The purpose of this research is to understand the impact of informality on inclusive growth in Latin America, and particularly in Colombia. The relationship between informality and inclusive growth is represented by two different hypotheses. According to the traditional perspective, informality constrains inclusive growth by restricting growth of the formal sector, draining resources from the public treasury and supplying low quality jobs that are unable to provide adequate conditions for a better standard of living.
However, from another point of view, informality provides a default alternative to unemployment, particularly amongst poorly educated individuals; a perspective that is rarely taken into account in Latin America. Drawing on the case study of Colombia as well as a review of literature on Latin America, one of the main conclusions of this paper is that both hypotheses hold, yet their relevance depends on labour market restrictions and the socio-economic characteristics of informal workers since the informal sector in Latin America demonstrates considerable heterogeneity.