In the favorable macroeconomic context of the past few years, Uruguay has experienced a significant
decrease in its labor informality rate —defined as the rate of workers not contributing to social security.
In this article, we analyze the evolution of informality and its potential explanations. In so doing, we
consider the role of various policies implemented over the period, as well as the wage differentials between
formal and informal workers. The informality rate for all workers went from 36% in 2001 to 23% in 2014.
The fall in inequality —almost 61%— is mainly explained by the decrease in informality among private
workers. The reduced importance of self-employment without premise also contributes to the fall in
informality. Our aggregated decomposition of the changes in labor informality between 2001 and 2014
reveals that 60% of the reduction is due to the characteristics effect of workers, who exhibit a decreased
likelihood of belonging to the informal sector. The wage differentials between formal and informal
workers vary significantly across job categories. At the end of the period, both informal workers from the
private sector and self-employed individuals with or without premises receive lower wages than formal
workers in the private sector, at the median of the distribution. In addition, neither self-employed
individuals —with or without premises— working in the formal sector nor employers in the informal
sector exhibit significant wage differences with the reference group at the end of the period. On the other
hand, public workers and formal-sector employers benefit from a higher wage than formal employees
working in the private sector. The wage penalty from being in the informal sector is higher in the lowest
percentiles of the distribution, while the reward for belonging to the formal sector increases up to 70th
percentile approximately for public employees, and across the whole distribution for formal-sector
employers. Wage differentials have tended to decrease since 2007, which is consistent with the fall in
wage inequality.