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The global crisis and the Peruvian labor market: impact and policy options

Listed author(s):
  • Moron, Eduardo
  • Castro, Juan F.
  • Villacorta, Lucciano

After almost 20 years of prudent macro policies, Peru seems in better shape than before to withstand the effects of a financial crisis. Progress, however, has left some policy areas unscathed and the labor market is one of them. In this paper we analyze the potential effects of the crisis on labor market outcomes, and discuss policy options to address short run and structural considerations. We review stylized facts from this and previous crisis to account for potential transmission mechanisms, review policy options and results from past and existing labor market interventions, and build a DSGE model to provide further insight regarding labor market outcomes and the effects of transitory and permanent policy measures. On the countercyclical front, our analysis reveals that the main risk that the policymaker should aim to mitigate is a surge in informality and underemployment. For this, job protection alternatives (as temporary payroll tax holidays already implemented) have to be accompanied by a strengthened and better focalized reemployment service, especially if the shock transpires into the nontradable sector. On the more structural side, policy should aim at the prime drivers of informality in our country: low productivity and high formal labor costs. For the latter, progressive access to labor benefits for small firms (already introduced via a special labor regime) could be complemented by introducing different minimum wage levels according to firm size and a generalized reduction in firing costs. Low productivity issues, on the other hand, can be addressed by strengthening and integrating existing training programs and information networks which have already proven successful in terms of formal job creation. Simulations reveal that permanent non-wage cost reductions (like those introduced via the special labor regime) can increase formal employment and formal GDP participation by 2 percentage points. Structural policy interventions also exhibit a large countercyclical potential due to their permanent nature. This implies that we should not wait for the crisis to be over to start their implementation.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 22120.

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Date of creation: 16 Oct 2009
Handle: RePEc:pra:mprapa:22120
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  1. Juan Díaz & Miguel Jaramillo, 2006. "An Evaluation of the Peruvian "Youth Labor Training Program"-PROJOVEN," OVE Working Papers 1006, Inter-American Development Bank, Office of Evaluation and Oversight (OVE).
  2. Bosch, Mariano & Maloney, William F., 2008. "Cyclical Movements in Unemployment and Informality in Developing Countries," IZA Discussion Papers 3514, Institute for the Study of Labor (IZA).
  3. Juan F. Castro & Eduardo Morón & Cynthia Sanborn, 2009. "Helping Reforms Deliver Inclusive Growth in Peru," Chapters of Books,in: L. Rojas-Suarez (ed.), Growing Pains in Latin America, edition 1, volume 1, chapter 1, pages 236-293 Fondo Editorial, Universidad del Pacífico.
  4. Yamada, Gustavo & Cárdenas, María, 2009. "Reinserción laboral adecuada: dificultades e implicancias de política," MPRA Paper 22108, University Library of Munich, Germany.
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