This Selected Issues paper analyzes the developments in the labor market of Peru during the 1990s. The study assesses the relationship between the orientation of economic policy and export performance, in particular, export diversification over the last four decades. The paper describes the two-tier pension system and evaluates the long-term fiscal burden of this system. The study also reviews the design and implementation of monetary policy in Peru over the last decade.


This Selected Issues paper analyzes the developments in the labor market of Peru during the 1990s. The study assesses the relationship between the orientation of economic policy and export performance, in particular, export diversification over the last four decades. The paper describes the two-tier pension system and evaluates the long-term fiscal burden of this system. The study also reviews the design and implementation of monetary policy in Peru over the last decade.

I. Peruvian Labor Markets and the Impact of Economic Activity in the 1990s1

A. Introduction

10. At the time of the Board discussion for the 1999 Article IV consultation with Peru, Directors expressed concern that in Peru in the 1990s, industrial employment fell, the rate of unemployment was little changed, and underemployment remained high, despite high rates of output growth.2 All the while, real wages were falling. This paper attempts to explain this apparent anomaly. The paper is divided in three sections. The second section discusses the evolution of employment, unemployment, underemployment, and real GDP growth over the course of the decade. The final section presents some recommendations in light of the paper’s conclusions that:

  • In the 1990s there was only a weak correlation between output growth and unemployment during the course of the decade. However, there was a much stronger correlation between output growth and employment performance, and between output growth and total underemployment (defined as the sum of underemployment and unemployment).

  • The latter correlations became stronger after 1993, in reflection of the greater degree of labor market flexibility in this period following the labor law reforms of the early 1990s.

  • Over the course of the decade, the relatively strong performance in output and employment growth, together with a more modest reduction in total underemployment, reflected a sharp increase in the rate of labor-force participation.

  • The increase in labor force participation was most pronounced since 1994, a period in which real wages for blue-collar workers were declining. The drop in real incomes of these workers is likely to have motivated additional household members to seek employment.

  • The degree of labor market informality seems to have changed little over the 1990s, except for a modest rise since the middle of the decade that may have arisen because the majority of labor shed during the downsizing of the public sector in the first half of the decade could not find work in the formal sector.

11. The analysis in this paper concentrates on total underemployment, rather than just unemployment, because the size of the underemployment problem dwarfs that of unemployment, and because movements in the unemployment rate were often offset by changes in the underemployment rate (Table 1). The rate of underemployment has exceeded that of unemployment by at least five-fold in the 1990s, and surveys of workers’ concerns on Peruvian labor markets point to two main issues that are directly linked to the level of underemployment: (a) the instability of employment status (which has meant that workers are facing variable hours of work, temporary layoffs, and job loss),3 and (b) the lack of adequate- paying jobs (currently, about one-third of those employed earn less than one-half the IMR).4

Table 1.

Peru: Employment, Unemployment, Underemployment, and Real Wages 1/

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Source: BCRP and Fund staff estimates.

Data is for metropolitan Lima only.

In accordance with standard rate definitions, all rates are expressed as a percentage of the EAP, except the EAP which is a percentage of the WAP.

12. The relatively high rate of labor taxation in Peru, of around 50 percent of the base wage, has no doubt affected the level of employment and total underemployment, albeit not the trends in these indicators (see Appendix II for details on the structure of labor taxation and regulation). The impact of this level of taxation on employment is more likely to be greater on unskilled labor, owing to the failure of the market wage to absorb part of the tax burden, as the supply curve of unskilled labor is very elastic. Also, the high rate of labor taxation and costly severance payments regulations are likely to have contributed to the maintenance of the relatively large informal sector (Table 2).

Table 2.

Peru: Informal and Formal Employment

(In Percent of Employment)

Source: ILO.
Source: GRADE.

Informal sector data on employment are based on household surveys that are independent of formal employment data that is based on surveys of firms.

ILO definition of informality is based on size of the firm (mainly firms with less than five employees).

Independents include family-run operations.

GRADE definition of informality is based on compliance with regulations.

13. The analysis in this paper focuses on labor market developments in Lima only (which according to the latest data contains 30 percent of the economically-active population and is where more than 50 percent the country’s output is produced). Labor market series data for employment outside of Lima are only available since 1997 and data for labor force participation, unemployment, and underemployment rates are only available since 1996. Appendix III describes in detail the problems of labor-market data in Peru. Where possible, nationwide labor market performance is noted. Also, where appropriate, the paper makes use of comparisons with other countries in the Andean region.

B. Employment, Unemployment, Growth, and Labor Market Participation in Peru in the 1990s

14. The analysis that follows focuses on labor market developments in two distinct time periods: 1991-93 and 1994-99.5 Over the first period, there were significant reforms that increased the flexibility of labor markets, and thus, modified the response of labor-market variables, such as employment, to economic developments.6


15. In this period, the economy grew a cumulative 6.7 percent, and the level of employment grew by 26.2 percent (Table 1). Employment growth was most pronounced in enterprises operating in the informal sector (Table 2). On the other hand, labor force participation grew so that the rate of employment was steady at around 41.5 percent, and the rate of total underemployment was basically unchanged at 58.7 percent; albeit, the rate of unemployment rose 4 percentage points, while that of underemployment fell by a similar amount. Real wages fell slightly for blue-collar workers and rose sharply for white-collar workers (Table 3).

Table 3.

Peru: Real Wage Developments

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Source: ILO and Central Bank.

ILO definition of informality.


16. This period, which was characterized by substantial labor market flexibility, also covered two distinct periods in terms of economic performance. Between 1994 and 1997, the Peruvian economy experienced high rates of growth, spurred by prudent macroeconomic policies, the normalizing of relations with external creditors, and the implementation of major structural reforms that included the privatization of most state enterprises.7 In this circumstance, labor market performance improved. However, owing to a series of external shocks beginning in 1998 and a slowdown in the implementation of structural reforms, economic activity slowed considerably in 1998-99 with an adverse impact on the labor market.

17. Between 1994 and 1997, output grew a cumulative 34 percent, and the level of employment grew by 51 percent. Over the same period, the employment rate rose from 41.3 percent to 50.5 percent, while the total underemployment rate fell from 58.7 percent to 49.5 percent (with the unemployment rate falling from 9.9 percent to 7.7 percent). While a significant reduction took place, the level of total underemployment remained very high after four years of growth well in excess of any plausible assumption on its long-term trend (Figure 1). In 1994, real wages of both blue- and white-collar workers rose sharply, but then fell through 1997, with blue-collar wages declining faster.

Figure 1.
Figure 1.

Peru: Labor Market and Real Sector Indicators

Citation: IMF Staff Country Reports 2001, 051; 10.5089/9781451831009.002.A001

Source: ILO; Central Reserve Bank of Peru; and Fund staff estimates

18. In this period, the substantial downsizing of the public sector led to a drop in the public sector’s share of total employment from 12 percent in 1993 to 7 percent by 1997, resulting in a significant number of new job-seekers. While some found formal employment in the private sector, the majority that found work did so in the generally lower-paying informal sector. Employment growth in this period was again most pronounced in enterprises operating in the informal sector, but employment also rose in the formal private sector (Table 2).

19. The rate of total underemployment in the period 1994-97 did not fall faster because the labor-force participation rate rose from 57.4 percent to 64.5 percent.8 Decomposing the change in total underemployment into the impact from changes in employment and labor-force participation9 shows that the increase in employment of 9.2 percentage points in 1994–97 (calculated as the increase in the average level of employment in the period with respect to the level of employment at the start of the period) was offset to some degree by the 2.3 percentage point rise in labor-force participation, such that the reduction in total underemployment in this period was 6.8 percentage points.10

20. The rise in labor-force participation would appear to be related to the fall in real wages in this period, especially among blue-collar workers, which may have induced new entrants into labor market, mainly women (Table 5), to recoup real household income.11 Moreover, the decision to enter the labor market was likely buoyed by the positive employment picture; albeit, the jobs available for many were relatively low-paying. While, the majority of new entrants found full-time employment, enough did not so that the total underemployment rate did not fall as fast as it would have had labor-force participation rates remained unchanged.12

21. As noted earlier, in 1998-99 economic activity slowed sharply (with negative growth in 1998 and only a slight recovery the following year). In this period, the rate of unemployment rose only slightly, the total rate of underemployment rose by 2 percentage points and the rate of employment fell 2 percentage points. Participation rates rose further, reaching 66 percent by 1999, 10 percentage points above the level at the start of the decade. Decomposing the change in underemployment into its employment and labor-force participation effects shows that the 2.3 percentage point rise in average total underemployment in 1998–99 (compared with the rate at the start of this period) reflected both a drop in employment (that contributed 1.7 percentage points) and a continued rise in labor-force participation (that contributed 0.6 percentage points). Over this period, real wages declined for blue-collar workers, but rose for white-collar workers. Also, in this period, real wages of independent workers in the informal sector fell sharply, after having been basically flat between 1990 and 1997 (independent workers are mainly low-skilled, low-wage earners). In this circumstance, labor-force participation continued to rise despite the more gloomy employment picture.13

22. The performance of wages in Peru, especially between 1994 and 1999, appears to have reflected the growing rate of return to labor with appropriate human capital and skills for the changing economy, while labor whose skills had become less productive or obsolete faced growing competition for low-skill work from new entrants. Wages declined 17 percent in real terms between 1994 and 1999 for blue-collar workers, but wages for white-collar workers rose six percent in real terms in the same period. As a result, the gap between blue-collar salaries and white-collar salaries in the economy widened from 19.5 percent in 1994 to 52.1 percent in 1999. This is consistent with several studies of supply and demand models of labor markets in Peru that point to a dual labor market structure. In the skilled labor market, demand has outstripped supply, such that there has been upward pressure on wages. In the low-skilled labor market, falling wages has induced increased participation that has raised the supply of labor at a rate in excess of the demand; thus putting downward pressure on the unskilled wage. Moreover, a similar pattern of wage developments took place in the informal market (Table 3). Real wages of independent workers fell between 1994 and 1999, while real wages in informal enterprises, which include professional services providers (generally white-collar workers), have soared since 1994.

23. The informal labor market in Peru in the 1990s has provided employment to workers that might not otherwise have been available in the formal sector because of the high cost of hiring labor. While the degree of labor market informality changed little over the 1990s, there was a modest rise beginning in the middle of the decade that may have arisen because the majority of labor shed during the downsizing of the public sector in the first half of the decade could not find work in the formal sector.14 Of the 5 percentage point decline of public sector (formal) employment as a share of total employment between 1993 and 1997 (the last year for which data is fully available), the share of informal employment rose by about 3-4 percentage points and private-sector formal employment rose by around 1-2 percentage points (Table 2).

C. Policy Recommendations

24. The major policy challenge that follows from the above analysis is how to reduce the high level of total underemployment and improve wage conditions of lower-skilled and blue-collar workers. Under current demographic trends, and the latest estimate of the long-term employment-growth elasticity of 0.5,15 it would take six-percent growth of the economy for 20-25 years to reduce total underemployment to low levels. An increase in the employment-growth elasticity to 0.75 (a feasible number, which is below the 1.00 level in Chile16) would reduce the time period roughly in half. Thus, policies should aim at both high growth and increasing the employment-growth elasticity. Regarding the former, to sustain high rates of economic growth for an extended period of time would require the maintenance of sound macroeconomic policies and continued efforts in structural reform in the economy to encourage investment. This policy stance would also raise labor productivity and therefore wages. To raise the employment-growth elasticity in the economy, the government could:

  • Eliminate structural impediments to growth in labor-intensive industries, such as agriculture (by increasing the pace of land titling and registration and implementing legislation to provide for the adequate pricing of water usage in rural areas) and tourism (by improving regional airport and highway infrastructure through private sector operating concessions).

  • Foster human capital development through improved education services in the country. Planned outlays in 2001 on education amount to 2.5 percent of GDP (below the 4 percent average in Western Hemisphere countries). Over the near term, fiscal resources would need to be shifted away from nonproductive areas in order to improve public education services.

  • Finally, reducing the direct taxation on labor and eliminating cost-increasing regulations (e.g., generous severance payments rules) would lead to an increase in employment, especially for unskilled labor.

Table 4.

Peru: Determinants of the Total Underemployment Rate 1/

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Source: BCRP and Fund Staff estimates.

Over this period, staff estimates suggest an annual labor productivity growth rate of 2.5–3.5 percent.

Table 5

Peru: Demographics of the Rate of Labor Force Particpation 1/

(In percent of working age population) 2/

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Source: ILO.

Data is for metropolitan Lima. Total, male, and female labor force particpation are in terms of working age population.

Total, male, and female labor force particpation rates are in terms of working age population, all sub-categories are expressed as a percentage of the working age population in that particular cohort.

Table 6.

Peru: Labor Market Comparators with Andean Community 1/

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Source: ILO.

Data for Colombia and Ecuador are for major urban centers; for Peru are for Lima, and for Venezuela are national.

Table 7.

Peru: Additional Labor Market Comparators with Andean Community 1/

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Source: ILO.

Data for Colombia and Ecuador are for major urban centers; for Peru are for Lima, and for Venezuela are national.

Data are for 1998, except in Bolivia where the data are for 1996.

Appendix I. Glossary of Labor Market Definitions in Peru

Unemployed: not employed by a third party nor worked independently in the week before the survey was carried out, and were physically able to work and looked for work in the period in question.

Visibly underemployed: employed in the period in question but working less than 35 hours a week, despite being able to work more and desiring to work more.

Invisibly underemployed: employed for more than 35 hours a week in the period in question, but earning less than half the cost of the standard consumption basket.

Underemployment: the sum of visible underemployment and invisible underemployment.

Employed: working more than 35 hours a week and earning more than one-half the standard consumption basket.

Working age population (WAP): the population over the age of fourteen (there is no upper limit).

Economically active population (EAP): the working age population that is actively seeking employment or is currently employed in some capacity.

Standard Consumption Basket (Ingreso Minimo Referencial, IMR): monthly level of income needed to purchase the requisite items to maintain a family of five. As of January 2001, the IMR was around US$315.

Appendix II. Labor Market Regulatory Environment

Taxation and regulatory charges in Peru are significant; amounting to between 49 and 54 percent of the base wage pay (albeit, labor taxation has fallen somewhat in the 1990s). Recently, the minimum wage seems to have become binding, which would have had an adverse effect on employment.

There are five major taxes and regulatory charges on labor. First, there is a 5 percent payroll tax levied on most wage earners, the solidarity wage tax (IES). Second, there is an employer contribution to the national health plan of 9 percent of the base wage. Third, firms must pay an extra salary into a worker’s account as a form of unemployment insurance (an effective tax rate of 9.7 percent);17 in addition, workers have the right to a severance payment of 1½ salaries for each year of work up to 12 salaries. Fourth, firms must pay one month of vacation pay (which adds another 9.7 percent to the effective monthly wage bill). Fifth, there are obligatory biannual bonuses and special school bonuses that add 19 percent to the wage bill.18

In March 2000, the minimum wage was raised to S/. 410 a month (US$116 as of January 2001).19 At this rate, the staff estimates that the minimum wage may be beginning to reach a level earned by some 20 percent of those employed in either the formal or informal sectors.20 On top of the minimum wage, workers receive the aforementioned legal bonuses, CTS, health insurance contributions, and vacation pay (less pension system contributions), such that the cost to the employer of hiring someone at the minimum wage is as much as 54 percent higher, or S/. 615 a month.21

The level of taxation and regulation of labor in Peru raises the question as to the international competitiveness of Peruvian labor. As noted in Appendix III, productivity data and, therefore, unit labor cost data are scarce. Notwithstanding, ILO data (1996) revealed that the very low salaries in Peru were not offset by nonwage costs and that unit labor costs are among the lowest in Latin America. Salaries were estimated at less than US$1.5 per hour in industry (compared with US$4 per hour in Argentina, US$3 per hour in Brazil and US$2.5 per hour in Chile). Unit labor costs in Peru were estimated at US$0.07 compared with US$0.09 in Chile, US$0.09 in Argentina, and US$0.10 in Colombia and Brazil.

Appendix III. Statistical Issues in Peruvian Labor Market Analysis

The analysis of Peruvian labor markets is hampered by changes in the definitions and coverage of labor market statistics over the years.22 There are two main sources of labor market statistics: employment data since the 1950s has been based on monthly surveys of firms, while data on unemployment, underemployment, and labor participation have been based on annual household surveys, which are carried out in the third quarter of the year.

Until 1994, the employment survey covered only manufacturing firms in Lima that employed at least 100 workers, and the survey was rarely revised to incorporate new enterprises. Since then, the Lima survey has been expanded to the services sector and to include new enterprises. Also, beginning in October 1997, an additional survey has been carried out that covers ten national urban areas and enterprises with as few as 10 employees. In discussions with ILO officials and labor market analysts in Lima, their general view was that the latest survey is well constructed and the results accurately depict the employment situation nationwide.

Nationwide labor market data on labor participation, unemployment, and underemployment comes from the annual household survey. Quarterly unemployment and underemployment data for Lima has become available recently. Generally, the National Statistics Institute (INEI) has been in charge of designing and conducting the survey, but there have been years in which the Ministry of Labor and Social Protection (MTPS) has been in charge (the latest year being 1997). The ILO and labor market analysts view the INEI survey as solid, but the coverage of the survey has changed over time. Until 1995, the survey was carried out only in Lima. Thereafter, it has covered all urban centers (towns with a population of at least 2,000) and concentrated rural areas (rural population zones of at least 14,000).

The increase in labor force participation since the 1970’s may in part reflect the impact of rural migration to Lima that was spurred by the poor economic performance of the agricultural sector and security problems in rural areas.23 As these rural workers moved to the city and were likely to have a relatively high labor force participation rate (as a principal motive for the migration was to find work), the participation rate in Lima would have increased, albeit for the country as a whole, this shift would not have implied a rise in labor market participation rates.

With respect to unemployment and underemployment, until 1995, data was limited to the once-a-year, third-quarter survey of households. Since then, the quarterly survey shows that unemployment and underemployment tend to have seasonal patterns, higher in the first half of the year, which could imply that historical unemployment series are downward biased as they reflect third quarter conditions.

Notwithstanding the improvement in the surveys and data coverage since the mid-1990s, figures for unemployment, especially for 1998 and 1999, may be underestimated. Until the most recent publication of revised labor market data in December 2000, official labor market data beginning in 1998 did not square with macroeconomic developments. For example, in 1998, the data showed that the unemployment rate fell from 9 percent in 1997 to 6.9 percent in 1998, in a year when economic activity was severely impacted by the El Niño weather phenomenon and the Asian financial crisis. ILO staff in Lima pointed out that they were unable to confirm these unemployment numbers as they were not given access to the raw data from the government’s household surveys (they also pointed out that as of end-1999, Peru was the only Latin American country that did not provide the ILO with such information). Moreover, even with the publication of revised data, the official estimate for the unemployment rate in 1999 in Peru of 8 percent may be too lows—the ILO has made its own estimate for the year and shows the unemployment rate to have been around 14 percent (the ILO has not published a 1998 unemployment rate estimate).

Finally, there is a lack of published official data on labor-market productivity. Estimates of productivity growth in Peru by the ILO, central bank staff, and private market analysts, suggest that from 1990-98 average labor productivity grew at an annual rate of between 2.5 to 3.5 percent. The publication of labor market productivity and unit labor costs should be made a regular part of the reporting of labor market statistics by the MTPS.

Summary Table of Peruvian Labor Market Statistics

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Appendix IV. Labor Market Legislative Changes in the 1990s and the Impact of Structural Reform on Employment

Reforms to labor market legislation, principally implemented between 1991-93, have profoundly improved the flexibility of Peruvian labor markets. According to the ILO (1999), in 1990 Peru had one of the most rigid, protectionist, and interventionist labor policy frameworks in Latin America. By 1998, however, the World Bank (González, 1998) concluded that Peruvian labor markets were sufficiently flexible, allowing both quantity and wage responses to changes in economic conditions.

Labor market reform began in July 1991 with a legislative decree that allowed employers to modify work schedules in line with the type of industry (such as Sunday shifts for retailers). In November of that year, the Law on Employment Promotion was approved that allowed various types of labor contracts, including temporary contracts24 and expanded benefits for youth labor contracts.25 It also ended the constitutional protection for labor stability (the guarantee that one could not be laid off in the event of an economic downturn) for new labor-force entrants. In 1993, the new constitution eliminated the previous constitutional rights that all workers should have a job if desired and redefined the concept of “protection from arbitrary dismissal”.26 Finally, in July 1995 a law was passed that eliminated labor stability for all workers and required that laid-off workers receive severance pay of 1½ months of salary for each year of work, up to a maximum of 12 monthly salaries. The law also lengthened the probation period to six months for skilled workers and to one year for workers in “confidential” jobs, and eased conditions for hiring young workers under youth-labor contracts by extending the maximum age from 21 to 25 and the length of the contracts from 3 to 5 years.

In addition to the legislative changes noted above, the Peruvian economy has undergone fundamental structural changes since 1992. The changes that have affected the employment situation most directly include the downsizing of the public sector (mainly through privatization), the reduction in trade protection, especially for the industrial sector, and the more recent restructuring of other sectors in the context of increased global integration (e.g., financial sector).

While the public sector was a major source of job creation between 1960 and 1990, since 1990, the public sector has undergone a fundamental restructuring, with the largest change having occurred in the public enterprises. Between 1991 and 1998, 80 state enterprises were privatized, with employment in these firms falling initially by 77,000 (out of 120,000 total workers). The decline was mainly effected through voluntary retirement programs that were offered to workers in soon-to-be privatized firms. However, over time, employment picked up in the privatized firms. Looking at a subset of 11 major firms sold (for which detailed employment data are available)27, employment rose from a total of 15,359 workers (all directly employed as there was no employment sub-contracting) at the time of privatization to 19,255 at end-1998 (including direct and sub-contracted employment).

During September 1990–March 1991 significant changes were made to the trade regime, and effective protection for industry was sharply reduced, but this did not lead to a reduction in the level of employment in the manufacturing sector. In September 1990, the average tariff (including surcharges) was reduced from 66 to 26 percent. In March 1991, all quantitative trade restrictions were eliminated and tariff rates were reduced further from three tiers (with rates of 15, 35, and 60 percent) to two (with rates of 15 and 23 percent). In a six-month period, average tariff and effective protection rates were reduced from 66 to 17 percent and from 123 to 34 percent, respectively. While it is difficult to isolate the impact of these trade measures on employment, as general labor market reform was taking place concurrently, the table below shows that between 1993 and 1997 employment rose in all sectors, including manufacturing (albeit, employment in the manufacturing sector fell as a percentage of total employment). Moreover, Saavedra and Torero (2000) did not find statistically significant variation in the labor demand behavior of firms that were exposed to different changes in effective protection.

Percentage of the Labor Force and Number Employed By Sector

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Source: The restructuring of the manufacturing sector was not an isolated event in the 1990s. The most recent sector to undergo a significant downsizing was financial services. Bank employment, which first rose in the mid-1990s from 17,196 at end-1995 to 26,854 by mid-1998, in reflection of the recovery in economic activity, fell thereafter to 17,890 at end-November 2000 as the banking system underwent a significant consolidation.

Appendix V. Employment, Unemployment, Underemployment and Labor Participation

To analyze the impact that changes in the rate of employment and the rate of labor force participation have on the unemployment rate, standard labor market analysis decomposes the change in the later in the following manner:

Let U = level of unemployment,

E = level of employment,

EAP = economically active population, and

WAP = working age population.

Then EAP = U + E. Dividing both sides of the equation by WAP and multiplying terms by

EAP/EAP yields:

EAP/WAP = (U/EAP) (EAP/WAP) + (E/WAP) or p = p u + e, where,

p = participation rate (measured in terms of the working age population),

u = the unemployment rate, and

e = the level of employment expressed as a percentage of the working age population.


ut = 1 - et/pt and Δu = et/pt - et+1/pt+1 for any time period t.

Rearranging we have terms in Δe and Δp:

Δu = et+1 (pt+1 - pt)/(pt pt+1) - (et+1 - et)/pt, where:

et+1 (pt+1 - pt)/(pt pt+1) is the component of the change in the unemployment rate owing to the change in the rate of labor force participation, and

(et+1 - et)/pt is the component of the change in the unemployment rate owing to the change in employment.

In order to incorporate the effect of underemployment into this analysis, let us redefine the variable U to equal to the level of unemployment plus underemployment, or total underemployment.

Then the above mathematics still hold with a different interpretation, that being that the change in the rate of total underemployment can be decomposed into changes in the labor force participation rate and changes in employment.

Table 4 reports the results of this decomposition for Peru between 1990 and 1999.

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Prepared by Andrew Wolfe. The research would not have been possible without the help of Ms. Teresa Lamas of the Central Reserve Bank of Peru and Mr. Jaime Saavedra of the Grupo de Análisis para el Desarollo (GRADE).


Underemployment is defined as the number of individuals working less than 35 hours a week, or working more than 35 hours a week but earning less than half the cost of the standard family consumption basket, IMR. For definitions of the labor market performance measures used in this chapter, see Appendix I.


In part this uncertainty has risen from the growing use of temporary contracts. Firms are exempt from certain charges and regulations (e.g., mandatory amortization payments) for temporary workers; thus, they prefer to rollover temporary contracts to offering full-time contracts.


Also, over 90 percent of the unemployed in Peru are out of work for less than six months. In 1998, the average duration of unemployment was around ten weeks, with chronic unemployment (more than one year out of work) affecting only 0.1 percent of the working age population. Additionally, the demographics underlying the overall unemployment rate were little changed in the 1990s. Women had the highest rates of unemployment along with young workers (14-24 years of age). Nevertheless, the dispersion between male and female rates of unemployment has closed somewhat over the course of the decade, from more than 75 percent to 50 percent.


No growth rates for labor market statistics can be calculated for 1990, owing to the lack of published data for 1989.


For a complete description of these labor market reforms, and other structural reforms that have taken place in Peru and are likely to have affected labor market conditions, see Appendix IV.


The employment impact of the privatization program is discussed in Appendix IV.


The economically-active population rose on average by 159,000 individuals a year between 1993 and 1997.


The formal methodology to carry out the decomposition is described in Appendix V and the results are summarized in Table 4.


Moreover, looking year-by-year in the period 1994–97, the pace of employment increases was about the same or exceeded that of the improvement in total underemployment, owing to growing labor-force participation.


The only year in the period when real wages rose, 1994, was also the only year in the period when the labor force participation rate fell.


In comparison with other countries in the region (Colombia, Venezuela, and Ecuador) in the period 1990-97, Peru had the highest employment rate, with a significantly higher female employment rate (Table 6). In addition, between 1990 and 1997, Peru was the only country in which the rate of unemployment did not rise. Also, Peru had the highest rate of labor market participation for both men and women.


Nationwide employment data for 1998-99 show that the rate of employment fell 4.8 percent in 1998 and another 3 percent in 1999.


This is true regardless of the choice of measure of informality: the traditional ILO definition bases the classification of formal/informal in part on the size of an enterprise (those with less than five or ten workers, depending on data availability, are classified as informal) and GRADE, a private think-tank in Lima, defines informality on the basis of legal criteria (i.e., firms are in the informal sector if they do not comply with any legal contribution requirements such as social security or health insurance). Comparing informality in the Andean region shows that between 1990 and 1997, the degree of labor market informality rose in three of the four countries for which data are available (Table 7).


Ministry of Labor and Social Protection (MTPS, 1999).


The Service Time Compensation Scheme (CTS) is a substitute for unemployment insurance, which in the standard design does not exist in Peru. Firms pay one half a salary every six months (May and October) into an interest earning account of workers. Workers can withdraw up to 50 percent of the accumulated contributions made to the account at any point in time. If they leave their job for voluntary reasons or are laid off, they can withdraw the balance.


There are also several lesser charges for industrial training programs (0.75 percent), protection from arbitrary layoff (0.38 percent), and labor contract registration fees.


In the 1990s the minimum wage was raised from USS58 in early 1992 to US$60 in April 1994, US$83 in October 1996, US$100 in April 1997, US$113 in May 1997, and US$127 in September 1997. Notwithstanding these increases, the purchasing power of the current minimum wage is only about one-third of the minimum consumption basket. The monthly average wage for blue-collar workers in Lima was S/. 819 (about US$235) as of September 1999.


The staff estimate is derived from information in the last household study of wage distribution, which was carried out in Lima in 1996. Inflating the 1996 structure of wages by accumulated inflation between 1996 and end-2000 implies that about 20 percent of today’s labor force would be earning around S/. 400 a month, or roughly the minimum wage. However, Macroconsult, a Lima consulting group, estimates that minimum wage is binding on only about 8 percent of workers in Lima.


In Peru, there is little indexation of social benefits or other contractual obligations to the minimum wage. Constitutionally, a tripartite commission of workers, government, and employers is to set the minimum wage. The minimum wage in Peru is defined on the basis of a 40-hour workweek, pro-rated for part-time workers. Also, there are special rates for mining workers (25 percent premium) and experienced journalists (200 percent premium).


For a summary of the sources, coverage, and type of labor market data collected, see the table at the end of this appendix.


In this circumstance, the urbanization rate rose (according to Egger and Garatz, ILO, 1999) from 58 percent in 1970, to 64 percent in 1980, to 69 percent in 1990 and to 71 percent in 1995.


This change in legislation has led to a sharp increase in the use of workers hired under temporary contracts. According to the ILO (1999), 74 percent of Peruvian workers are now hired under these contracts (compared with 35 percent in Argentina, 30 percent in Chile, and 38 percent in Colombia). They are mainly used in small firms and in the services and trade sectors as a means of avoiding the high severance payments. In large firms, 22-25 percent of workers are hired under temporary contracts.


Youth labor contracts allow for a training wage that is below the minimum wage and firms are exempted from paying payroll and health insurance taxes. The maximum number of workers allowed to be employed under the youth-labor contract program remained at 30 percent


The 1979 constitution only allowed for the firing of workers with at least three months of experience for “just” causes, which did not include the economic cycle. Under the 1993 constitution, the State remained obliged to protect workers from “arbitrary dismissal”, but the factors that could be found as grounds for “arbitrary dismissal” were to be determined at the firm level (i.e., negotiated between workers and employers) and could not include misconduct or lost productivity.


These are mainly firms with high growth potential in the telecommunications, electricity generation and distribution, mining, and oil refining sectors.