Informal Barriers: An initial diagnosis of informal employment in the construction sector from LabMTESS

Gustavo Setrini, Cristhian Parra, Mónica Ríos, Georgina Hernández Rivas*, Fernando Ovando*, Claudia Montanía*, Mónica Recalde* y Giselle Morínigo*

30 de Abril de 2021

In a country where around 64% of the economically active population works under informal conditions, understanding how this sector works and identifying the barriers to the creation of formal employment is of vital importance. This is only further underlined by our current health and economic crises. For this reason, discovering the challenges posed by informality in the construction sector in Asunción and Central has been the main focus of the Ministry of Labor’s Participative Laboratory for Employment Formalization (LabMTESS) since its launch in July 2020.

In order to identify the key research questions whose answers could help improve the Labor and Social Security Ministry’s formalization strategies, the UNDP Paraguay’s Acceleration Lab along with LabMTESS spent the first weeks after its launch studying the available data on informality. This allowed us to create an initial informality “x-ray.” This Discovery Phase of our research focused on a specific sector of the economy: construction. It was selected by the lab team due to its importance in structuring labor markets in Paraguay, especially informal labor markets, in addition to its centrality to national plans for economic recovery and to the national government’s own labor needs.

The early findings from this exploratory research were articulated and summarized in the Informe Diagnóstico del Empleo Informal en el Sector de la Construcción (Assessment Report on Informal Employment in the Construction Sector). This assessment provides a general description of informal workers based on an analysis of statistical data collected in the Permanent Household Survey, as well as qualitative data collected via semi-structured interviews with key actors in the construction sector in order to map the value chain in the sector and to identify and processes and dynamics in the value chain that generate labor informality. 

Rates of informality by economic sector, 2015-2019 - Source: Based on data from the Permanent Household Survey, DGEEC.

What did we find?

An analysis of data from the Permanent Household Survey (2015-2019) showed that informality in the construction sector in Asunción and Central primarily affects private employees/workers and the self-employed. A majority are young adult men without higher education who enter into work agreements via oral contracts. Their work is largely seasonal, and they do not enjoy medical insurance or vacation days. In addition, their income is up to 47% less of than what formal workers earn in the construction sector and is up to 19% lower in relation to other informal productive sectors.

Having described these workers, we proceeded to map the value chain the work in. The construction sector includes multiple types of construction projects which can be slotted into three general categories:

General typology of construction projects - Source: LabMTESS.

Given the complexity of the sector and the heterogeneity of project types, we decided to focus our analysis on residential projects, and on apartment building construction. This type of project represented around 25% of the construction projects registered by Municipality of Asunción in 2018.

Our map shows that the construction value chain begins with the project design, which is done by developers’ technical teams or by architects and engineers acting as special consultants. The next phase comprises the execution of the project design, which involves a large network of subcontractors and self-employed workers that includes machine operators, forepersons, master builders, and work crews. The final step is the delivery phase, which involves specialized and real estate consultants. Throughout the process, various inputs and services are consumed, stimulating other productive sectors such as the cement, iron and steel, hardware, and hydraulic, electric, plumbing, etc. 

Generic construction value chain - Source: LabMTESS

We identified the key actors within this value chain by means of specialized interviews and the secondary literature on the subject. Generally, actors are located in the private sector (formal and informal), where most of the value chain’s productive actors are located. However, we also identified institutional and social actors who can promote or limit the sector and its political, social, and economic power. 

Key actors in the construction sector - Source: LabMTESS.

Where are the informal workers?

Within the private sector, primarily in the micro- and small-enterprises that generally take on small-scale developments within the value chain. While they tend to have a Registro Único del Contribuyente (RUC; Unique Taxpayer ID), the main criteria for formality from a business and tax perspective, they cannot cover the tax withholdings necessary to register their workers within the social security system.

Informality also affects work done by self-employed workers. A fraction of the self-employed provide specialized consultancy services and have a RUC but are generally not registered as independent workers within social security. Another fraction consists of workers who provide technical building services, those who have moved up the ranks from being apprentices and laborers to the position of master builder. They generally employ a team of workers and constitute a form of “quasi-enterprise” comprising relatively stable employment networks. But neither the self-employed “quasi-entrepreneurs” nor their quasi-employees have RUCs or are registered on the social security.

Next Stages on the Learning Circle

Based on what we learned during the Discovery Phase of this project, LabMTESS moved on to the work of the Exploratory Phase of the learning cycle. In this phase, we will focus on reaching out to the key actors in the construction value chain to understand their perceptions and interpretations regarding informality in the sector and social security.

In the next blogs, we will show how the value chain map was validated and how we identified barriers to formalization in the construction sector via interactive workshops with a range of actors from the value chain, as well as a cultural survey of construction workers in the Asunción metro area. The findings from this second phase in the learning cycle generated new insights from a different perspective: that of construction workers themselves.

Lea este blog en español aquí.


Georgina Hernández Rivas: is a Salvadoran anthropologist with a doctorate in Latin American Studies, Cultural Diversity, and Social Complexity from the Universidad Autónoma de Madrid, Spain.  For her thesis, Hernández applied a methodology of participative social cartographies for socio-environmental change.  She was recently part of the founding team of La Casa Tomada, a project financed by the European Union to create a model cultural ecosystem for the transformation of the economic environment of vulnerable communities within the metropolitan area of San Salvador. 

Fernando Ovando: is an economist from the Universidad Nacional de Asunción with graduate studies in economics from the Universidad Nacional de la Plata, Argentina.  His publications deal with labor markets, poverty, income distribution, fiscal policy, and public finances.  In 2019 he published Understanding the Determinants of Economic Informality in Paraguay A Kaleidoscope of Measures.

Claudia Montanía: has a Ph.D. in Economics from Universidad de Extremadura, España. She is affiliated researcher of the Regional Economics Applications Laboratory at the University of Illinois, Urbana Champaign. Beginning in August 2020, she is supporting the AccLab team as an independent consultant, collaborating in data analysis and basic research.

Mónica Recalde:  General Director of Social Security of the Ministry of Labor, Employment and Social Security (MTESS) and responsible for the coordination, monitoring and evaluation of the integrated employment formalization strategy and national and sectoral social security policies In Paraguay. She is a lawyer with a masters degree in the management of social security systems and more than 16 years of service in the public sector. She is the direct counterpart of several international organizations in the design and execution of projects and consultancies, among which those of the ILO, IDB, OECD, World Bank, OISS, ISSA and UNDP, among others, stand out.

Giselle Morínigo: Director of the Labor Observatory in the Ministry of Labor, Employment and Social Security. Giselle holds a degree in economics from the Autonomous University of Baja California – Mexico and is an instructor of Regional Development in the Colegio de la Frontera Norte - EL COLEF (Baja California - Mexico).She has more than seven years of experience working on issues of labor market analysis, statistical analysis of the main employment indicators, discussion and preparation of employment and labor policy proposals.