COVID-19 and the Informality-driven Recovery: The Case of Colombia's Labor Market

IMF Working Papers, September 17, 2021

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About a quarter of employment was temporarily disrupted at the height of the first pandemic-induced lockdown in 2020.
Women, the young, and the less educated were the most affected groups.
Since the first lockdown, a remarkable recovery has taken place, led by a rebound in informal employment.
The informal sector adjusted both employment levels and hours faster than the formal sector, acting as an important margin of adjustment, particularly in industries most affected by the first lockdown.
The informal sector appears to have reduced the sensitivity of aggregate employment to more recent lockdowns in 2021.
A substantial downside risk is that higher informality rates could become embedded, undermining long-term productivity.

Informality as an adjustment margin:
- Faster adjustments in employment levels and hours within the informal sector enabled a quicker employment rebound.
- The informal sector’s flexibility was particularly important in industries hardest hit by the first lockdown.
Evolving pandemic response:
- As the economy "learned to cope with pandemic restrictions," the link between lockdowns and aggregate employment weakened in 2021, with informality playing a role in that decreased sensitivity.

Groups disproportionately affected during the initial disruption:
- Women
- The young
- The less educated

Short-term stabilization vs. long-term productivity trade-off:
- While informal employment supported a rapid recovery in employment, the potential embedding of higher informality rates is a substantial downside risk for long-term productivity.
Implied policy considerations (drawn from the paper’s findings):
- Monitor informality trends to assess whether recovery gains are sustainable.
- Design policies that support reallocation back to more productive, formal employment without undermining the short-term adjustment role that informal employment played during the pandemic.

COVID-19 and the Informality-driven Recovery: The Case of Colombia's Labor Market — Jorge A Alvarez; Carlo Pizzinelli; September 17, 2021.