Informe Nº: 13/05/2014

In the north of the country only 1 out of 5 are proper jobs

The government presented a draft bill seeking to incentivize formal employment. In the draft lies the recognition that economic growth and tighter controls alone are not enough to reduce informality. Reforms to labor institutions with special emphasis on small enterprises can help to solve the problem. In any case, Congress should enhance its design since, as it is conceived, will repeat frustrations.

The President sent to Congress a bill designed to promote registered employment. It basically consists in creating the Public Registry of Employers' Labor Sanctions (REPSAL) and reducing employer contributions. If included in the REPSAL firms will not be allowed to sign contracts with the public sector, enrolling in a simplified tax system (monotributo) and computing wages as an expense when calculating the income tax. The reduction of employer contributions will apply only to the 17% of salary which currently paid as tax to ANSES (public social security system) and PAMI (public healthcare system). The reduction varies by company size, reaching its highest level at 5 employees’ business where it will be around a 50% of this tax. 

The main strength of the bill is the recognition of the importance of labor institutions. Its main weakness is that, as with similar initiatives in the past, the proposed measures are clearly insufficient. There is a clear imbalance between the severity of the problem to be solved and the weakness of the proposed instruments.

In this regard, the statistics provided by the INDEC referred to the 3rd quarter of 2013 show the magnitude of this imbalance. According to this official source it is estimated that:

· In Buenos Aires City 44% of the privately employed are registered.

· In Patagonia 36% of the privately employed are registered while in the central region this percentage is 33%.

· In northern region only 18% of the privately employed are registered.

This data shows that the type of jobs that the proposed bill seeks to create is the minority. In the Buenos Aires City less than half of the privately employed are registered, in the south and center regions this proportion descends to approximately a third while in the northern provinces only less than 1 out of 5 private jobs are registered. The remainder are state jobs, unregistered and self employed.

Lowering taxes especially to the small firms as proposed by the bill goes in the right direction. However the incentives are weak when considering the huge obstacles and costs that the current labor institutions and their interpretation by the justice system impose. For example, tax level on wages is so high that the 50% reduction of employer contributions for ANSES and PAMI (the highest reduction included in the project) will only translate in a 20% effective reduction in total social charges. Even more relevant is that the bill does not include a reduction of bureaucracy and the high risks of litigation currently associated with hiring a registered employee.

Congress should add integrity and creativity to the proposed bill so as not to repeat new frustrations. Very similar measures have been applied in the past with poor results; this is explained by the fact that the costs and barriers of formality are so high that marginal changes are not enough to generate results.

Recognizing that economic growth and tighter controls are not enough and that the real solution lies in labor institutions is a step forward. However, in order not to lose the opportunity to adopt an effective strategy for promoting good jobs a far deeper modernization of the labor institutions is needed. Measures like the establishment of a tax exemption in social security contributions, as used successfully in other countries, a substantial simplification of labor registration, different legal wages by geographical areas and mechanisms to reduce labor litigation should be considered. 

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