Peru minimum wage hike ‘could increase informality’

A hike in the Peru minimum wage that will come into force on May 1 could push more workers into informality, according to a leading Peruvian economist.

The increase, which was approved by the Peruvian government on April 3, will see the Peru minimum wage rise from 930 soles (approx. USD 242) to 1,025 soles (approx. USD 267) per month. 

Estimates for how many people earn minimum wage in Peru range widely, from around 567,000 to almost 1.5 million. Peru has a total labor force of 18.57 million people. 

Given that the unemployment rate was around 9.4% in March 2022, while an estimated 71% of workers are employed informally, that means between one-in-eight and one-in-three formally employed workers could benefit from the rise.

However, according to Jorge Carrillo Acosta, an academic director for finance courses at the Pacific Business School – part of Peru’s prestigious Pacific University – the 10% increase in the minimum wage could have a number of effects.

Among them is the incentivization of using informal labor among small- and medium-sized enterprises (SMEs), with Carrillo Acosta suggesting that the Peru minimum wage hike could see many such companies offering to continue paying workers the previous minimum wage off the books. 

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That would mean those workers gain the benefit associated with not having tax deducted from salaries, while the companies will not need to stump up the additional pay – for bonuses and other benefits, as well as monthly salaries.

“Large companies will not be affected much, since they have the financial backing to [pay the increased rate], who will be affected is the SMEs or small companies, because this increase implies 95 soles more, that is almost 1,600 soles over the annual cost. This increase will produce more expenses (bonuses, benefits, Essalud, cts, etc.),” he was quoted as saying by Infobae. 

According to Carrillo Acosta, the Peru minimum wage increase is also likely to see other companies choose to lay workers off.

Peru minimum wage rises outstrip inflation over recent years

The 10% increase in the Peru minimum wage that will be enforced from May is the first rise implemented since 2018, and tenth rise since the turn of the century. 

The Peru minimum wage was set at 410 soles in 2000, before rising 12.2% in 2003 to 460 soles. Since then, eight more increases have been implemented, seeing the minimum wage rise 84.4% this century.

The impending 10.2% increase will therefore represent an almost doubling of the Peru minimum wage since 2000.

That figure far outstrips the rate of inflation seen in Peru during the same period, which has never risen above 5.79% for any given year since 2000, with the cumulative total of inflation during the past 22 years being 56.16%.

That means the Peru minimum wage has risen at close to double the rate of inflation since the turn of the century. However, inflation is based on a wide range of factors, and while the overall rate may remain low, consumers can still suffer when price rises are seen for popular consumer goods.

Like in many countries around the world, the ongoing crisis in Ukraine following Russia’s invasion in February has contributed to just that happening in Peru, with prices soaring for the likes of food and fuel, leading to widespread protests in the country in recent months.. 

The crisis has placed considerable pressure on leftist President Pedro Castillo and his government, having only come to power in July 2021, and the hike in the Peru minimum wage is one of a number of measures implemented with the intention of mitigating the crisis.

However, should more workers be pushed into informality, as Carrillo Acosta has suggested, the move is likely not to bring the desired benefits. 

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