Labouring away: Unemployment remains stable as the formalisation of the workforce advances

Though improving rapidly, there are several obstacles to the development of the labour market in Peru ranging from brain drain and recurring strikes to inflexible hiring and firing practices and an inadequate amount of qualified staff. However, these challenges generally pale in comparison to the task of formalising the workforce. According to figures from the World Bank, as of 2011 76% of Peru’s population between the ages of 15 and 64 was actively involved in the country’s labour force, though the accuracy of such figures is extremely hard to verify due to the fact that more than half of all activity stems from the informal economy. Hugo Perea Flores, chief economist of BBVA Banco Continental, told OBG, “If Peru hopes to remain competitive, it must improve productivity through labour market reform and formalisation of the informal economy.”

Informal Labour

Certain commonalities exist across all countries with large informal economies, including low productivity and inefficiency, limited access to benefits and poor tax collection rates. Over the past decade the labour market in Peru has evolved along with wider economic growth and the result has seen decreases in both poverty and informal labour. Even so, the informal economy looms large, and estimates of its actual contribution to economic production range from 50-60%. In urban areas, rigid labour laws and misinformation surrounding taxes and benefits are the primary obstacles preventing employees and employers alike from declaring income and registering businesses. In rural areas, where economic growth has yet to trickle down, paying taxes and worrying about pension plans are at times entirely unfamiliar concepts.

Unemployment

The unemployment rate in Peru floated between 6% and 7% for much of 2012 and, according to the last available data from the National Institute of Statistics and Information, in the third quarter of 2013 unemployment fell to 5.9% in the Lima metropolitan area. While unemployment has remained reasonably low over the past decade, it has on several occasions been measured in the double digits. The highest double-digit spike occurred when unemployment shot up to 13% in January 2005. Overall, unemployment averaged 8.6% from 2001-12, according to data from the Central Reserve Bank of Peru. Broad macroeconomic growth has been responsible in large part for keeping Peru’s unemployment rate in check. In order to curb unemployment and create jobs for the 360,000 people entering the workforce each year, the country must generate GDP growth of at least 4%, according to the Institute of Economic and Business Development at the Lima Chamber of Commerce.

Government Programmes

The central government has several programmes geared towards improving the employment situation, including Trabaja Perú, Jóvenes a la Obra, Perú Responsable and Vamos Perú, all of which fall under the umbrella of the Ministry of Labour and Promotion of Employment. Trabaja Perú, the largest government-run social programme, hires both unemployed and under-employed workers to assist the government in completing and maintaining small-scale infrastructure projects such as road and irrigation works. The programme had 56,578 participants in 2012 take advantage of 16,253 temporary employment opportunities. An investment of $60.7m was used to complete 1263 projects throughout the year.

Pension Reform

One of the knock-on effects of the large informal economy is a pension system lacking in depth as an estimated two-thirds of the working population do not have a pension, although new legislation could increase participation. In July 2012 the country’s Congress passed a law legally obliging all workers earning 1.5 times the monthly minimum wage (PEN750, $282) to contribute to either a public or private pension fund. In early February 2013, the Association of Pension Funds Administrators (Asociación de Administradoras de Fondos de Pensiones, AFP) announced that finances within the nation’s pensions had amounted to more than PEN100bn ($37.66bn), or roughly 20% of GDP, up from just PEN22.1bn ($8.32bn) in 2003. Pension reform has been a hot topic of debate as the AFP has called for liberalising reforms that would allow for greater flexibility on investment regulation, including the elimination of prior authorisations, reviewed investment limits and a greater percentage of AFP assets to be invested abroad.

Sectors

While agriculture has traditionally been Peru’s largest employer, providing work to roughly one-third of the workforce, it is the retail sector that has had the greatest impact in formalising the economy. As commercial centres and shopping malls spread throughout urban areas, new jobs are created in the formal sector. Chilean retailers in particular have made a strong push inside and outside Lima as brands such as Saga Falabella, Ripley and Cencosud have all moved north to capitalise on Peru’s rising middle class and consumer culture. Within the formal private sector, as of the first quarter of 2013 the commerce, services and retail category is now the second-largest employer with 499,785 employees, behind only real estate, business and renting activities (596,830), while industrial manufacturing (488,562) is in third place, according to data from the Ministry of Employment.

Labour Law

Rigid labour laws are seen by some as an obstacle to the formalisation of the workforce. However, perceptions of the labour code are varied and the reality is a blend of opinion that can change slightly from industry to industry. While employers from the manufacturing industry may think twice before offering long-term fixed contracts to employees, for employers from service industries these have been a key driver in formalising the workforce. There are certain key items within the labour code that investors, particularly those from abroad, need to be aware of. For example, limitations exist with regards to foreign employees as firms may not contract more than 20% of their workforce from outside the country. Some see the process by which a company may lay-off employees as particularly lengthy, with employers required to pay laid-off employees one-and-a-half times their monthly salaries for every year of work up to a maximum of one year’s salary. Employers are also required to grant a full month of paid vacation in addition to public holidays and pay employees 14 monthly salaries, giving one extra salary in both July and December.

In the context of Latin America, Peru’s labour laws are very moderate. Peru ranked 48th out 144 counties in general labour market efficiency in the World Economic Forum’s 2013-14 “Global Competitiveness Report”, which measures the flexibility of the labour market in terms of wage fluctuations, hiring practices and its ability to shift employees seamlessly between industries. Peru ranked well above regional peers such as Colombia (87th), Brazil (92nd), Mexico (113th), Uruguay (139th) and Venezuela (148th). Even so, in the sub-indexes of hiring and firing practices and pay and productivity there is room for improvement as Peru came in 129th and 76th, respectively, while restrictive labour regulations were listed as the third-most-problematic hurdle for doing business, behind corruption and bureaucracy.

Strikes

In 1988, amidst an environment of hyperinflation and economic despair, Peru’s economy lost 38.3m man-hours stemming from 814 strikes, according to statistics from the Ministry of Labour and Employment Promotion. In fact, throughout the 1980s the country routinely lost upwards of 10m man-hours each year as a result of labour action. However, economic growth resumed in the 1990s and by 2000 social unrest in the workplace had cooled significantly as 37 strikes were recorded with lost production limited to 181,691 man-hours – both 30-year lows. Since then workplace interruptions have experienced a slight uptick, registering a decade high of 2.2m lost man-hours and 73 strikes in 2007. In 2012 there were 84 strikes and 1.8m lost manhours. In the second quarter of 2013 there were 20 strikes, comprising 6098 workers and generating 424,984 lost man-hours. The affected companies are often either within the extractive industries or industrial manufacturing, where low wages and poor workplace conditions are the main complaints. During 2012, 72.7% of the total lost production occurred in the mining and oil industry, while industrial manufacturing accounted for an additional 18.2%.

Over the past decade strong macroeconomic growth has been largely responsible for keeping the unemployment rate in check, while simultaneously assisting in the formalisation of the workforce. Even so, there is a long way to go as many micro and small enterprises, which employ the majority of the workforce, continue to exist in the informal economy. Peru’s labour market is relatively efficient when compared to its regional peers, though strikes and rigid labour codes in some sectors need to be addressed.

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