The Central Bank of Colombia has released an Economics Working Paper in its Borradores de Economía series examining how labour informality affects macroeconomic volatility in a small open economy, using Colombia as the reference case. The paper’s central conclusion is that higher informality increases the volatility of consumption and investment, and raises inflation volatility, even though informality can dampen employment volatility by absorbing workers displaced from the formal sector. The study combines cross-country empirical work using data from 60 countries with a DSGE model featuring heterogeneous households and a segmented labour market with differentiated wage rigidities and productivity gaps across formal and informal sectors, alongside household financial constraints. It finds that formal-sector wage rigidities amplify income and labour-demand adjustments, while financial exclusion limits informal workers’ ability to smooth consumption, together increasing aggregate fluctuations; quantitatively, the model explains 36% of the observed relationship between informality and consumption volatility and 60% for investment volatility.
Central Bank of Colombia 2026-02-23
Central Bank of Colombia publishes research arguing labour informality amplifies macroeconomic volatility
The Central Bank of Colombia's Economics Working Paper examines how labour informality affects macroeconomic volatility, finding that higher informality increases consumption, investment, and inflation volatility. Using a DSGE model and cross-country data, the study reveals that formal-sector wage rigidities and financial exclusion of informal workers exacerbate aggregate fluctuations. The model accounts for 36% of the observed relationship between informality and consumption volatility and 60% for investment volatility.