Informal Sector in the Dominican Republic: Thinking about solutions

By Odalis F Marte 
     @ofmarte

In the context of the Dominican Republic´s (DR) economy, informality is an absolutely critical issue, reflecting both the inability of the economy to generate enough formal businesses and thus jobs because of structural constrains, and also inadequate labor market policies, especially those implemented in the last few decades. In the DR, around half of those employed works in the informal sector (http://www.bancentral.gov.do/publicaciones_economicas/otros/mercadolaboral_informalidad.pdf). According to the World Bank, “Informality can be defined along different dimensions such as operating without registration, income tax evasion, labor tax evasion, or operating outside the legal framework of an economy”. (http://www.enterprisesurveys.org/data/exploreTopics/Informality)

Policies for the labor market can be focused toward protecting jobs or protecting workers. Many developed countries (before the onset of the financial crisis in 2008) were considered operating close to full employment and as a result, labor policies tended to move from protecting jobs to systematically protecting workers. That scheme proved not to work for developing countries as the lack of opportunities in the labor market only pushed workers and businesses to the informal sector.

To reduce the informality in the DR, the government should engage in short-to-mid term microeconomic reforms to render the labor market more flexible and thus boost business and employment:

1.       Implement targeted employment programs throughout disadvantaged communities;

2.       Modify labor code to make it less costly for businesses to hire employees;

3.       Simplify tax code to make it easier for business to register and pay taxes, eliminating incentives to remain informal;

4.       Implement policies to promote more competition in the domestic market in order to expand entrepreneurship letting more people to start new businesses;

5.       Facilitate more access to financial services to small business.