The ghost economy

Since 2020, 1.8 million Peruvians have entered the informal economy.

Earlier this month, Peru’s National Institute of Statistics and Informatics (“INEI”) published figures revealing that since 2020, almost 2 million Peruvians have entered the informal economy. 19.8% of those – 185,600 – were university graduates. This means that almost 9.5 million Peruvians are neither officially employed nor eligible to receive social welfare. Many don’t have bank accounts. These 9.5 million citizens have fallen off the fiscal radar meaning greatly diminished tax revenue for a cash-strapped Lima.

An economist based in Peru said, “Peru’s labour informality has now reached 76.8%, higher than anywhere else in the region. The INEI is an impartial and respected institution – I believe these figures. The pandemic caused informality to surge but it has been an intransigent problem for decades. Although the economy is recovering, reducing informality takes a long time – businesses must generate the right jobs at the right wage. The bureaucratic and legal barriers are also high for those wishing to migrate to formal employment.”

“Peru’s labour informality has now reached 76.8%, higher than anywhere else in the region.”

Economist, Peru

Comparing the year 2021 with 2019, the population of working age increased by 3% but inactivity grew by 6.3%. Between 2019 and 2021 the sectors that have contributed the most to job creation have been construction (18%) and agriculture (16%), job losses on the other hand were experienced most significantly in the services sector (-13 %). Thus, there has been a restructuring of employment towards less qualified work and in companies with lower productivity and, furthermore, the educational level of the employed labour force has been reduced.

A Peru-based political and economic expert commented, “The administration is proposing to raise the minimum living wage, which generates a reverse effect when it comes to migrating people out of the informal economy. It is a very high entry barrier amidst low productivity.”

Peru remains a country with a high rate of tax non-compliance and the growing informal economy represents a fiscal headache for the administration of president Pedro Castillo (“Castillo”). In 2020, the percentage of informal employment in Peru stood at 68% of the total employed population. This means that over two thirds of Peruvian workers were considered informally employed. The agricultural sector, from which much of Castillo’s political support base derives, has significantly higher levels of informality in comparison to other sectors.

A Peru-based consultant on labour markets said, “Covid has left a less productive, less equitable and more precarious labour market as a consequence of the response to the pandemic. The economic reactivation policies and the labour policies of the current administration will do little to change that dynamic. True, almost all restrictions have already been lifted, except those related to the education sector, and the economy is recovering to its pre-pandemic levels, but the same has not necessarily happened within the labour market.”

“Covid has left a less productive, less equitable and more precarious labour market.”

Labour market consultant, Peru

During the pandemic, the administration struggled to identify informal workers, and therefore those Peruvians most in need could not receive benefits. “The informal economy was almost shut down overnight due to strict lockdown measures. Not even going back to 2014 do we see such a low number of people working formally,” added the labour markets consultant. The startling conclusion that emerges is that informal employment has increased, compared to pre-pandemic levels. Migrating those workers into the formal economy will be a monumental challenge.

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