INFORMAL EMPLOYMENT IN EL SALVADOR: STRUCTURAL ANALYSIS, DETERMINANTS, AND AN INTEGRATED STRATEGY FOR FORMALIZATION

Abstract

Labor informality in El Salvador is a structural and persistent phenomenon that has shaped the country’s economy for over five decades, constraining productivity, social equity, and fiscal sustainability. This study adopts a mixed historical, quantitative, and institutional approach to identify its main determinants and design an integrated national strategy for formalization for the 2026–2032 period. Using microdata from the Multipurpose Household Survey (2009–2019) and reviewing public policy documents, the analysis finds that low educational attainment, rural residence, gender inequality, low productivity, and weak institutional capacity are the key drivers of informality. Logistic regression results confirm that each additional year of education significantly reduces the probability of informal employment, while living in rural areas more than doubles it. Furthermore, the qualitative analysis incorporates the care economy dimension and the collateral effects of recent security policies as factors reshaping the survival strategies of vulnerable households. The findings suggest that informality is not an individual choice but the expression of a segmented and institutionally fragile economic system. An integrated formalization strategy is proposed, consisting of four pillars: administrative simplification and digitalization, progressive fiscal incentives, productivity and human capital development, and strengthened social protection. The study concludes that eradicating informality requires a new social and productive pact that paves the way for an inclusive and sustainable development model.