Informal employment in Paraguay affects 60.1% of workers and accounts for approximately 20.5% of GDP, according to national accounts data. Despite the economic expansion recorded in 2025, the phenomenon remains a structural challenge for the country, affecting everything from street commerce to sectors such as construction, domestic services, transportation, agricultural activities, and small family businesses.
Economist Rodrigo Ibarrola, from the Center for Analysis and Dissemination of the Paraguayan Economy (Cadep), explains that informality is multicausal and cannot be reduced to a single indicator. He distinguishes different profiles of informal workers: there are self-employed workers and microenterprises operating in subsistence, for whom the cost of formalization is virtually unaffordable, such as street vendors and construction workers; but there are also high-performing self-employed professionals, with greater productivity and entrepreneurial capacity, who choose to remain informal for tax advantages and flexibility, such as construction contractors, cross-border traders, and software developers.
"These are legal activities. What makes them informal is that they do not pay taxes, do not issue invoices, do not register workers, and do not fully comply with labor or commercial regulations," Ibarrola states. He emphasizes that informality is not a clearly defined legal category and can refer to workers without social security, unregistered businesses, activities not declared to tax authorities, precarious employment, self-employment, and unregistered production.
Among the determinants of the phenomenon, the economist points to education as a central factor. Workers with more years of schooling are more likely to have health insurance, contribute to retirement savings, receive vacation time, work at registered companies, and hold formal contracts. "Education increases individual productivity. Since more productive workers are more attractive to formal companies, this facilitates entry into larger firms, more professional jobs, and the public sector. This is how a virtuous cycle is formed," he argues.
Regarding the role of the State in reducing informality, Ibarrola argues that state coercion or the mere simplification of bureaucratic procedures are not enough. He notes that Paraguay has low regulatory capacity and high regulatory intent, with constant announcements of formalization plans but modest results given institutional constraints. "The current Paraguayan economy cannot function without the informal economy," he states.
The economist warns that mass enforcement and harsher penalties tend to yield low marginal benefits, and that abrupt formalization could generate unemployment, the closure of microenterprises, and a reduction in household income. For him, the central strategy must focus on education, differentiation among types of self-employment, and incentive-based formalization, accompanied by visible benefits and improved public services. "We need to move from asking how to eliminate informality to asking what level is compatible with an economy that wants to develop and which segments to prioritize," he concludes.