Non-wage employer costs in Latin America average over half of formal wages and formalizing informal workers is on average 88% more expensive than paying informal wages, raising the effective cost of formal employment; these high and rising costs heighten firms' incentives to substitute labor with capital — including automation and AI — especially where automation is technically feasible.
Salaried Labor Costs in Latin America and the Caribbean: A Ten - Year Update
In 2023 employer non-wage costs averaged 51.1% of formal wages and formalizing an informal worker cost on average 88% more than the informal wage across 19 Latin American and Caribbean countries, with both levels and cross-country divergence rising since 2013 and 2025 projections reflecting recent reforms in six countries.
The tension between productivity and labor costs in Latin America and the Caribbean remains one of the greatest challenges to creating formal employment. This note estimates the cost of salaried formal labor in 19 Latin American and Caribbean countries for 2023, updating two key indicators previously calculated by the IDBthe average non-wage cost of salaried labor (NWC) and the minimum cost of salaried labor (MCSL)and introducing a new measure: the cost of formalizing informal labor (CFIL). Results show that labor costs have risen since 2013, with increasing divergence across countries. In 2023, the regional average NWC reached 51.1% of formal wages, while the MCSL represented 43.1% of GDP per worker. The CFIL indicates that formalizing a worker costs, on average, 88% more than the informal wage. The note includes projections for 2025 to incorporate recent reforms in 6 countries.
Summary
Main Finding
Labor costs in Latin America and the Caribbean have risen and diverged across countries since 2013. For 2023 the note finds: the regional average non-wage cost of salaried labor (NWC) is 51.1% of formal wages, the minimum cost of salaried labor (MCSL) is 43.1% of GDP per worker, and the newly introduced cost of formalizing informal labor (CFIL) implies formalizing a worker costs on average 88% more than the informal wage. The authors also provide 2025 projections that incorporate recent reforms in six countries.
Key Points
- Three indicators updated/introduced for 19 Latin American and Caribbean countries (2023):
- NWC (average non-wage cost of salaried labor): 51.1% of formal wages (regional average).
- MCSL (minimum cost of salaried labor): 43.1% of GDP per worker (regional average).
- CFIL (cost of formalizing informal labor): on average 88% higher than the informal wage.
- Labor costs have increased since 2013 and divergence across countries has widened.
- The note provides 2025 projections to reflect reforms enacted in six countries, changing future cost estimates.
- Higher non-wage and formalization costs create barriers to creating formal salaried employment and alter firms’ hiring and investment decisions.
Data & Methods
- Coverage: 19 Latin American and Caribbean countries, baseline year 2023; projections for 2025 include recent legislative/reform changes in 6 countries.
- Indicators:
- NWC: measures employer non-wage costs associated with salaried workers (expressed relative to formal wages).
- MCSL: a minimum-cost metric for salaried labor reported relative to GDP per worker.
- CFIL: a new metric estimating the additional cost of hiring and formalizing an otherwise informal worker, reported relative to the informal wage.
- Approach (high-level): the analysis updates prior IDB methodologies by compiling country-specific statutory employer obligations (payroll taxes, social contributions, mandated benefits, severance and similar non-wage components), relating those to wage and macro-labor benchmarks (formal wages, GDP per worker, informal wages), and projecting near-term changes based on known legal reforms through 2025.
- Results presented as country-level estimates and regional averages; emphasis on cross-country divergence and temporal changes since 2013.
Implications for AI Economics
- Incentives for automation: high non-wage costs (NWC ~51%) and large formalization premiums (CFIL ≈ +88%) increase the private incentive to substitute labor with capital, including AI/automation, especially for routine tasks — accelerating adoption where technology is feasible.
- Formalization vs. automation trade-off: expensive formalization may push firms either to remain informal (preserving low-cost labor) or to automate instead of hiring formally. Policy choices that lower formalization costs could retain jobs that otherwise would be automated.
- Measurement and modeling: empirical models of labor costs, productivity, and AI adoption should use total labor cost (wages + NWC) rather than wages alone; CFIL matters for modeling transitions from informal to formal employment under automation scenarios.
- Distributional and regional effects: widening country divergence in labor costs implies heterogeneous pathways for AI adoption and labor-market impacts across the region. High-cost countries may see faster automation and different skill-demand shifts than lower-cost ones.
- Policy levers affecting AI outcomes: reforms that reduce non-wage burdens, subsidize formalization, or redesign social protection can influence whether AI complements or substitutes labor. Complementary investments (training, digital infrastructure) can help formal workers gain from AI rather than be displaced.
- Research priorities: quantify how country-level NWC and CFIL affect firm-level decisions about AI investment and formal hiring; evaluate distributional effects of automation in contexts with high informal employment; simulate policy interventions (e.g., lowering payroll taxes vs. conditional subsidies for formal hiring) on employment, informality, and AI adoption.
Assessment
Paper Typedescriptive
Evidence Strengthmedium — The note delivers systematic, transparent country-level measurements derived from statutory rules and standard macro labor benchmarks, so the descriptive evidence on labor-cost levels and cross-country variation is credible; however, it does not use micro- or firm-level causal analysis to demonstrate that these costs cause higher automation or changes in employment, and the 2025 projections rest on policy-assumption scenarios rather than observed outcomes.
Methods Rigormedium — Methods rely on careful compilation and standardization of statutory employer obligations and linking them to formal wages, GDP per worker, and informal-wage estimates, which supports comparability across 19 countries; but they depend on statutory (not realized) cost assumptions, potentially noisy informal-wage imputations, limited country coverage, and no validation against firm-level behavior or enforcement heterogeneity.
SampleCountry-level dataset for 19 Latin American and Caribbean countries, baseline year 2023, containing three indicators (NWC: non-wage cost relative to formal wages; MCSL: minimum cost of salaried labor relative to GDP per worker; CFIL: cost of formalizing an informal worker relative to the informal wage), constructed from statutory payroll taxes, social contributions, mandated benefits, severance rules, formal wage data, GDP-per-worker benchmarks and informal-wage estimates; 2025 projections incorporate known reforms in six countries.
Themeslabor_markets adoption
GeneralizabilityLimited to 19 Latin American and Caribbean countries — findings may not generalize to other regions, Based on statutory obligations rather than actual payments or enforcement, so realized employer costs may differ, Does not use firm- or worker-level data, so implications for hiring, formalization behavior, or AI adoption are inferential rather than demonstrated, Informal-wage estimates and their comparability across countries are noisy and may vary by sector and region, Country-level averages mask within-country heterogeneity by sector, firm size, and region, 2025 projections assume legislative changes are implemented as expected and omit behavioral responses by firms and workers
Claims (10)
| Claim | Direction | Confidence | Outcome | Details |
|---|---|---|---|---|
| The regional average non-wage cost of salaried labor (NWC) in Latin America and the Caribbean was 51.1% of formal wages in 2023. Wages | null_result | high | NWC (employer non-wage costs) as % of formal wages |
n=19
51.1%
0.18
|
| The regional average minimum cost of salaried labor (MCSL) was 43.1% of GDP per worker in 2023. Wages | null_result | high | MCSL (minimum cost of salaried labor) as % of GDP per worker |
n=19
43.1%
0.18
|
| The cost of formalizing informal labor (CFIL) implies formalizing a worker costs on average 88% more than the informal wage in 2023. Wages | negative | high | CFIL (additional cost of formalizing) as % above informal wage |
n=19
88%
0.18
|
| Labor costs in Latin America and the Caribbean have risen since 2013, and divergence in labor costs across countries has widened over that period. Wages | negative | medium | Change in labor costs (non-wage and total) over time and cross-country dispersion |
n=19
0.11
|
| The note provides 2025 projections that incorporate recent legal reforms in six countries, changing future cost estimates. Wages | mixed | medium | Projected NWC, MCSL, CFIL for 2025 (incorporating reforms in 6 countries) |
n=19
0.11
|
| Higher non-wage costs and higher formalization costs create barriers to creating formal salaried employment and alter firms’ hiring and investment decisions. Hiring | negative | medium | Probability/level of formal salaried hiring and firm investment/hiring behavior |
0.11
|
| High non-wage costs (NWC ≈ 51%) and a large formalization premium (CFIL ≈ +88%) increase the private incentive to substitute labor with capital, including AI/automation, especially for routine tasks. Automation Exposure | positive | low | Incentive/probability of firm-level substitution of labor with capital/automation (AI adoption) |
0.05
|
| Expensive formalization may push firms either to remain informal (preserving low-cost labor) or to automate instead of hiring formally; policy choices that lower formalization costs could retain jobs that otherwise would be automated. Hiring | mixed | low | Firm formalization decisions and likelihood of automation vs. informal hiring |
0.05
|
| Empirical models of labor costs, productivity, and AI adoption should use total labor cost (wages + NWC) rather than wages alone; CFIL should be included when modeling transitions from informal to formal employment under automation scenarios. Other | positive | medium | Accuracy/validity of empirical models of AI adoption and formalization transitions |
0.11
|
| Widening cross-country divergence in labor costs implies heterogeneous pathways for AI adoption and labor-market impacts across the region (high-cost countries may see faster automation and different skill-demand shifts than lower-cost ones). Adoption Rate | mixed | medium | Heterogeneity in AI adoption rates and labor-market impacts across countries |
n=19
0.11
|