Informality Places a “Tax” on Workforce Quality

Mexico, and much of Latin America, enter 2026 with low unemployment and expanding labor participation, but those headline figures conceal a structural constraint on productivity, resilience, and growth. With over half of the region’s workforce remaining informal, employers face what amounts to a hidden tax in the form of high turnover, fragile supply chains, and a labor force that struggles to absorb technology and skills. As economic growth slows and regulatory pressure increases, the long-standing narrative of low-cost labor is reaching a strategic limit.

“The slowdown in the transformation of economies toward sectors with more productive workers and better working conditions acts as a major roadblock in narrowing decent work deficits,” explains the ILO through their Employment and Social Trends 2026 report. That assessment captures a paradox shaping Mexico’s labor market. Unemployment is projected to remain near historic lows, around 2.8% to 3.0%, yet GDP growth forecasts for 2026 cluster between 1.0% and 1.5%. The disconnect reflects an economy that is generating jobs without consistently generating productivity.

Informality sits at the center of that gap. Across Latin America and the Caribbean, 51.1% of total employment remains informal, making it less an exception than a baseline. In the most recent growth cycle, roughly 2 million of the new jobs created in the region were informal, reinforcing a pattern in which employment expands without strengthening skills, stability or output. In Mexico, official data show that while formal employment coverage has improved in structural terms, a majority of workers still operate outside full labor and social security protections.

This dynamic has direct consequences for organizational performance. Informal employment is typically associated with limited training, weak skill accumulation, and restricted access to technology. Global labor productivity growth is projected at about 2.0%, a level widely seen as insufficient to sustain income gains or competitiveness. ILO analysts attribute much of that stagnation to the slowdown in structural transformation — the process of moving workers into formal, higher-productivity roles — which has halved over the past two decades. For employers, this translates into teams that are harder to upskill, less able to integrate digital tools, and less prepared to leverage AI beyond basic tasks.

Turnover is another expression of the informality tax. Low unemployment has not eliminated labor scarcity; instead, it has reshaped it. Employers increasingly report difficulty retaining workers, particularly in operational and technical roles. Informal jobs are characterized by unstable and irregular incomes, which encourages short job tenures and frequent movement between employers or activities. This instability raises recruitment and training costs, disrupts operations, and weakens institutional continuity.

Supply chain vulnerability adds a further layer of risk. Informality limits access to formal financing, insurance, and long-term contracts, constraining the growth and reliability of smaller suppliers. In sectors exposed to nearshoring and export demand, informal links can become points of failure when compliance requirements tighten or when production schedules require consistency. With roughly 75% of Mexico’s exports tied to the United States, heightened trade policy uncertainty has made formal compliance, documentation, and traceability less optional and more central to operational survival.

Recent policy initiatives illustrate both advances and limitations. The expansion of social security coverage to digital platform workers has increased registrations and extended benefits to hundreds of thousands of people. While these programs represent a step toward inclusion, they often amount to what analysts describe as “statistical formalization,” in which workers enter registries without a corresponding rise in job quality, training intensity, or productivity. The challenge for employers is to move beyond minimum compliance toward employment models that generate durable value.

The demographic dimension amplifies the cost of inaction. Youth unemployment in Latin America stands near 11.9%, almost three times the adult rate, and about 56% of young workers in the region are employed informally. In addition, roughly one in five young people globally is classified as not in education, employment, or training, signaling a pipeline failure for future skills and leadership. Gender gaps compound the issue. Women are more than 24 percentage points less likely than men to participate in the labor force, and among those who do, informality rates are often higher in lower-income segments. These patterns represent foregone productivity and a shrinking effective talent pool at a time when skills shortages are becoming more acute.

For employers, the implications are increasingly strategic rather than merely regulatory. Formalization affects the ability to plan, to invest in training, and to deploy technology effectively. A workforce with stable contracts and social protection is more likely to engage in reskilling, remain with an employer longer, and support process standardization. Conversely, reliance on informality may suppress short-term labor costs while inflating long-term operational risks.

Wage data underlines the tension. Nominal salaries have continued to rise, driven by minimum wage increases and easing inflation, even as hiring slows. Many organizations appear to be prioritizing retention and compensation adjustments for existing staff rather than expanding headcount. In that environment, informality functions as a drag on productivity gains, as higher wages are not consistently matched by higher output or deeper skills.

By 2026, an estimated 2.1 billion workers globally are projected to be informally employed, typically in jobs with limited access to social protection, says ILO. In Mexico and across Latin America, the persistence of informality highlights where progress has lagged most. Competing primarily on labor cost offers diminishing returns in a context of low growth, tighter regulation and rising expectations around compliance, resilience, and workforce quality.

Shifting toward aggressive formalization — through stable contracts, structured training, inclusive hiring and stronger supplier integration — is emerging as a prerequisite for sustaining competitiveness. The alternative is to continue paying the informality tax through turnover, fragility, and missed opportunities in technology adoption. As the region moves through 2026, the ability to convert employment into productivity may prove as decisive as the number of jobs created.