Subsidizing Informality?: Non-contributory Public Spending in Latin America and the Caribbean

This paper presents new data documenting the level and evolution of public spending on non-contributory programs for 16 countries in Latin America and the Caribbean. Salaried formal workers contribute to social security and in return have access to an array of benefits -mainly old-age pensions and health services. In recent decades, informal workers – salaried and non-salaried- have gained access to similar benefits, financed through general revenues. Our calculations indicate that, on average, the region spends 1.7% of GDP in these programs. Although they were created in response to social demands, by targeting informal workers these programs may create a behavioral response -i.e. more informality. This paper does not attempt to measure behavioral effects. Its main contribution is to be the first to document this “subsidy to informality” following a common methodology across countries and years in the region.