PROTECTIONIST LABOR LAWS HINDER FORMAL ECONOMY

C O N F I D E N T I A L BOGOTA 000379 SIPDIS E.O. 12958: DECL: 01/30/2019 TAGS: PTER PGOV PREL ECON SOCI CO SUBJECT: PROTECTIONIST LABOR LAWS HINDER FORMAL ECONOMY Classified By: Political Counselor John S. Creamer Reasons: 1.4 (b) and (d) SUMMARY -------------- ¶1. (SBU) Colombia's heavily taxed and regulated labor market--higher than many regionally--encourages informality and temporary contracts and cooperatives, said Vice President of the National Association of Industries (ANDI) Alberto Echavarria. He added that the 50% additional non-wage worker cost associated with the "European-type" worker protections helps explain why 59% of all workers in Colombia are employed in the informal economy. Local ILO Representative Marcelo Castro Fox said the informal economy undermines unions' efforts to organize workers, and contributes to the low union affiliation rate--4.7% of all workers. He said the labor violence and anti-union sentiment in Colombia further limit unions. END SUMMARY. High Labor Costs -------------- ¶2. (SBU) AFL-CIO affiliated Solidarity Center Director Rhett Doumitt estimated that Colombia's non-wage labor costs are higher than other countries in the region--about 47%. Ecuador averages between 16.7 - 25% of the base wage, Venezuela between 37% - 43%, and Peru 23%. Former CUT President Carlos Rodriguez agreed, estimating that the average non-wage cost of labor in Latin America was about 30%, putting Colombia on the higher end of the scale. He noted Guatemala and Honduras had about a 15.5% and 13.7% non-wage labor cost. ¶3. (U) Echavarria said the costly worker protections encourage the informal sector, as businesses cannot remain competitive. He said that the non-wage labor costs were closer to 60-80% of the base wage in Colombia since additional costs not included in the unions' 47% estimate include uniforms, mandatory holiday and summer bonuses, and maternity/paternity leave. He compared the Colombian worker costs to the European model, noting that this inhibited job creation, as labor-intensive industries often choose to invest elsewhere. ¶4. (U) Employers must pay formal workers at least minimum wage (about USD $250 per month for fiscal year 2008),and must contribute an additional 15.5% of a worker's salary to a pension plan. Employers must also pay the national tax agency (DIAN) 12.5% for the worker's health care, and anywhere from .5% to 8% for a worker's accident compensation fund, depending on the level of risk associated with the job. An additional 10% per year goes into a special savings plan that the employee can draw from when unemployed, buying a home, or paying for education. Finally the employer pays 9% for social assistance and capacity building programs administered by the unions. Stringent Labor Protections -------------- ¶5. (U) Echavarria explained that the layoffs currently seen in the United States could never happen in Colombia. Due to stringent labor protections, businesses must get permission from the Social Protection Ministry (MPS) before firing from three to fifty workers, depending on the size of the business. Labor think tank the National Union School (ENS) Director Jose Luciano Sanin said the Colombian labor code was changed in 1990 to protect workers from "arbitrary firing." He told us the business must inform the employees of the MPS application to dismiss employees, citing the specific economic or other reasons. The employees are then allowed to make their case to the MPS in an attempt to prevent the company from dismissing them. MPS Lawyer Ramiro Correa told us the business cannot fire any employees until this three-month review process is complete. ¶6. (U) The ENS reports only eleven companies were permitted to fire employees due to economic reasons in 2007, two of them due to a partial or complete company closing. Sanin added even to fire individuals, a full justification must be provided to the employee citing which of the 15 permitted labor code reasons to dismiss an employee pertained to the case. Echavarria said businesses are hesitant to bring too many direct-hire employees on the payroll, due to the economic risk of not being able to quickly shed labor costs if the market turns. He said this limits economic growth, and makes Colombian companies less competitive. The Result: Large Informal Economy, More Co-ops and Contractors -------------- ¶7. (U) Sanin told us the primary reason businesses remain in the informal sector is to avoid taxes--in particular the costly worker taxes. Colombia's work force consists of 7.4 million formally-employed workers (41%) and 10.8 million informally-employed workers (59%) according to the ENS. Echavarria said more labor inspectors were needed to require businesses to move to the formal sector--currently 247 MPS inspectors cover the entire country. He said simplifying the process to register small businesses was also important, noting the cost of starting a business was low in Colombia, but the process was too complicated. He said the minimum wage in Colombia is about average for Latin America (taking cost of living into account)--this year's increase was the same as inflation: 7.66%. ¶8. (C) Castro Fox said that cooperatives and contractors were the logical business solutions to the inflexible labor market, noting businesses often avoid the liability of direct-hire employees for financial reasons more than for any anti-union ideology. Echavarria told us the Cooperatives Law of 2008 should help close the savings gap that businesses sought with cooperatives. (Previously cooperatives were not required to pay social security and other benefits.) Still, he voiced concern about the loop hole the Colombian congress added before passing the bill that exempts small cooperatives from paying the benefits. He noted that many congressmen own cooperatives. ...And Lower Union Affiliation -------------- ¶9. (C) Doumitt told us the low union affiliation rate in Colombia was due in great part to the vast informal sector. Violence against labor unionists during the 45-year armed conflict and the public's perception that that unions values politics over pocket book issues for workers also limit union membership. Doumitt complained that the politics of the labor movement in Colombia impede positive, practical advances on labor issues, but noted that some unions are moving away from their traditional socialist ideologies. Polls show 45% of the Colombian public has a negative perception of unions in part due to their focus on leftist ideology and politics at the expense of pocketbook issues. ¶10. (U) Doumitt said Colombia's union affiliation rate was on the lower side of the scale for Latin America--Ecuador has a 2% union affiliation rate, Venezuela 11%, and Peru 7% as compared to Colombia's 4.6% union affiliation rate per total worker population. The ENS reported that union affiliation in Colombia is about 11% of the formal economy. Most unions are in the public sector (55%)--educators alone make up 30% of all unionists in Colombia. Colombian economist Mauricio Santa Maria said public sector professionals, especially educators, tend to unionize more than others because they remain in the same job longer. Private sector workers change jobs several times throughout their lifetime, and thus do not perceive the long-term benefits of joining a union. BROWNFIELD