The countries of the region are characterized by being small and open economies, which means that their growth is heavily conditioned by the level of global economic activity—particularly that of the United States, China, and the European Union, which together account for nearly 70% of the region’s total trade. Some studies show that if the world grows by 1%, the region grows proportionally. This peculiarity presents multiple challenges for managing external events, while highlighting the need to strengthen the region’s institutional and productive capacities.
Latin American countries’ responses to changes in the international environment tend to be uneven or asymmetric. When external factors drive regional growth—such as rising commodity prices—economic conditions for the population improve. However, when these external factors induce a recession, the effects are usually deeper and more prolonged than those of periods of prosperity, revealing a heightened vulnerability.
This asymmetry can be explained by several factors: poorly diversified productive structures—sometimes dependent on commodities and their price volatility; trade concentration in a few partners; institutional weakness; low productive linkages and lags in infrastructure and technology; and a high degree of labor informality.
Between formality and labor survival
The labor market in the region is marked by a pronounced duality in its employment structure, reflected in the coexistence of two opposing profiles. On one hand, formal employment, which accounts for an average of 48.7% of workers, is associated with better working and wage conditions, as well as higher productivity levels. On the other hand, informal employment represents an average of 51.3% of the total and, in contrast, offers precarious conditions, with lower income and fewer labor benefits than the formal sector.
During expansion periods, formal employment grows while informal employment decreases. Conversely, in times of economic slowdown, the opposite occurs: formal employment contracts while informality and unemployment rise. In other words, informal employment functions both as a survival sector—providing an immediate source of income when formal jobs are lost in contexts where unemployment insurance is ineffective—and as an entryway to the labor market, since it demands lower productivity requirements for those just beginning their working life.
Unemployment, meanwhile, tends to remain practically unchanged regardless of the economic cycle, as most of the adjustment occurs within the duality of employment. For example, during Latin America and the Caribbean’s main economic boom of this century (2004–2006), with average annual growth of 4.7%, the unemployment rate stood at 7.6%. In contrast, during the period of weakest expansion—excluding the COVID-19 pandemic—between 2014 and 2016, with average annual growth of just 0.46%, unemployment was nearly the same (7.7%).
Thus, it is not surprising that several Latin American countries show relatively low unemployment rates, even lower than some developed economies. On average, between 2000 and 2024, Latin America’s unemployment rate was 7.7%, while the European Union’s reached 8.7%. This apparent stability does not reflect a situation of full employment, but rather a scenario of labor duality that requires a different analytical lens.
A study conducted by the Universidad de las Américas (UDLA) covering 16 Latin American countries found that wage employment—mostly formal—does not respond to increases in external demand. One possible explanation lies in the combination of high regulation and low labor market efficiency: hiring processes are slow and costly, leading firms to avoid expanding staff during booms and instead opt to increase working hours.
In contrast, when external demand falls, wage employment does decline. This confirms that crises have a stronger impact, generating layoffs in quality jobs and deepening labor precariousness in the region. The study also found that self-employment—mostly informal—responds asymmetrically to external cycles: it rises more strongly and persistently during crises than it falls during booms.
A similar dynamic is seen in unemployment, though with less intensity and a delayed response. This shows that external recessions deteriorate labor market conditions in the region more deeply and for longer than expansion periods are able to improve them.
Therefore, favorable economic conditions fail to translate into sustained employment improvements. Wage employment does not increase due to various structural factors in the region, such as productive structure, labor regulations, low human capital accumulation, and business hiring strategies, among others. However, when conditions worsen, there is a marked deterioration in job quality, reflected in the reduction of wage employment and the rise of self-employment. This precarization affects not only job quality but also job quantity. Over time, even self-employment becomes insufficient to sustain households economically, leading many workers to become trapped in unemployment.
Diversification and formalization: Pillars for a better future
These findings highlight that Latin America urgently needs to rethink how it faces global economic cycles. In terms of public policy, it is essential to move toward structural reforms that accompany people’s labor trajectories with education, stability, and effective protection. This means strengthening education systems as the main tool for improving employability and lifelong opportunities; simplifying procedures and modernizing public mechanisms that facilitate business creation and hiring; reviewing the tax burden and complexity that hinder formalization; and consolidating social protection mechanisms—such as more effective unemployment insurance—that allow workers to face crises without being forced into informality.
Moreover, it is crucial to foster a competitive investment environment and promote the most productive industries—those capable of diversifying the economic structure and reducing dependence on a few sectors or external markets. Without stronger institutions and a clear, long-term development strategy, the region will remain trapped in this dynamic of fleeting growth and deep setbacks.
Within this framework, the private sector must take on a more active role in transforming the labor market. It is essential that companies commit to formalization, not only as a legal obligation but as a strategic investment in productivity, stability, and worker well-being. In periods of growth, it is equally important that firms can respond more agilely to rising demand, avoiding rigid structures that limit hiring and expansion, while maintaining worker protections.
Promoting job training, digitalization, and business innovation is key to facilitating this transition toward a more competitive and sustainable environment. In summary, the region must break from the inertia of reacting late—and with high social costs—to external crises. Only then will it be possible to build a more resilient, productive labor market capable of turning boom periods into sustained growth that improves the population’s quality of life.
Autor
Profesora e investigadora de la carrera de Economía de la Universidad de Las Américas – Ecuador. Maestría en Economía del Desarrollo por la Universidad Nacional de Costa Rica. Ha publicado artículos en revistas académicas nacionales e internacionales.
