP) implemented the “Crezcamos Juntos” [Let’s Grow Together] strategy, which launched schemes to create incentives that would make the transition to formal work more attractive. Within this, it is important to mention how both strategies, both that of the PFE and the SHCP initiative, approach different facets of the issue, but provide incomplete schemes for transitioning to formal employment. On one side, the tax authorities perpetuate legal schemes, such as the Fiscal Incorporation System, which only give priority to the worker's contribution, but do not necessarily guarantee the benefits of social security that would be due to him or her in exchange. Meanwhile, programs such as the PFR are an alternative to including workers in the IMSS, but are mainly based on the punitive approach of inclusion and its effects do not remain on the long term.
In conclusion, both paying taxes and signing up for social security are necessary, but insufficient, conditions for an effective transition toward the formal sector. Therefore, this should not be the only public policy approach. In addition, regarding these two conditions, in Mexico incentives to “become a formal worker” are contradictory. On one side, legal concepts promote formal business, but informal workers. On the other, governmental initiatives promote membership in social security networks but, in turn, the use of non-contributory health schemes is incentivized. The effective measures to make formal employment more attractive are those that go beyond social security. In fact, they are those that facilitate both entry into the formal sector and flexible business operations over the long term. Spanish original
[1] http://www.inegi.org.mx/est/contenidos/proyectos/cn/informal/
[2] http://espanol.doingbusiness.org/data/exploreeconomies/mexico/#close
[3] Data from the local economic research of Dr. Joyce Carol Sadka.
[4] Social communication from the Department of Labor and Welfare (STPS). “CONAGO [National Conference of Governors] passes STPS proposal to relaunch Program for Formalization of Employment, available at: http://www.gob.mx/stps/prensa/aprueba-conago-propuesta-de-la-stps-de-relanzar-programa-de-formalizacion-del-empleo?idiom=es-MX.