Impossible mission: more formal employment, by Eduardo Morón

By: Eduardo Moron. Economist

A complex new year begins for the country and the government continues to pursue a revolutionary imprint, although it still does not know where to focus its efforts so that what it undertakes can really be called revolutionary.

In Peru, if any aspiring Quixote were to ask which of the pending tasks in public policy is the most impossible to face, but at the same time the most revolutionary, the most obvious answer would have to be to face the massive labor informality, that is, give access to formal jobs to those 8 out of 10 workers who today seek a living with an informal job. Although it is true that chamba is chamba, the truth is that these jobs pay little, they do not make much effort to train their employees, they do not protect their workers against risks that can greatly complicate their family budgets: there is no protection against disability or accidental death, or resources to finance old age, among other disadvantages.

In this context, this government could take advantage of the recent report of the so-called Employment Mission, a group of local and international experts that the Colombian government (http://misionempleo.gov.co) convened to help it understand why, as well as in Peru, they have a labor market with a high proportion of informal workers (60 percent of the total) that produces exclusionary treatment and punishes economic growth by not promoting increases in productivity. Something that is evident in the report is that the design of tax and labor policies encourages business dwarfism and informality. The same thing happens in Peru, where several works by the IMF and the IDB illustrate how damaging our legislation is with thresholds for differentiated treatment.

The one line summary of the Colombian report is that there are no good jobs in bad companies. In other words, if, as in Peru, most of the companies are informal, with few workers and low productivity, there is no way that jobs that one would like to have come from there.

If we look at the Colombian numbers, we find situations very similar to ours. For example, more than 80 percent of all companies are informal, and only 1 percent of all companies are formal companies with more than 10 workers. The question one must ask is why a company chooses to be (or remain) informal. Clearly there are costs to being informal, such as higher financing costs from not being able to show a sales record that better warrants an additional financing request. There are costs to attracting talent. Nobody who considers himself talented aspires to work in an informal company.

These costs are offset by benefits such as not having to comply with extensive labor or tax regulations, or not having to pay the costs of having a place that meets all the security conditions required by the municipalities for any location. Sometimes we forget about all these other costs and just focus on the minimum wage. As Santiago Levy, a Mexican economist and team leader of the Employment Mission, says, “the minimum wage is the gateway to formality (…) the higher it is, the narrower that door is.” In general, we have also been wrong in the same way as Colombians, governments have felt comfortable improving conditions for an increasingly smaller number of formal workers. The rest of the workers, who are the majority, see the increases in the minimum wage as a reference, perhaps aspirational.

And this is where the current government has an enormous opportunity to act, generating a great impact on a large segment of the population. Instead of continuing to try to give even more benefits to the formal minority with bills such as the one that seeks to pay for snacks, the announced increase in the minimum wage or the new Labor Code, we should start looking at the forest of informality that It grows every day and, as the aforementioned report points out, generates undesirable consequences for the entire economy by reducing the prospect of long-term progress.

The report maintains that the reform (which will be gradual but comprehensive) must aim at two objectives: (1) extend and improve social protection for all workers; and (2) create better conditions for formal companies to generate more productive and better paid jobs. In other words, create more and better jobs, which allow more families to access income streams that will lift them out of the poverty to which they returned as a result of the pandemic.

Among the proposals is a complete redesign regarding how to finance social benefits, seeking greater universalization, simplifying the issue of dismissals for just causes, maintaining compensation in the case of unjustified dismissals.

But this government may want to insist that the “revolutionary” content of its mandate is the search for a new constituent that will hardly do anything to reduce informality. In reality, given that this scenario exacerbates uncertainty, the impact will probably be exactly the opposite of the desired effect, we will end up with less investment from formal companies and, therefore, fewer of those good jobs that we all would like. We will soon know if the government wants to dedicate resources, time, brains and political capital to a task that will be quixotic, but that will not move the needle to solve Peru’s problems that require better management or if it suddenly dares to start a real reform by better jobs for all. ❖