Social dialogue to support the drafting of holistic strategies on transition to the formal economy in Costa Rica
The National Strategy for the Transition to the Formal Economy in Costa Rica (Ministerio de Trabajo y Seguridad Social de Costa Rica (MTSS), n.d.) was drafted in consultation with social partners and adopted by tripartite partners in 2017. It exemplifies how social dialogue can shape and help implement holistic strategies that facilitate transition to formality. By involving social partners from the outset, the strategy aims to realistically consider and address the needs of workers and employers. Costa Rica has strongly emphasised the role of social dialogue in promoting formal employment, recognising it as a foundation for democratic and sustainable socio-economic development.
The strategy is building on the Transition from the Informal to the Formal Economy Recommendation, 2015 (Recommendation No. 204), and is contributing to the achievement of the Sustainable Development Goals (SDGs), especially SDG 8 on decent work and economic growth and its target 8.3 on formalisation of enterprises. Further, the strategy is replying to one of the OECD adhesion recommendations to Costa Rica: the need for a strategy to reduce informal employment.
Social dialogue is at the heart of the strategy. The ground was laid by the Ministry of Labour and Social Security (MoLSS/MTSS[1]) and social partners in October 2016 when they signed an agreement for the implementation of Recommendation No. 204. Under this agreement, they committed to engage in tripartite dialogue with the aim of designing a strategy and an action plan to implement the recommendation. At that time, close to half of the workforce was employed informally (45.7% in the third trimester of 2015).
- Access to and coverage by social protection: More than two thirds of informal workers do not have access to social protection. For those who are covered, the coverage is often limited, especially affecting family workers and employees in medium and small-sized enterprises (MSMEs).
- Access to and relevance of technical vocational education and training: Low educational attainment and limited participation in technical and vocational education among informal workers contribute to occupational segregation. This results in a higher concentration of informal workers in low-skilled, low-paying jobs.
- Registration of enterprises: Complex financial and administrative regulations put a high burden on MSMEs and disproportionately affect self-employed workers, leading to high informality levels.
- Tax system and social contributions: High informality rates limit equity among taxpayers and affect the legitimacy and relevance of the state and public services.
To address challenges and draft the National Strategy for the Transition to the Formal Economy, MoLSS/MTSS, in line with the 2016 tripartite agreement, established the Tripartite Committee for Transition to Formality in March 2017. This committee brought together MoLSS/MTSS, the Ministry of Economy, Industry and Commerce, the Ministry of Finance, the National Institute for Women, the National Training Institute and the Social Security Fund as well as major workers’ and employers’ organisations. The Tripartite Committee for Transition to Formality consisted of a high-level instance with six representatives from each tripartite partner and tripartite technical commissions (TTC). After initial technical discussions, it was decided to focus on four priority issues and create four TTCs, each giving strategic and operational recommendations and defining its respective action plan, which was then validated by the high-level committee (see figure below).
Tripartite partners agreed to reduce the share of informal employment by 10% by 2025, compared to the average share of 42.6% observed between 2012 and 2016. Further, tripartite partners defined five guiding principles:
- Engage in tripartite social dialogue for drafting, implementing, monitoring, and evaluating the strategy.
- Promote decent work.
- Respect, protect, and promote human rights, with a focus on fundamental labour rights.
- Advance gender equality, non-discrimination, and inclusion.
- Adopt a holistic approach that leverages the potential, creativity, skills, and innovation demonstrated by actors in the informal economy.
From 2018 to 2019, social partners were actively involved in the implementation of the strategy and the drafting of action plans to address challenges and support the following objectives:
- Improve access to and relevance of technical and vocational education by aligning it with labour market needs. The National Employment System,[1] a national free service, was further supported to enhance matching as well as refer people to training programmes to improve their employability.
- Enhance access to existing social protection schemes, design new schemes, increase awareness on labour rights and strengthen labour inspection systems.
- Design a strategy to simplify the formalisation of enterprises, put in place one-stop-shops to support the integration of both enterprises and workers in the formal economy and promote knowledge exchange on good practices to support formalisation.
- Design contributory systems that promote the formalisation and creation of medium and small-sized enterprises (MSMEs) and simplify the tax system.
Every three months, the TTCs, with technical support of the ILO, came together to oversee progress and collect quantitative and qualitative data to measure the progress towards formalisation.
With the COVID-19 pandemic, the implementation of the strategy came to a halt. After a new government in Costa Rica took office in 2022, it was decided to update the strategy and include it under the National Employment Policy, that is currently being drafted (see box 2). Currently, the informality rate, which is measured periodically by the National Censuses and Statistics Institute as part of the Continuous Employment Survey, stands at 38.3% (Q1 2024). Social partners have been very committed to continue working on the strategy, and to update it, building on the following results, achieved up to July 2024:
-Under the first objective concerning technical and vocational education:
- The strategy achieved the upscaling of the National Employment Programme (PRONAE 4x4) – supporting entrepreneurship, construction of public infrastructure, and vocational training – with its budget set to double by 2025. The funding will increase from CRC 7.4 million in 2014 to CRC 14.5 million in 2025, benefiting a total of 50 920 people.
-Under the second objective concerning social protection:
- The insurance for domestic workers now allows contributions from multiple employers. This approach ensures that insurance is based on the worker's salary and is aligned with state subsidies for disability, age, and death coverage.
- The health insurance for coffee pickers is now provided by the coffee sector and the MoLSS/MTSS. Among other benefits, the coverage includes medical care, financial support in case of illness, and medication for both workers and their families regardless of their immigration status.
- Health insurance contributions for both workers and employers in MSMEs were reduced for a four-year period. The reduction applies to businesses with five or fewer employees that are registered with the Ministry of Economy, as well as small and medium agricultural producers accredited by the Ministry of Agriculture and Livestock.
-Under the third objective on formalisation of enterprises:
- Support is provided for self-employed workers who are in default in their social security payments. This includes a reduced annual interest rate, lowered from 9.47% to 4.15%, and an extended payment term (now up to 15 years instead of the previous five years). Additionally, the minimum initial payment required to arrange a debt settlement has been decreased, with the first payment now ranging from 5% to 20% of the total debt, depending on the amount owed.
- An “Entrepreneur’s Manual” was elaborated with the support of the ILO to explain the different steps to create formal micro enterprises.
- The Directorate of Social Solidarity Economy (DESS) was created within MoLSS. DESS is responsible for supporting and promoting the social and solidarity economy, including cooperatives and producer associations. It also oversees the National Programme to Support Microenterprise and Social Mobility (PRONAMYPE), which targets micro and small businesses and potential small business operations, by providing soft loans and training. The programme aims to facilitate their transition to formality.
-Under the fourth objective concerning simplification of the tax system:
- A simplified and lower tax payment regime for low-income workers in 14 occupations was put into place.
There are several policies in place in Costa Rica that have been drafted with the support of social partners, including the National Employability and Human Talent Strategy 2023-2027 (ENETH-CR) and its Action Plan launched in 2023 (the Strategy is also known as BRETE which is Costa Rican popular reference to work) and the Employability Strategy for Migrants in the Framework of the National Employment System launched in 2023.
The National Strategy for the Transition to the Formal Economy in Costa Rica is no longer active, however, it is planned to further support transition to formality by paying particular attention to this topic under the National Employment Policy. MoLSS/MTSS is currently drafting the National Employment Policy with social partners and it is planned to adopt the policy by 2025. This process was unanimously approved by the Superior Labour Council in Costa Rica, which is a permanent tripartite social dialogue forum. The new policy elaboration process is supported by ILO; and social partners are actively participating in it.
Key Lessons
Both workers’ and employers’ organisations can play a key role in identifying factors driving informality.
Establishing technical working groups that include social partners has proven useful to design a holistic and inclusive strategy that promotes transition to formality.
Regular monitoring of progress and the exchange of good practices on transition to formality, with the support of social partners, are essential to track progress and achieve set objectives.
While the National Strategy for the Transition to the Formal Economy is no longer active, the future National Employment Policy will build on achievements under the strategy.
Even though the National Strategy for the Transition to the Formal Economy is no longer active, social partners still play an important role in supporting transition to formality in Costa Rica.
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