Labor informality negatively
affects economic growth, the productivity of workers and social welfare (it
makes access to credit difficult and, by reducing tax collection, induces lower
coverage and quality in the provision of public goods and services). In Peru,
yes Although labor informality has moderated in the last ten years in a context
of greater economic dynamism, still remains at high levels, which suggests that
it is necessary to take actions to reduce it and limit its harmful effects. In
general, it is necessary to improve the regulations under which the labor
market operates in Peru to correct the elements that inhibit formal
contracting. It is also necessary to strengthen labor inspection and raise the worker
productivity. This document contains some concrete proposals for attack the
problem of labor informality, developed with information collected in
interviews specialists in the subject. Its eventual implementation will require
consensus building, for which must adequately communicate the benefits that can
be obtained for millions of people who are currently working in precarious
conditions.
How is labor informality defined
and what are the causes? what generates it?
Broadly, the informal sector of
the economy encompasses individuals, businesses, and transactions that are
carried out outside the legal regulations and tax obligations established to
regulate the economic activity.
. From a labor perspective,
informality implies the establishment of relationships that do not fully or
partially comply with current regulations.
. For example, this situation occurs
when a company fails to comply with the legal obligations it has towards its
workers, such as such as the payment of a salary equal to or greater than the
minimum, the contributions that must be made for the schemes of protection
against unemployment, payments to social security and the pension system,
vacations, among others.
How much informal employment is
there in Peru and how does it compare to other countries?
More than two thirds of the
workers are informal in Peru (see Graph 1). It is true that there has been a significant
reduction in the proportion of jobs with these conditions, but the informality
rate continues to be high (around 71%), which implies that more than 7.5
million people work in informal conditions. The rate of labor informality does
not compare well with what happens in the rest of Latin America (see Chart 2).
Now, it is reasonable to think of
a limited rate of labor informality in a country where, for example, there is
an adequate institutional framework, laws are followed, justice is fast and
predictable, it is easy to do business, capital capacities Human resources are
high, the state provides goods and services adequately, and the size of the
agricultural and rural population is relatively small. Does Peru have these
characteristics? If you do not have them, what is the informality rate
consistent with your particular characteristics? To answer this question, we
synthesize the aforementioned characteristics in a simple indicator: per capita
GDP. Then, based on information from the World Bank and the International
Monetary Fund on the labor informality rate and per capita GDP (measured in
terms of purchasing power parity) for different countries, we found a
relationship between both variables (see Graph 3). . For reference purposes,
this relationship suggests that a country with the characteristics of Peru
should have labor informality of around 40%. Therefore, not only is labor
informality high in absolute terms, but it also appears to be higher than in
other countries with similar characteristics.
Why is it preferable that formal
jobs be created instead of informal?
Labor informality has pernicious
effects on economic growth and the well-being of people. These effects occur
due to:
a. Reduced worker productivity. The idea here
is that informal workers, who work in informal companies, carry out their
activities in precarious conditions and with low equipment, which affects its
performance. In other words, two identical workers (with the same capacities,
education and skills) and who carry out the same activity have different performance
depending on the working conditions found in your workplace.
On this point, it should be noted
that data recently published by the National Institute of Statistics and
Information Technology (INEI) suggest that the average productivity (and with
it the average income) of a worker employed in a formal productive unit is
almost four times greater than that of a worker employed in an informal
productive unit (see Graph 4)4
Although part of this difference
is explained because workers with more education tend to be employed in the
formal sector (see Figure 5), a characteristic that naturally makes them more productive,
another part of the explanation may be linked to the practices and conditions
in which that often operate informal production units. INEI surveys show that informal
productive units tend to operate without accounting records (or when they do, consist
of personal notes), often do not have a location (or when they do, it is usually
one of the rooms of the house and this room is not only dedicated to business),
and they generally have limited exclusive access to public services such as wáter
drinking water, drainage, electricity, fixed telephone, or internet (see Graph
6). In other words, the units Informal productive companies do not have the
best practices or conditions to operate a business, which negatively affects
the productivity of the workers employed there (and thus their income)
regardless of their educational level.
b. The distortion in the
allocation of resources. If, due to excessively rigid legislation of the labor
market, formal companies consider that it is very difficult to hire employees,
it is posible that they may opt for a more intensive use of resources that are
not affected by the regulations.
In this case, formal companies
oppose a less than optimal level of labor, given the availability of workers in
the economy, and would eventually replace them with a more intensive in capital
goods, for example.
c. A lower tax collection that
affects the provision of public goods and services and generates a tax burden
on the formal sector. As a result, the productivity and competitiveness of formal
companies, and the economy in general, is reduced. Because informal workers do
not pay direct taxes (income tax, which is the more relevant, although,
eventually, they pay indirect taxes such as the one applied to the sales),
state revenues are diminished. This situation limits the coverage and quality
of the goods and services provided by the State (education, health, justice,
citizen security, infrastructure). In particular, the informal sector (workers
and companies) makes use of and can congest public infrastructure, but does not
contribute to improve and maintain it. As the Infrastructure is part of the
productive process, its congestion by the informal sector affects the productivity
and competitiveness of the economy.
The low tax collection that can
be associated with a large informal sector creates another problem. To
compensate for the lower tax revenues and to be able to finance their activities,
the State relies only on the collection obtained from the formal sector
(workers and companies), overloading it with taxes, often distorting, which
remains competitiveness to formal activities and the economy in general.
d. A more limited access to
credit. A worker employed in informal conditions has more difficulties in
sustaining a sustained flow of income (a situation that differs from that faced
by a formal worker who appears on the payroll of a company). In this context,
the evaluation of risks posed by the lending financial entity is complicated
and, therefore, the granting of the credit for the informal worker (see Graph
7). As a result, people who do activities in the informal sector (and those who
depend on it) have more limited capacity to invest in themselves (for example,
in training and education that later generate more income) and are also more
exposed to fluctuations in their income (due to an illness, for example).
e. The absence of the social
protection provided by formal employment (in terms of protection against unemployment
and health, for example), which reduces the well-being of people who work in
the informality.
BBVA.( 2017, jan 9th). Peru | Labor informality and some proposals to reduce it. Observatorio económico del Perú. https://www.bbvaresearch.com/wp-content/uploads/2017/01/Observatorio-informalidad-laboral1.
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