Informal employment remains a defining feature of many developing economies, limiting access to social protection, reducing productivity, and perpetuating inequality. In India, nearly 85 percent of workers operate without formal contracts, health insurance, or pension benefits. Latin America has faced similar challenges, with an estimated 50 percent of workers employed informally in 2023 (ILO, 2024). Across the region, informality rates vary widely: over 70 percent in countries like Peru, Honduras, and Guatemala, compared to below 30 percent in Chile, Uruguay, and Costa Rica, with Brazil and Mexico occupying the middle range of 40–60 percent. This variation reflects the diverse policy approaches that countries in the region have adopted to formalize labor markets and expand social protection.
The Latin American experience offers a wealth of lessons. Chile combines mandatory individual pension savings with state-funded solidarity benefits for informal workers. Costa Rica links social security with primary healthcare delivery, achieving near-universal coverage. Mexico uses conditional cash transfers (Prospera) to incentivize education and healthcare compliance, indirectly encouraging formal employment. These examples illustrate a key principle: formalization succeeds when social and economic incentives are aligned to encourage voluntary participation.
Among these diverse experiences, Uruguay and Brazil offer particularly relevant lessons for India. Uruguay demonstrates how coherent social protection reforms—such as linking health coverage to formal employment—can dramatically reduce informality even in smaller economies. Brazil, by contrast, shows how scalable digital systems and low-cost formalization pathways can transform labor markets in large, heterogeneous economies similar in size and diversity to India. The common thread in these two countries is the strategic use of policy design, digital infrastructure, and targeted incentives to bring informal workers into formal employment. India, facing an informal workforce of nearly 380 million, can replicate elements of Uruguay’s approach by linking social benefits to formal registration, and adopt Brazil’s model of digital registries and affordable micro-entrepreneur programs to achieve scale.
Uruguay: Linking Health to Formal Jobs
Uruguay, with a population of 3.4 million, has one of Latin America’s most successful social protection systems. A landmark 2008 health reform that extended public health coverage not just to formal sector workers but also to their dependents. This reform created a strong financial and social incentive for families to engage in formal employment: by registering formally, workers secured healthcare access for themselves and their families. This linkage between employment status and social benefits is a key driver of formalization because it turns social protection into a tangible, everyday reward rather than a theoretical entitlement (Inter-American Development Bank, 2021).
Uruguay’s system also leverages digital technology and streamlined administration to lower barriers for small businesses and self-employed workers. Real-time digital tracking of social security contributions reduces paperwork, minimizes errors, and makes enforcement more efficient. Simplified registration procedures for small and medium enterprises (SMEs) reduce the bureaucratic hurdles that often discourage businesses from formalizing. Affordable taxation and contribution schemes for micro-entrepreneurs ensure that joining the formal system is financially feasible, particularly for those with limited resources. Additionally, Uruguay’s tripartite social dialogue framework—bringing together government, employers, and unions—ensures compliance and inclusivity. As a result, informality fell to 21.5 percent in 2022, with over 90 percent of workers covered by social security programs (ILO, 2023).
For India, linking healthcare, pensions, and family benefits to formal registration could encourage workers to join the formal sector. At the same time, simplifying administrative processes for micro-entrepreneurs and small businesses would make formalization easier and more accessible.
Brazil: Scaling Workforce Formalization
Brazil provides a compelling example of how large and diverse economies can tackle labor informality through a combination of digital innovation, simplified formalization pathways, and coordinated enforcement. The country’s Microentrepreneur Individual (MEI) Program, launched in 2009, targets self-employed workers and small business owners who often operate outside the formal system. By allowing them to register at low cost, the program provides access to essential social protections such as pensions, maternity benefits, and healthcare, which were previously unavailable to many informal workers. The MEI program has been highly effective, formalizing over 14 million Brazilians (EGAP, 2022) and demonstrating that financial and administrative incentives can motivate voluntary participation in the formal economy.
To ensure compliance, Brazil introduced integrated labor inspections in 2014. These inspections coordinate efforts across multiple ministries, including labor, social security, and taxation, creating a more efficient and consistent enforcement mechanism. This reduces loopholes and non-compliance while ensuring that formalization policies are uniformly applied across regions and sectors (Social-Protection.org, 2020).
Another cornerstone of Brazil’s strategy is the Unified Social Registry (Cadastro Único), a digital platform that integrates welfare programs, social security, and subsidies. Covering nearly half of the population (IMF, 2024), this registry allows government agencies to monitor eligibility, track contributions, and deliver benefits efficiently. By combining digital infrastructure, affordable pathways for formalization, and coordinated enforcement, Brazil demonstrates that even large, heterogeneous economies can systematically reduce informality while expanding social protection coverage.
For India, Brazil’s experience is particularly instructive. Adopting similar measures—low-cost formalization options for micro-entrepreneurs, integrated digital registries linking multiple programs, and coordinated enforcement—could help India manage its vast, diverse informal workforce. Such an approach would make formalization scalable, inclusive, and sustainable, ensuring that millions of workers gain access to social protection while improving overall compliance across sectors and regions.
How India Can Replicate Latin American Success
India’s informal workforce requires a multi-pronged strategy:
- Link social benefits to formal registration: Extend healthcare, pensions, and family support to incentivize workers to formalize.
- Simplify digital onboarding: Integrate EPFO, ESIC, and e-Shram under a single digital registry to reduce administrative friction.
- Strengthen enforcement: Coordinate inspections across labor, tax, and social security agencies to enhance compliance.
- Promote social dialogue: Engage unions, employers, and local governments to build trust and ensure practical implementation.
By combining technology, incentives, and governance, India can transition millions of informal workers into formal employment, boosting productivity, social protection coverage, and economic resilience.
Building a Formal and Inclusive Workforce in India
Latin America’s reduction in informality—from roughly 60 percent in the early 2000s to around 50 percent today—demonstrates the power of sustained, well-designed policy interventions. Uruguay’s near-universal coverage and Brazil’s scalable formalization programs highlight how digital innovation, targeted incentives, and coordinated governance can significantly reduce labor informality. For India, the challenge is not whether such reforms can work, but how to implement them across a workforce of nearly 380 million—ensuring that digital systems, incentives, and governance mechanisms function at scale. By adapting these lessons, India can build a more formal, inclusive, and secure labor market, supporting equitable growth and long-term economic stability.
