UNDER THE RADAR

Peru 2015 | ECONOMY | FOCUS: LABOR MARKET

The informal economy is a drain on state coffers, but requires a multi-dimensional approach to incentivize employers and employees alike to join the system.

Peru has been one of the fastest expanding countries in the world over the past 10 years, and one of the front line economies in Latin American. Consumption and private investment have been the reliable engines of this progress. With this in mind, the Peruvian government has tried to sustain this brilliant performance, by improving the conditions for foreign investors, turning the investment climate into one of the most attractive in Latin America.

This has created different challenges in the labor landscape, since policies drafted by the government to improve investment have directly impacted it. The recent Youth Labor Regimen of Peru, which aimed to reduce the informal economy by improving the attractiveness of the employability of workers aged between 18 and 24, has reduced the cost of employing young workers.

One of the main tasks of the Ministry of Work and Employment Promotion is to reduce the rigidity that is characteristic in the Peruvian labor market. At the moment, the cost overrun in Peru is the highest in Latin America. In Peru, due to the inflexibility of existing labor laws, companies assume an estimated 60% of this cost overrun, considerably higher than Colombia, Mexico and Chile, where the cost overrun is assumed at 54%, 36% and 31%, respectively. The company assumes costs such as the two supplementary payments that makes annually to workers, contributions to health insurance, the deposit for the Compensation for Time of Service (CTS), and where the worker has a family, the assignment of an extra 10% of the minimum salary.

The current labor law has made labor more expensive, and there have been changes in the outsourcing and subcontracting restrictions. As a result of the inability for a large amount of companies to meet these requirements, the informal economy and unofficial employment has risen to a remarkable 56% (according to estimates by the Ministry of Labor). These measures, which aim to protect the worker, decrease the rate at which employees are dismissed during recession times, but also give companies fewer incentives to expand their workforce during expansion periods.

The Lima Declaration, adopted by the 18th American Regional meeting in Lima, organized by the International Labor Organization, addresses these challenges, such as the formalization of the informal economy, and the sustainable development of regional employment. International standard labor law is well defined, although the government hasn't successfully enforced it in all areas. This document urges the country to adopt several laws to promote an attractive climate for the creation, development and sustainability of companies, both national and foreign, in accordance with the resolution adopted by the International Labor Conference in 2007. Peru also aims to increase the region's competitiveness by improving infrastructure and adopting regional integration policies, which will promote wider trade markets, and enforce investment

In order to improve the desirability of national and foreign investment and reduce the informal economy, the current government is implementing a series of policies that aim to reduce the cost overrun. Some of these policies include a reduction of the bureaucratic processes and an increase in private investment. The cost overrun will therefore be reduced, particularly for larger companies either by reducing employee benefits, improving the effectiveness of those that have to be assumed, or reducing the tributary weight that burdens the small and medium sized companies (SMEs). As a result, the labor landscape will improve not only for the companies and national and foreign investors, which will see their costs considerably reduced, but also for the workers, since their real salary will be increased.