IMF: Reducing Informal Labor Sector Is Key to Peru’s Success

(Photo: El Comercio)

Research shows that productivity and average income are much higher in Peru’s formal sector while necessity continues to drive informality.

With the recent declaration by the International Labor Organization that the deaths of 4 young men in a recent Lima fire were a case of “modern slavery,” it seems that a new light has been cast upon the dark underbelly of Peru’s large informal sector.

El Comercio reports that President Pedro Pablo Kuczynski attributed the fire directly to informality.  It is a phenomenon that is endemic in Peru; 88% of  micro-businesses in Peru work under informal labor conditions.  The deaths of young workers being locked inside during the disaster reveal the worst that can happen under these circumstances.

However, there are less sensational ways that informality is harmful to workers and society as a whole.  The story lies in the numbers.  El Comercio reports that the average salary for micro-business employees in the formal sector is S/1,980.  In the informal sector it is  only S/819, less than the national minimum wage of S/850.

It seems obvious that working in the formal sector is better than working in the informal sector.  Why then do people allow their small businesses to remain in the informal sector?

The National Statistics Office of Peru did a study on this and found that only 5% remained informal because of costs, lack of time, or difficulty with the formalization process.  This goes against common belief that people are unable to formalize because of an impenetrable bureaucratic structure, which may have been true in the past.

Today, the most common reasons cited for not formalizing are that it isn’t considered necessary (48%), it’s a small business (34%),  or it’s just an “odd job” (10%).  Also, 48% of respondents cited “economic necessity” as the reason for starting their informal business.  Put the numbers together and it seems clear that informality is a result of a lack of options and not of choice.

A recent International Monetary Fund (IMF) report explicitly singled out informality as a roadblock for Peru on the path to becoming a high-income nation.  The report claims that “generous labor laws” in Peru make it difficult to fire employees that become too costly.  The result is that more than half of the workforce is stuck outside of the formal system while those inside are overly protected and receive all the benefits.

What do you think about the labor situation in Peru?  Let us know here at Living in Peru.


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Mike Dreckschmidt

Mike grew up and eventually attended university in Green Bay, Wisconsin. He graduated in Integrative Leadership Studies with an emphasis in Urban and Regional Planning and has been a part of planning projects in three different countries. Mike’s passion is reading; he devours both literature and nonfiction. His favorite author is Peru’s own Julio Ramón Ribeyro.