Labor dynamics in times of migration crisis: the structural problem of informality

Cristian Castillo, Maria Moyano, Emma Ávila
DESH Consultores

Context, Concepts and Literature

The Venezuelan exodus into Colombia offers an unusually sharp setting to study labor-market adjustment in a developing economy. In the language of empirical labor economics, it resembles a “natural laboratory” not because it is tidy, but because the primary driver of the flow is largely external to Colombia’s short-run labor demand. Unlike more common migration episodes shaped by pull factors, this movement was triggered by exogenous push factors (most notably Venezuela’s institutional and economic collapse) which translated into a rapid and massive labor supply shock (Caruso et al., 2019).

In Colombia, informal employment creates a cycle that is difficult to break: experience gained in informal jobs is hard to certify and is often viewed negatively by formal employers, which reduces workers’ chances of moving into formal employment. This effect is compounded by the lack of incentives for skill development in informal work, as these jobs rarely reward credentials or support training. As a result, workers—especially youth—can become trapped in low-productivity roles, facing stagnation of their human capital and limited opportunities for upward mobility.

This paper’s core analytical move is to separate two forces that are too often conflated in public debate and in empirical work: (i) a Structural Persistence component, driven by informality traps and state dependence; and (ii) a Contemporary Migration Shock component, capturing the incremental effect of the Venezuelan inflow. The hypothesis is straightforward: migration does not create traps; it makes them bind more tightly for already vulnerable groups.

Key Concepts

To distinguish between different forms of informality, it is useful to separate informality as a static status from informality as a dynamic process. “Simple informality” refers to a reversible employment state lacking registration, formal contracts, or social security, often reflecting temporary constraints or short-term choices. In contrast, an “Informality Trap” is a dynamic mechanism where previous informal work increases the likelihood of remaining informal in the future, creating a path-dependent condition that reduces mobility toward formal employment, especially when formal jobs require verifiable credentials, stable work histories, and compliance with regulations.

This trap consolidates primarily through two structural channels that degrade human capital and weaken market signaling:

1) In Colombia’s informal labor market, workers often lack incentives to invest in skills because informal jobs rarely reward credentials or finance training, leading to stagnation or depreciation of human capital and making it harder for workers to match the requirements of formal employment.

2) Informal employment often produces experience that is difficult to certify, making it hard to transition into formal jobs; employers may view long informal work histories as a sign of low productivity or weak commitment, even if this perception is inaccurate, which can trap workers in low-productivity roles.

Against this conceptual backdrop, the empirical objective is to decompose observed informality into persistence versus shock. The purpose is not semantic; it matters for diagnosis. If persistence dominates, policies that focus narrowly on controlling flows or protecting nationals will miss the main driver; if shocks dominate, short-run stabilization and targeted protection may be sufficient. The results below speak directly to this distinction.

Methodology

This research uses microdata from Colombia’s GEIH survey (2013–2018) to examine the labor-market impact of the Venezuelan migration crisis. Because the GEIH is not a true panel, the analysis constructs pseudo-panels following Deaton (1985). Individuals are grouped into synthetic cohorts (statistically comparable cells defined by birth year, education, and geography) allowing the estimation of dynamic labor trajectories at the cohort level.

The identification strategy combines this pseudo-panel structure with a Difference-in-Differences (DiD) design. Specifically, the analysis compares highly exposed border departments with interior regions before and after the 2016 border closure. This timing is used as a policy-relevant breakpoint that coincides with intensified migration pressure, helping to isolate the contemporaneous shock from longer-run structural dynamics.

The main empirical models are dynamic logit specifications with state dependence, used to separate structural persistence from migration shock. Multinomial logit models are additionally estimated to characterize transitions between formal and informal states. Unconditional quantile regressions are used to capture heterogeneous impacts along the earnings distribution, an important complement when migration affects different parts of the informal market through different channels. Finally, labor transition matrices summarize mobility patterns and are used to infer long-run equilibria and amplification effects associated with the trap mechanism.

Results

The informality trap in Colombia’s labor market is reinforced by two main structural channels: first, skill depreciation and weak incentives for training, as informal jobs rarely reward credentials or support skill development, leading to stagnation of human capital; and second, the lack of verifiable signals, since informal experience is difficult to certify and may even be seen as a liability by formal employers, making it harder for workers—especially youth—to transition into formal employment.

Dynamic models also support an “experience paradox”: accumulated informal experience behaves as a liability. Rather than improving future prospects, time in informal work raises the probability of remaining trapped. The interpretation is consistent with the conceptual channels described above where informal histories are hard to certify and may be discounted by formal employers, while skill accumulation can stagnate in precarious jobs. This is precisely the mechanism through which persistence becomes quantitatively dominant.

Income effects are heterogeneous and reveal what average estimates can conceal. Unconditional quantile regressions indicate that the poorest women (Q25) experienced earnings losses of −8.7%, consistent with heightened competition in subsistence tasks. Meanwhile, youth at the upper end of the informal tier (Q75) saw a −4.8% decline, consistent with occupational downgrading of skilled migrants who compete in higher-tier informal niches. In other words, the shock can compress earnings from both ends of the informal distribution, though through different mechanisms.

A distinctive contribution to the analysis is the identification of a systemic amplification effect. The results suggest that an initial demographic shock is not merely absorbed; it multiplies over time as it interacts with pre-existing traps, amplifying 4.05 times in the long run. One concrete implication is that upward mobility for youth collapses from 10% to 3.1%, indicating that the shock can “seal” escape routes toward formality when the market is already prone to persistence.

Finally, the study quantifies an omission bias that can distort the migration–labor nexus. Estimates that do not incorporate appropriate control groups and labor-market dynamics overstate the migration effect by 147%. This matters because it can lead to policy misdiagnosis: attributing structural segmentation to migration obscures the true drivers of informality and encourages responses that are politically salient but economically weak.

Public Policy Implications

The study finds that the informality trap in Colombia’s labor market is reinforced by two main structural channels: first, skill depreciation and weak incentives for training, as informal jobs rarely reward credentials or support skill development, leading to stagnation of human capital; and second, the lack of verifiable signals, since informal experience is difficult to certify and may even be seen as a liability by formal employers, making it harder for workers—especially youth—to transition into formal employment

Four pillars follow from the empirical mechanisms:

1) Protection of formal employment during crises. Because migration exposure increases transitions from formality into informality, temporary job protection instruments, such as payroll subsidies, can prevent downward mobility. Programs like Colombia’s payroll subsidy (PAEF) illustrate how stabilizing formal employment can reduce spillovers into informality.

2) Incentives for formalization of firms and workers. Reducing non-wage costs, simplifying administrative procedures, and improving access to credit and markets can increase formal absorption capacity. Without firm-side formalization, labor supply will continue to be absorbed in low-productivity informal jobs.

3) Life-cycle–oriented policies for youth. Given strong state dependence, early labor-market entry is decisive. Policies that prioritize first formal insertion (through training, internships, apprenticeships, and support for formal entrepreneurship) can prevent early informal spells from becoming permanent trajectories.

4) Effective labor integration of migrants. Credential recognition, access to employment services, and pathways into formal jobs can reduce occupational downgrading and ease competitive pressure in higher-tier informal niches. This is not only a migrant policy, but it also protects native workers by shifting competition away from the informal sector.

In addition, targeting must be differentiated by territory, income level, and population characteristics. Border departments such as La Guajira, Arauca, Norte de Santander, and Cesar require special support schemes due to high exposure and limited institutional capacity. Quantile results also indicate that adverse effects concentrate in lower income segments, suggesting that broad, average-based interventions may be inefficient or regressive if they ignore distributional heterogeneity.

Finally, an intersectional approach is essential. Women and youth face layered barriers to formal work and services, which implies that general employment policies should be complemented with affirmative measures, inclusion strategies, and partnerships with community-based organizations capable of reaching excluded groups.

In summary, an effective response to migration must address the structural foundations of informality. The goal is to strengthen the State’s capacity to protect formal employment, expand formalization of productive units, prevent early exclusion of youth, and leverage migration through effective integration. These are not short-term welfare measures; they are structural reforms that can convert a crisis into an opportunity to modernize Colombia’s labor market.