Informality represents an enormous challenge to economic development and worker wellbeing in Paraguay. It is estimated that 64% of the economically active population works under conditions of informality. For informal workers, this means little to no access to the social security system which could have provided a valuable safety net during the COVID-19 pandemic. Addressing the issue calls for a nuanced understanding of how informality emerges and persists in the Paraguayan economy.

LabMTESS was formed precisely for this task: our first learning loop seeks to understand the roots of informality in Paraguay by analyzing the construction sector—a sector of strategic economic and policy importance—in hopes of informing and refining the Ministry of Labor, Employment and Social Security’s (MTESS) Integrated Strategy for Employment Formalization in Paraguay. 

In an earlier blog, we described findings from the sensing phase of this study and published a diagnostic report that analyzed the high degree of informality and the prevalence of subcontracting and outsourcing practices along the value chain. We also identified the key actors in the sector (construction and real estate companies, SMEs and self-employed contractors, business associations and workers organizations, among others).

We now turn to exploring some of these actors’ perspectives, recorded and analyzed through the guided conversations, focus groups, and a cultural probe, we conducted in order to identify the underlying barriers to formalization. From the qualitative analysis of these actor’s voices, emerges a story about how the discontinuous, project-based temporality of construction work creates barriers to formalization and feeds a reliance on outsourcing and subcontracting, contributing to a high degree of churn in construction labor. In combination with misinformation, scarce knowledge, and low consciousness of legal rights and responsibilities related to social insurance coverage, this creates confusions about who is ultimately responsible for registering workers and about the real value of Social Security.  

Real Estate Developers: Prime Movers or Background Facilitators?

Developers are arguably among the most powerful and important value chain actors in the Paraguay construction sector. It is often the only actor to be involved in a construction project from start to finish—from the design phase to the sale of the last flat or office space. “We encompass the whole construction cycle,” said an interviewee. 

Nevertheless, developers in our focus group saw their role largely as that of investors. Their financial support and their preferences set in motion a series of activities—from design to construction to marketing, brokerage, and consumer financial services—which they do not directly manage directly manage. 

“Our job is to finance [the work] and to hire a construction company which ultimately is responsible for working with this value chain,” said a developer in an actor-mapping workshop.

In this way, these firms design, build, and sell finished properties, but often do not employ more than a dozen or so employees. Instead, they manage contracts with construction firms and self-employed intermediaries, such as real estate brokers, that are responsible for most of the work and the employment in the value chain.

Construction Firms: Cornerstone or Middleman?

The real estate developers we spoke to placed responsibility for managing a construction project and its employment relations with construction firms. However, even the largest construction firms in Paraguay are often not much larger than the developers. Given the high degree of variability in the intensity and length of any given project, these large firms also often assume a managerial role, contracting a network of medium, small, and self-employed sub-contractors to carry out the various activities associated with a given project. 

Labor law requires large firms to ensure that their subcontractors contribute to social security on behalf of their employees (see Article 25 of Paraguayan Labor Code), however, confusions remain about how this law is applied and exactly what this means for firms that subcontract most of their work. Specifically, the Labor Code stipulates that companies whose subcontractors do not provide social insurance to their employees should provide this coverage as a “solidary” responsibility. However, because article 25 of the law has not been translated into regulatory rules, it is not applicable in practice. 

Furthermore, enrolling workers in IPS is not a one-time transaction; each new employer must register their workers when they begin work and then update their active or inactive status as needed. This means that enrolling workers for short-term projects generates costs not easily born by small- and medium-sized firms. In the race to win bids from larger construction firms, smaller firms perceive that omitting Social Security costs gives them an advantage.

 “What do you prefer? To win bids or to pay IPS,” said an interviewee from this sector. 

“IPS tends to be for administrative staff, for office workers ... for the more permanent workers. Those who don’t quote [IPS] costs generate a lower quote. Social security impacts costs a lot.”, says another. 

Foremen and laborers: strong claimants to IPS?

We’ve seen how temporary employment and high levels of turnover, generate disincentives for employers and contractors to provide IPS to workers. While it might seem reasonable to hypothesize that these same conditions would generate a countervailing interest among these workers—namely a strong interest in receiving social security—this does not appear to be the case.

First, foremen in Paraguay are self-employed workers contracted by construction firms. As such, they can contribute voluntarily to IPS, but are not obligated to, and they are not entitled to employer contributions. They are, still, responsible for registering any workers they employ and contributing to IPS on their behalf (as noted in Labor Code). However, laborers may see paying into IPS as an untenable reduction in their take-home pay. “Young workers are more focused on the cash, for the moment,” said one interviewee. 

Another worker noted that, even when he was able to enroll in IPS, it wasn’t worthwhile for temporary and seasonal workers. “One day my daughter got sick and I went to IPS to use my social security and they told me I needed to be enrolled for six months before using the insurance. I think this is wrong,” the worker said. This final quote illustrates a central barrier to employment formalization in the construction industry and in general: the prevalence of misinformation and scarce knowledge and consciousness of legal rights and responsibilities regarding social insurance. 

Conclusions and next steps

Based on guided conversations, focus groups, and a cultural survey of the key actors in the construction sector identified several potential key drivers of informality in the sector: the temporality of construction work itself, workers’ negative perceptions of the value of social insurance, and misinformation about social insurance benefits. 

Regarding the first barrier, the short, project-based temporality of the sector’s labor needs increases the relative costs of IPS enrollment for employers and workers alike and can bar workers from accessing the scheme’s putative benefits. It also generates a reliance on subcontracting and outsourcing that shifts the burden of paying for and managing worker’s IPS enrollment away from larger firms and onto smaller subcontracting firms that are either less able to bear the costs or find themselves caught in a “race-to-the-bottom” that rewards eliminating required IPS costs in order to win bids.

In our next installment, we will examine the second two barriers, as we delve into the results of our cultural probe and analyze social security from the perspective of construction workers. 

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