Uruguay offers an interesting case to study the link between informality and credit access. Compared to other Latin American countries, Uruguay stands out due to its low ratio of credit to Gross Domestic Product (GDP) as well as for its low level of employment informality. In regard to employment informality, some 39.8 percent of employees in Uruguay are informal. This number is significantly lower than the average of 58.7 percent for the other 15 Latin American countries. Further, in 2002 Uruguay experienced a deep economic and financial crisis, followed by a period of rapid economic growth. This allows the study of the effect of credit on informality in different phases of the business cycle.
By using sectoral differences in financial needs to identify the relation between access to credit and informality this study aims to assess whether changes in financial deepening had an effect on formality in Uruguay in the years 2000 to 2010.
This study shows that easier access to bank credits decreases informality, especially in more financially sectors. This effect is larger for women, younger workers and workers employed by large firms. Despite a severe economic crisis and sharp contractions of bank credits experienced by the Uruguayan economy during the study period, this study shows no evidence to support a change in the effects of bank credit on formality over time.
Despite the positive effects of bank credit on employment formality reveal by study, results cannot provide further information on the possible causes of the magnitude of the effect as well as the differential effects across different types of workers. Understanding how the economy’s underlying key parameters and institutions affect the impact of bank credit on informality is of outmost importance.