US embassy cable - 05LIMA4139

UNCLAS SECTION 01 OF 02 LIMA 004139 
 
SIPDIS 
 
DEPT FOR WHA/AND, EB/EPSC 
LABOR FOR ILAB, TMCCARTER, LBUFFO, CROMERO 
 
E.O. 12958: N/A 
TAGS: ELAB, ECON, PGOV, ETRD, PE 
SUBJECT:  PERU AMONG WORLD'S MOST INFORMAL ECONOMIES 
 
REF: LIMA 3778 
 
1.  Summary: The World Bank ranks Peru as the world's fifth 
most informal economy.  In urban Peru, nearly 70 percent of 
workers (62 percent in Lima) are employed informally, the 
third highest rate in Latin America.  Bureaucratic barriers 
largely account for Peru's informality, generating problems 
such as tax evasion, low productivity, and poor working 
conditions.  The GOP sought to reduce informality through 
legislation approved in July 2003, but it has achieved 
little progress.  The GOP views the U.S.-Andean FTA as a 
tool to reduce informality and generate more export-oriented 
employment.  End Summary. 
 
High Informality in Urban Centers 
--------------------------------- 
 
2.  The Ministry of Labor's most recent report on national 
labor market informality reveals that Peru possesses the 
third highest rate in Latin America, behind Bolivia and 
Panama.  In its 2002 National Household Survey, the Labor 
Ministry reports 69 percent of all workers in urban Peru are 
employed informally.  The Ministry defines informal workers 
as: employees of unregistered businesses, workers without 
remuneration, untrained independent workers, and domestic 
employees.  In 2003, the World Bank listed Peru as one of 
the leaders in informal employment worldwide, ranking it 
fifth, with 60 percent informality (no definition for 
informality was provided). 
 
3.  In Metropolitan Lima, 62 percent of all employment 
qualifies as informal, according to INEI, Peru's Statistical 
Organization.  The 1.3 million independent workers (domestic 
workers, taxi drivers, and food vendors, among others) 
account for 57 percent of the informal workforce, 279,000 of 
whom are street vendors.  Enterprises employing between two 
and four workers account for another 39 percent of the 
informal workforce.  Nearly all informal workers are 
employed by microenterprises, which employ less than ten 
workers.  The young bear the burden of informality.  Those 
between 11 and 24 years old make up 26 percent of the 
economically active persons, yet account for about half of 
informal workers. 
 
4.  An even higher incidence exists in the urban areas 
outside of Lima, where informality accounts for 74 percent 
of the workforce.  Single worker enterprises occupy 50 
percent of the 3.2 million informal jobs existing in these 
areas.  Another 44 percent work for enterprises employing 
between two and four people.  Just as in Lima, micro 
enterprises account for nearly all informality. 
 
Costly to Join Formal Economy 
----------------------------- 
 
5.  Despite Peru's positive macroeconomic growth, formal job 
creation has lagged.  Bureaucratic barriers are largely 
responsible for the long delays and high costs in 
establishing a formal business.  In Peru it takes a minimum 
of 98 days and costs $778 (36 percent of per capita income) 
to start a business, according to the World Bank.  Business 
leaders often complain that Peru's labor laws are too 
burdensome and costly, creating incentives for small 
enterprises not to join the formal economy.  Employers that 
adhere to the high-standard labor legislation find that 64 
percent of their labor expenses are non-salary related. 
 
 
6.  The Labor Ministry indicates that 41 percent of workers 
participate in the informal sector because they could not 
find other work, whereas 50 percent participate by choice. 
The most prominent reason why people choose to work 
informally is the opportunity to make more money, followed 
by the desire to work independently.  Given the option, 
informal one-worker enterprises and microenterprises prefer 
not to pay taxes and cover the relatively high costs of 
being formal.  Many business leaders argue that by 
implementing a more flexible labor code and streamlining 
registration bureaucracy, Peru would attract more private 
investment and increase the size of the formal economy. 
 
Legislative Fix Fails to Reduce Informality 
------------------------------------------- 
 
7.  Congress passed Law 28015 in July 2003, with the 
objective of reducing barriers to the formal economy and 
simplifying the registration process for microenterprises. 
Unfortunately, then-Labor Minister Fernando Villaran, the 
main promoter of the law, left his office just as it passed 
congress, and the four subsequent Ministers have not made 
its implementation a priority. 
 
8.  The negative effects of informality are extensive, 
reaching both the demand and supply side of the labor 
market.  The visible effects of Peru's high informality 
include: the inability to collect income taxes from nearly 
70 percent of workers, no tax revenue from informal 
businesses, low workforce productivity (down 40 percent from 
1975), and unregulated and poor working conditions.  Without 
job security, workers in the informal sector often receive 
less than minimum wages and no benefits. 
 
Comment: FTA Promotes Formality 
------------------------------- 
 
9.  A recent proposal by Labor Minister Juan Sheput to 
reduce labor market rigidity has met stiff opposition from 
labor unions and some political parties (Reftel).  While 
many in the GOP understand the problems affecting Peru's 
labor market, forward action is unlikely during an election 
year.  Nevertheless, the GOP views the U.S.-Andean Free 
Trade Agreement (FTA) as a tool to stimulate reform and 
create new export-related employment -- a key element for 
moving Peru's workforce into the formal economy. 
 
POWERS