Colombia’s informal workforce: High numbers and off the books

0
1377
As the minimum wage rises, more workers join the ranks of the informal labour force
As the minimum wage rises, more workers join the ranks of the informal labour force.

Among the husks of 1950’s era Chevys and bright yellow taxis, worker hawks hubcaps and replaces faulty engines. Welcome to Bogotá’s “Siete de Agosto” the capital’s largest conglomerate of auto repair and spare parts shops. Hundreds of small business operations line the neighborhood’s streets, yet the majority of employees do not receive work benefits or pay formal taxes on their salaries.

Along with the nation’s shoe-shiners and street vendors peddling flowers, cigarettes, and cellphone “minutes”, these off-the-books employees contribute to Colombia’s bulging informal labor sector, which makes up over half of the nation’s 23 million large active workforce.

Definitions of labor informality vary across governmental, international, and private organizations. The Colombian National Office for Statistics (DANE), in line with the United Nation’s International Labor Organization (ILO), classifies employees in relation to firm size and occupation rather than adherence to labor market regulations.

Academics and NGOs often criticize this interpretation because it does not directly measure the negative aspects of informality, which include inferior working conditions, low productivity levels, and a lack of formal health, unemployment, and old age insurance. In Colombia, informal workers are rarely covered by social security, have relatively low education, and on average earn lower wages than formal employees.

A 2013 report by the ILO named Colombia the region’s fourth largest leader in labor informality, following Perú, Bolivia, and Paraguay. While the state’s statistics agency DANE has pegged the nation’s informality rate at nearly 60 percent of the working population, Colombia’s Central Union of Workers (CUT) reports 68 percent, and the ILO a whopping 80 percent. Coupled with a 10 percent unemployment rate, the magnitude of Colombia’s informal sector restrains the nation’s growth and sustains staggering levels of inequality.

Despite progressive economic policies throughout President Santos’ first term, government legislation to safeguard Colombian workers may be thwarted by labor market rigidities. Relative to the nation’s level of productivity, the Colombian market is characterized by a high minimum wage as well as high nonwage costs for employers. In Colombia the latter can include severance payments, health and pension contributions, payroll taxes, two annual bonuses, vacation payments, and commuting subsides.

Rises in non-wage costs and the minimum wage are highly correlated with informal sector growth and lower informal income. An increase in non-wage costs will typically make an employer think twice about hiring more formal workers, and more likely to either shift production towards capital or transfer the tax to employees via lower salaries.

Given Colombia’s relatively high and binding minimum wage, however, the employer may opt to simply fire employees or to keep them on informally. As more low-skilled workers move into the informal sector, non-binding wages drop overall due to competition.

Setting the new minimum wage at each year’s end is a politically charged event, during which time the Colombian government sits down with the country’s main unions, trade groups, and business associations. President Santos repeatedly raised the specter of informality during last December’s negotiations, which in- deed saw an increase of only 4 percent for 2013, 1.4 percent above Colombia’s inflation rate the previous year. An excessive increase in real minimum wage would only hurt those Colombian workers subsisting right at the price floor, because their employers would likely put them into informality or redundancy.

Not all informal workers are excluded from the formal sector, but instead make a rational decision to stay put. Government subsidies and micro-credit initiatives can create incentives for poor laborers to remain in the informal economy. One particularly unsustainable example is the nation’s current healthcare system, whose major reform in the 1990s assumed that contributors would outnumber non-contributors, but today is subsidized by a minority of formal workers and the state. “Why pay when I can get [healthcare] for free?” asks Diogenes, a “Siete de Agosto” handyman, while polishing an old car headlight.

A stable economic trajectory promoting formal sector growth will ultimately depend on structural reform and longer-term macroeconomic and social policy. In December 2012, the Colombian Congress passed a comprehensive tax reform, shifting payroll tax burdens from labor to profits and eliminating incentive towards formal job destruction. The year prior, the government passed a progressive royalties reform that dramatically redistributes profits from Colombia’s lucrative non-renewable resources, thus decentralizing investments to include vulnerable departments. Generational changes include much-needed investments in education to combat low levels of basic schooling and limited capacity at higher-level institutions.

For now, Colombia’s massive informal sector may compel the Santos government to wean-off of its beloved “locomotive” of the national economy, namely the oil, gas, and mining industry. While promoting growth and exports, foreign direct investment, and importation of technology, the capital-intensive sector does not generate jobs. Tourism is a viable formal sector alternative, although hampered by security risks. With Minister Díaz-Granados hoping to more than double the nation’s visitors by 2014, formal sector growth may depend less on minimum wage levels and more on the outcome of peace negotiations in Havana.

LEAVE A REPLY

Please enter your comment!
Please enter your name here