Informality and productivity in the labor market in Peru

Abstract

This article analyzes the evolution of informal employment in Peru from 1986 to 2001.

Contrary to what one would expect, the informality rates increased steadily during the 1990s despite the introduction of flexible contracting mechanisms, a healthy macroeconomic recovery, and tighter tax codes and regulation. We explore different factors that may explain this upward trend including the role of labor legislation and labor allocation between/within sectors of economic activity. Finally, we illustrate the negative correlation between productivity and informality by evaluating the impacts of the Youth Training PROJOVEN Program that offers vocational training to disadvantaged young individuals. We find significant training impacts on the probability of formal employment for both males and females.

Keywords:

• informality
• employment
• labor costs
• training
• Peru

Notes

The views and opinions in this paper should not be attributed to the Inter‐American Development Bank, the World Bank, or its Executive Directors.

1. In the period of economic downturn between 1986 and 1992, the GDP fell at a rate of 3.9 percent per year while the LFP decline at a rate of 1.0 percent per year. In the period of economic recovery, from 1992 to 1997, the GDP grew at an annual average rate of 7.2 percent and the LFP grew at a rate of 2.3 percent per year.

2. We observe somewhat similar patters under the “traditional” criterion. Whereas the share of informal employment increases by 18 percentage points for males between 1986 and 2001, data on females show a modest increase of only 3 percentage points for the same period.

3. According to Saavedra (1996), the upward trends on relative earnings for the more skilled workers between the mid 1980's and mid 1990's can be explained by an increase in the relative demand biased towards women and high‐skilled workers, which more than compensated the increase on the relative supply of these groups.

4. By law, temporary workers may belong to a union, but firms implicitly threatened workers who registered in a union by not renewing the contract.

5. Deep institutional changes in the tax collection system were implemented since 1991, aimed at modernizing and strengthening the institution. The tax code was streamlined, with a reduction in the number and dispersion of rates and a reduction of exemptions and loopholes. As a consequence, the number of contributors, both individuals and firms increased steadily, together with the ratio of taxes to GDP.

6. The estimates are available upon request.

7. Jaramillo (2004), for instance, reports asymmetric distribution of social benefits by percentiles of income: whereas 10 percent of workers in the bottom quintile have health benefits, 32 percent of workers in the top quintile access to this benefit by 2000.

8. These occupations are, for example, maintenance mechanic, electricians, janitors and building cleaners, cashiers, receptionist clerks, construction laborers, plumbers, pipefitters, maintenance and repair workers, sewing machine operators, textile operators and tenders, and computer operators.

9. Payments are structured in per capita terms according to the following scheme: 100, 80, 60, and 30 percent if completing both phases of the program, at least one month of on‐the‐job training, only formal training, and at least a month of formal training, respectively.

10. The total number of participants in these program rounds is 1507, 1812, 2274, 2583, and 3114, respectively. The corresponding number of treated individuals in the random sample is 299, 321, 343, 405, and 421.