Identifier
Created
Classification
Origin
09BOGOTA379
2009-02-05 14:40:00
CONFIDENTIAL
Embassy Bogota
Cable title:  

PROTECTIONIST LABOR LAWS HINDER FORMAL ECONOMY

Tags:  PTER PGOV PREL ECON SOCI CO 
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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
--------

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