3. All together: Making growth more inclusive in Peru
Peru has experienced a steep reduction in poverty and inequality in the last two decades. However, the COVID-19 pandemic has worsened Peru's social disparities, particularly due to the high social protection gaps, a large proportion of informal workers without access to employment protection or social insurance, and unequal access to high-quality education and health services. The prevalence of informal employment, which accounts for over 75% of the workforce, presents significant challenges to reducing poverty, addressing inequalities, and promoting inclusive economic growth. To significantly increase formalisation and social protection coverage, deep reforms to social security, including the pension and health systems, and social assistance schemes, coupled with changes in labour, educational, and training policies, are needed. These reforms will require additional fiscal resources. A politically viable reform agenda should be gradual and follow an adequate sequencing and prioritisation of reforms. These reforms will not only allow to reduce poverty and inequalities, but also to boost productivity.
Peru has experienced remarkable success in reducing poverty over the last two decades. Poverty fell by 38 percentage points between 2004 and 2019, an average of 2.5 percentage points per year (Figure 3.1), one of the steepest reductions in poverty during that period in Latin America. Sustained economic growth and macroeconomic stability driven by a robust macroeconomic framework and structural reforms played a crucial role in poverty reduction.
However, the COVID-19 pandemic has also exposed major structural problems, such as a high share of informal workers with no social insurance, the low coverage of social assistance programmes, and unequal access to education. Peru was among the hardest-hit countries, experiencing high rates of infection and deaths, as well as a significant decline in economic activity. The comprehensive social emergency response was crucial in preventing steeper fall in incomes; however, Peru needs to redouble its efforts to prevent the impacts generated by COVID-19 from becoming permanent and deepen pre-existing inequalities.
Widespread informal employment in Peru, accounting for over 75% of the workforce, poses significant challenges to reducing poverty, addressing inequalities, and promoting inclusive economic growth. Informal workers lack employment protection, sick leave, and social insurance benefits, which leaves them vulnerable to poverty. Although informality is widespread along the income distribution, many of them earn low wages, have meagre savings or poor access to credit to rely on during crises, and have limited access to the internet and digital tools and policy support, such as wage subsidies and state-guaranteed loans. Informal workers are often exposed to poor housing conditions, such as overcrowding and inadequate sanitation facilities. Women, young and rural areas face larger informality. All these factors exacerbated the impact of the COVID-19 pandemic. Informal workers typically have limited access to training, and often work in small and low-productivity firms which avoid expanding their businesses to avoid detection by regulatory agencies, hindering overall productivity and tax collection.
Many Peruvians work in informal jobs because they lack the education and skills required for formal jobs. Learning outcomes are not only low but also largely driven by families’ socio-economic status, perpetuating inequalities, and poverty. Such poor outcomes are caused by limited access to quality educational infrastructure and materials, insufficient teacher quality, and inadequate public financing. Higher education is often misaligned with labour market needs, leading to skill mismatches. The outbreak of the pandemic has made things worse by causing long school closures and creating large learning losses and gaps between those who had access to distant learning and those who didn’t.
Among the many roots of informality, including low access to high-quality education and training and a weak institutional framework and enforcement, high labour costs are a key factor, resulting in low social insurance coverage. High labour costs, driven by strict employment regulations and mandatory social contributions, which fund social insurance benefits such as pensions, health, and unemployment protection, discourage formal job creation, particularly for low-income and vulnerable workers. High non-wage costs, bundled with a relatively high minimum wage, close to the median wage, and complex and strict regulation of formal employment, leave many workers in informal jobs. Because regulations are imperfectly enforced, firms regularly evade the costs of social insurance and hire salaried workers informally.
To increase social protection coverage, authorities have created multiple regimes that allow smaller firms to pay lower contributions and taxes. However, these schemes create awkward incentives for firms, encouraging them to remain small and informal with low productivity. A fragmented health system leads to deficiencies diminishing access to high-quality services. A pay-as-you-go public pension system operates alongside a funded private pension component, creating competition instead of complementarity, leading to inefficiencies and inequities in access to a system with low coverage and pension benefits. The popularity of withdrawals from private pension funds since the pandemic indicates discontent with the pension system and creates significant old-age poverty risks, which could turn into a contingent fiscal risk.
Peru has established non-contributory pillars in pensions and health to address the lack of coverage in social protection in the last two decades. These have been complemented by social assistance programmes, including conditional cash transfers to fight poverty. However, non-contributory pensions and cash transfers programmes have low coverage and benefit levels due to limited financial resources. The non-contributory health system provides universal coverage, but its provision of equal health benefits to informal, either for free or at a reduced cost, and formal workers, promotes informality.
A comprehensive, long-term strategy is needed to significantly increase formalisation and social protection coverage in Peru. This requires deep reforms to social security, including pensions and health, and social assistance schemes, coupled with changes in labour, educational, and training policies. These reforms must be accompanied by improvements in the enforcement of labour and tax laws, while making the labour market more flexible and decreasing non-wage labour costs, strengthening the institutional framework, simplifying the tax system and improving product market regulations. Implementing these reforms will require additional fiscal resources, but Peru has ample room to do so, given that Peru’s tax revenues are low by international and Latin American standards and there is also space to improve spending efficiency, as outlined in Chapter 1. It will be essential to ensure that spending reforms are fiscally sustainable. To achieve this, it is necessary to first increase permanent public revenues, allowing for a gradual implementation of spending reforms while maintaining fiscal responsibility. The political economy of overhauling existing institutions and frameworks, along with implementing tax reforms to secure additional revenues, is likely to be challenging. But the benefits of such reforms in terms of higher living standards for all, lower informality, higher revenue collection, and higher productivity are worth. The need to revert the pervasive impact of the COVID-19 pandemic along with the OECD accession process, could serve as a catalyst for the necessary political debate.
A politically viable reform agenda should be gradual and follow an adequate sequencing and prioritisation of reforms. First, social assistance programmes, including non-contributory pension benefits and programmes to tackle poverty could be gradually strengthened. A comprehensive pension reform should also address existing inequalities. Secondly, gradually reducing labour costs of formal job creation for low-income workers would reduce informality and benefit productivity, equity, and public finances at the same time. This will require the gradual modification of current schemes that charge social security contributions based on firm size, transitioning to a system of progressive social contribution rates based on workers’ incomes. Improving access to high quality health services will require gradually increasing the financing of health from general taxation and tackling the fragmentation of the health system. Improving the quality and access to education should proceed gradually and would raise formality and productivity while reducing inequities and boosting female labour force participation. Reducing low-income workers labour costs would not only particularly benefit low-income workers by boosting formal employment, but would reduce gender inequalities in the labour market by boosting female formal job creation. Clear communication on the benefits and costs of reforms will also be instrumental to gather support for the reforms.
This chapter analyses the challenges and shortcomings of the current labour market, social protection and education frameworks and reviews policy options to boost formal employment, which is one of the most salient policy priorities for Peru. The benefits of the discussed reforms should be potentiated by simultaneous policy action in other policy areas, including reforms to boost the structurally low and stagnant productivity and investment, as discussed in Chapter 2 of this Economic Survey.
Poverty and inequality significantly declined in Peru in the last two decades (Figure 3.2, Panels A and B). Poverty reduction was particularly rapid during the commodity price boom from 2004 until 2015, but since then, the pace of poverty reduction has slowed, stagnating since 2018, and even reversed during the pandemic. Inequality has also declined compared to other Latin American countries, particularly during the commodity price boom (Figure 3.2, Panel B). The middle class, measured as those with daily income between USD 5 and 12.4, also grew substantially during the same period, by around 25 percentage points to 75% of the population, but in 2017 42% of the population remained vulnerable to falling into poverty (de la Cruz, Manzano and Loterszpil, 2020[1]).
The main factor contributing to the overall decline in inequality is the reduction of inequality within regions (Castillo, 2020[2]). While economic growth between 2004 and 2019 benefited more the poorest rural areas, the highlands, and forests (Figure 3.2, Panel C), these regions still face persistent disparities with higher poverty levels. However, poverty has become increasingly more urban. Poverty in urban areas increased 6 percentage points between 2011 and 2022, while in rural areas it decreased 15 percentage points. Finally, although poverty levels began to decline again in 2021, they remain high and experienced an increase in 2022 due to high inflationary pressures, particularly in specific regions (Figure 3.2, Panel D).
Peru is a diverse country with a rich ethnic composition. Mestizos make up the largest ethnic group in Peru, comprising approximately 60% of the population, including individuals of mixed indigenous and European ancestry. The Quechua population is the largest indigenous group, comprising approximately 20% of the population. The Aymara population is estimated to be around 5% of the total population. Afro-Peruvians represent about 4% of the population, while the white population, which refers to individuals of primarily European descent, represent around 6% of the population according to the Census of 2017. Ethnic economic inequalities have also narrowed in the last two decades, with the mestizo group surpassing the white group in expenditure per capita due to rural-to-urban migration and increased access to education. The indigenous population has also seen a reduction in the income gap relative to the white population, albeit at a slower pace than mestizo, partly due to a lower rate of rural-to-urban migration (Salinas, Zamora and Chavez, 2022[3]). Nevertheless, indigenous peoples and the Afro-Peruvian population typically face higher poverty rates than the rest of the population. By 2021, the poverty rate was 7 to 8 percentage points higher among indigenous and Afro-Peruvians than among the white or mestizo population (World Bank, 2023[4]).
Over the past two decades, economic growth has been the primary factor driving poverty and inequality reduction and the growth of the middle class in Peru (Mazeikaite, 2022[5]; World Bank, 2023[4]; OECD, 2016[6]). Social assistance programmes have also played a crucial role (Mazeikaite, 2022[5]; Correa, 2021[7]). In-kind transfers, particularly education and healthcare services, also contributed significantly to living standards (Lustig, 2016[8]). However, taxes and transfers had a relatively low redistributive impact compared to peer countries in Latin America due to low social spending (Lustig, 2016[8]; Jaramillo, 2013[9]).
Note: In Panel A, poverty is defined as the share of people living in a household below the 50% of the median disposable household per capita income (or, in some cases, consumption expenditure). This poverty measure is different from the national definition of poverty by INEI, which is used in Panel D. Panel D shows poverty using the national definition based on the calculation of the basic food consumption basket.
Gini index measures the extent to which the distribution of income (or, in some cases, consumption expenditure) among individuals or households within an economy deviates from a perfectly equal distribution.
Source: INEI; World Bank,WDI; OECD, IDD database.
Despite a decrease in informality over the last two decades driven by economic growth, informality remains stubbornly high and has even increased again since 2019 (Figure 3.4, Panel A). Approximately three out of every four workers are informal, and even more in the case of women and rural areas, one of the highest shares among Latin American countries. While informality is prevalent across the income distribution, low-income households are mostly informal (Figure 3.4, Panel B), and informality is associated with high levels of poverty, income inequality, and social exclusion (Box 3.1), particularly in highlands and forest regions where informality rates exceed 85% (Figure 3.4, Panel C). Small firms are typically informal and tend to have a higher proportion of informal workers (Figure 3.4, Panel D). Larger firms, more often formally established, also hire workers informally. More than half of the population lives in a household that depends solely on informal employment, while another 30% lives in households with at least one informal worker (OECD et al., 2021[10]). High informality rates are the other side of the coin of low unemployment rates, which averaged 3.9% during 2015-2019 and rose to 5.7% in 2021. Workers often turn to informal work, often self-employment, to sustain their income during periods of unemployment.
Persistent gender gaps in the labour market undermine economic and social well-being. Although the participation rate gap between men and women is relatively low compared to other Latin American and OECD countries (Figure 3.3), it increased from 17% in 2019 to 20.5% in 2020. When in employment, they tend to hold lower quality jobs. Women are more likely to be self-employed (38%, compared to men’s 35%) and work in informal jobs (75%, compared to men’s 68%). Informality among women worsened with the COVID-19 pandemic and is a significant contributor to labour market disparities between men and women (OECD, 2022[11]). Around 22.1% of women are unpaid family workers or domestic workers, compared to only 5.7% of men. Women face a greater burden of care responsibilities at home, which further limits their job prospects and development. These differences between men and women translate into differences in labour income. The gender pay gap was already significant before the pandemic, with women earning 12% less than men on average in 2019. However, this gap widened to 19% during the pandemic, and women in households with school-age children face an even larger pay gap of 23%. Access to high-quality childcare is insufficient and highly unequal across the income distribution, exacerbating the impact of the pandemic on women’s labour market outcomes.
Ethnicity and migration status are additional factors that contribute to labour market disparities and informality in Peru. Informality is very high among indigenous people (89%) and Afro-Peruvians (82%). Venezuelan migrants are also vulnerable, with more than 1.4 million living in Peru in 2022. Despite their potential to contribute to the economy, they face significant barriers. Although most are of working age and have more years of education than the Peruvian average, 94% of Venezuelan migrants work informally and lack access to adequate housing and health insurance. The hourly earnings of Venezuelan workers are approximately 37% lower than those of their Peruvian counterparts who perform similar job functions. The job security of these workers is further threatened due to their migrant status and limited ability to validate their educational degrees, which adds to their vulnerability in the labour market (World Bank, 2023[4]).
Note: Panels A, C and D show INEI’s definition of informality, which includes employers and own-account workers whose productive unit are not registered with the tax authorities; wage earners without social security contributions; and unpaid family workers, regardless of the formal or informal nature of the productive unit where they work. In panel B informal workers are defined as those not paying pension contributions. In Panel D, informal employment outside the informal sector refers to informal jobs in institutional sectors that are by definition formal.
Source: INEI; IADB,SIMS.
The COVID-19 pandemic has exposed the vulnerabilities of a significant proportion of informal workers. They often lack savings and access to unemployment benefits and are typically in jobs that cannot be performed remotely, resulting in greater employment and earnings losses compared to formal workers during the first months of the pandemic (Figure 3.5). Women and youth were disproportionately affected by the pandemic as they hold more frequently informal jobs. Women labour force participation declined sharply, mainly to care for children and the elderly, given the closure of schools and less support of care systems (World Bank, 2023[4]). After the initial months of the pandemic, informal workers could not afford any more to adhere to public health recommendations to stay home, with subsequent high contagion rates. Since the economy started recovering, informal jobs are leading the way in employment growth, threatening to increase informality permanently and widen gaps in income and job quality. The COVID-19 pandemic has had a profound impact on poverty and inequality, and even as of 2021, these effects have not been fully reversed. Although economic activity has returned to pre-pandemic levels, poverty and inequality have not.
Source: ILO, Ilostat database; COMEX.
There is no unique international definition for informal employment. However, a generally accepted definition is a type of work that is not taxed, registered by the government, or compliant with labour regulations. Labour informality is not always illegal, as some types of workers, such as self-employed, domestic workers or employers, are not obliged to contribute to the pension or health systems. Businesses can also be informal by not registering with the tax administration or keeping formal accounting, which typically means failing to pay social security contributions for their workers.
Informal employment is highly stratified by socioeconomic characteristics (Figure 3.6, Panel A). Rural workers as well as young and older workers are more likely to hold informal jobs. Self-employment in Peru, at 38%, is one of the highest among OECD and peer Latin American countries, and most of these jobs are informal. Informal workers are concentrated in the agricultural sector, retail, hotels and restaurants, and the construction industry. There is a strong correlation between low skills and informality, with the rate of informality decreasing as workers attain higher levels of education.
Lower-income households tend to have all their members working informally, making them highly vulnerable to shocks (Figure 3.6, Panel B). Informal workers typically have lower and more unstable incomes, which limit their ability to cope with income shocks. In 2021, informal workers earned an average of 40% less than their formal counterparts, and the incidence of extreme low pay is higher among them (Figure 3.7). Most informal jobs are in informal enterprises or in self-employment, yet one in four informal jobs were within formal enterprises in 2019 (Ñopo, 2021[12]).
Widespread informality is cause and consequence of low productivity in Peru. Many firms and self-employed workers often avoid expanding their businesses to avoid detection by regulatory agencies. Most informal jobs are concentrated in small firms with a high incidence of low skill and low-productivity occupations. Over 80% of workers are employed in firms with fewer than five workers. The informality rate of these firms, as measured by their registration with tax authorities, amounted to 86% in 2021, according to the Peruvian foreign trade chamber (Comex, 2022[13]), which is highly correlated with low compliance with hiring formal workers, and sanitary standards. This keeps incomes low and dampens productivity (Ñopo, 2021[12]).
Note: In Panel A data are for year 2021; in Panel B for year 2018. An informal household has all its workers in informal work. Quintiles are based on monthly total household consumption or income.
Source: OECD calculations based on INEI data and OECD Key Indicators of Informality based on Individuals and their Households (KIIbIH) database.
Note: Informality is defined using the legal definition, i.e. a worker is considered informal if (s)he does not contribute to any pension scheme nor accumulates rights to a retirement pension in the old age. Only dependent workers are considered. Labour market insecurity due to unemployment is not estimated, given lack of unemployment insurance for informal workers. The OECD index of earnings quality combines the level of earnings and their distribution across the workforce. Average earnings correspond to net hourly earnings and inequality is measured by Atkinson Index. The risk of extreme shows the likelihood that an individual’s earnings are below the low pay threshold at any given time. The low pay threshold is set at USD PPP 1 in terms of net hourly earnings and corresponds to a disposable income per capita of USD PPP 2 per day in a typical household of five members with a single earner working full time.
Source: OECD calculations based on ENAHO survey for 2014 from (OECD, 2019[14]).
Rigid employment regulations prevent many workers from accessing high-quality jobs
In Peru, employment regulation for regular contracts is slightly less strict than in the average OECD and in most of Latin American (Figure 3.8, Panel A). However, a reinstatement regulation that is uncommon in OECD and Latin American countries limits possibilities to have dismissal decisions recognised as justified (e.g., due to misconduct, incapacity, or economic reasons). If a worker brings a case to court and the dismissal is deemed unfair, reinstatement is nearly automatic and prevails over compensation, discouraging the hiring of permanent and formal contract workers. Evidence shows that to circumvent this issue firms opt to hire workers informally or on formal fixed-term contracts, leading to higher worker turnover, discouraging investment in training, and reducing workers’ productivity and incomes (Jaramillo, Aknibacud and de la Flor, 2017[15]).
A wide asymmetry between the regulation of permanent and temporary contracts (Figure 3.8, Panels A and B) , together with a weak enforcement of labour standards leads to a high share of informal jobs and formal temporary contracts (OECD, 2020[16]). About 80% of dependent formal workers are hired on fixed-term contracts or special (short-term) regimes, compared to an average of 12% in a typical OECD country, leading to high job rotation though comparable to Mexico and Brazil (Jaramillo and Campos, 2021[17]). The labour inspection system is weak, lacking financial resources, infrastructure, inspectors, and training for personnel (Leyva De Amat, 2020[18]). In addition, the legal framework, with its more than 1 800 pages, is difficult to understand and therefore difficult to comply with and monitor. Monitoring is very difficult because of the multiple special regimes and total or partial contracting exceptions (Ñopo, 2021[12]).
Employment protection legislation should be reformed to reduce the stark differences between the regulation of permanent and non-permanent contracts that incentivizes informality and the excessive use of temporary contracts leading to high rotation in the labour market. The government could consider alleviating the protection provided by permanent contracts. For individual dismissals, the outstanding legal barriers that prevent employers from the possibility to plea for a justified dismissal could be relaxed, and adverse economic circumstances could be recognised among the reasons justifying a dismissal. Improved enforcement of labour standards will also be key. More effective public employment services and a higher coverage of training would also be needed to support workers during job transitions.
Note: Data refer to 2019. Panel A refers to version 4 of EPL; panel B refers to version 3. LAC5 is the unweighted average of ARG, CHL, COL, CRI, and MEX.
Source: OECD indicators of employment protection database.
The minimum wage is relatively high compared to the median wage
As of 2022, Peru’s monthly minimum wage (Remuneración Mínima Vital) stands at PEN 1 025, roughly USD 280. From April 2018 to April 2023, the minimum wage saw only one increase in 2022, and as of April 2023, the real minimum wage is 7% below pre-pandemic levels. However, Peru’s minimum wage, which stands at 77.5% of the median wage and 58.7% of the mean wage for full-time employees in 2021 (Castellares et al., 2022[19]), is high compared to OECD economies (Figure 3.9). Less than half of the population earns the minimum wage, with the share being lower for self-employed, women, informal, young, low-skilled, and rural workers (Figure 3.10). The minimum wage regulation is mainly intended for salaried workers and does not apply to self-employed and domestic workers. The percentage of workers earning below the minimum wage declined from 2007 to 2015 but has been growing since then (Figure 3.10).
Statutory minimum wages are a key tool for governments to influence wage levels. The high minimum wage should be considered in the light of the low unionization and limited role of collective bargaining in Peru, with only 6% of private sector workers unionised, as it is one of the few ways for trade unions to improve working conditions (OECD, 2016[20]). However, pressures to raise the minimum wage can neglect its impact on informal workers and can reduce formal employment prospects, particularly for low-skilled workers, youth, and people in rural and less developed regions. International evidence shows that moderate minimum wage increases tend to have a small impact on employment but can have more negative effects on vulnerable groups like the youth (OECD, 2015[21]). In developing countries with high informal employment, high minimum wages that are not effectively enforced can result in employees being displaced or moved from formal to informal employment (Nataraj et al., 2013[22]; Del Carpio and Pabon, 2017[23]). Some international studies show that minimum wage hikes can reduce wage inequality (Engbom and Moser, 2018[24]; Maurizio and Vázquez, 2016[25]). However, setting the minimum wage too high can result in job losses and a shift to informality, leading to undesirable distributional effects (Jaramillo, 2013[9]).
Note: Data are 2019 for Argentina and Brazil. For Peru, wage comes from the main job of a dependent worker who works more than 40 hours per week as calculated by (Castellares et al., 2022[19]).
Source: OECD, OECD Employment Outlook Database. Instituto Brasileiro de Geografia e Estatística (Pesquisa Nacional por Amostra de Domicílios); International Labour Organisation (ILO) Database on Conditions of Work and Employment Laws; National Institute of Statistics and Census of Argentina.
The impact of minimum wage increases depends on various factors, including its current level, binding nature, compliance and enforcement, competition in labour and product markets, and employer behaviour (OECD, 2018[26]; OECD, 2022[27]). Evidence from Peru is mixed with some studies suggesting negative effects on total employment and an increase in informality following minimum wage increases (Cespedes, 2006[28]; Cespedes and Sanchez, 2013[29]; Del Valle, 2009[30]; Jaramillo, 2012[31]) while others a slightly positive or nil impact on salaried employment generation (MTPE, 2022[32]). Economic sectors and regions with a higher ratio of minimum wages to average wages tend to have larger shares of informality (Castellares et al., 2022[19]).
Future minimum wage increases could be determined on technical grounds, taking into consideration the impact on employment and informality. The National Labour Council, operating under the Ministry of Labour and led by the Minister himself, comprises the most representative workers and employers’ organizations. Its primary responsibility is to propose minimum wage adjustments with the final decision resting with the executive branch. In addition to minimum wage discussions, the council discusses labour policies, employment promotion, and social protection to foster national and regional development.
A methodology for minimum wage adjustments based on inflation and productivity, approved in 2007, has never been formally implemented. Although authorities attempted to establish technical criteria for predictable minimum wage increases in 2019, this was postponed due to the COVID-19 pandemic. It is important to pursue efforts to set technical and objective criteria to guide minimum wage increases in line with inflation and productivity in the future. A technical secretariat within the Council or an independent commission could be established to monitor labour market and productivity developments and provide recommendations for minimum wage increases, similar to what other OECD countries such as France, Germany and the United Kingdom (Low Pay Commission UK, 2018[33]; Eurofound, 2018[34]; Vacas-Soriano, 2019[35]). This commission would be integrated by labour market experts, appointed through a rigorous and transparent selection process designed to minimize political influence. It would have the ability to set its own research agenda and have access to relevant data and resources, allowing it to gather and analyse information independently. Its advice would be used to establish criteria for increases in the minimum wage and monitor their impact on employment and informal jobs. This commission would help ensure the objectivity and transparency of the minimum wage setting process.
Peru could also consider differentiating the minimum wage by age or region to aid formalisation of youth and low-skilled workers in rural areas. A differentiated wage would help young workers enter the labour market and reduce unemployment (OECD, 2019[14]). While minimum wage practices across OECD countries vary, many countries have a minimum wage that differs by age group (to recognise that the young are generally less experienced, so the minimum wage is a greater hurdle to employment) and/or by region (to account for differences in living costs and local labour market conditions). A scheme differentiating minimum wages that allows for gradual differentiation and increases, like Australia or the Netherlands, limits job separation risks and supports youth workers’ career progression. In Latin America, other countries, such as Chile differentiate the minimum wage by age. In Uruguay, minimum wages are determined by occupational category in tripartite wage councils at the sectoral level. Differentiating the minimum wage would imply a constitutional change which makes this reform politically difficult and a need to achieve broad consensus in the political debate. Furthermore, continuous monitoring and evaluation when implementing minimum wages is warranted to avoid potential drawbacks.
High non-wage labour costs are a barrier to formalisation
Social contributions to health and pensions, levied both on the employee and the employer, amount to 23.4% in Peru for workers with an average income. This is slightly above the OECD average. However, there is a wider difference between the OECD and Peru for low-income workers and those earning the minimum wage (Figure 3.11, Panel A). Although social security contributions do not seem extremely high, often the employer and employee agree not to contribute to pension and healthcare so that the employer reduces its labour costs and the employee increases its net payment, thereby encouraging informality. Social security contributions represent a barrier to formality particularly for low-income groups: for informal salaried workers in the first decile of the income distribution, social security contributions can amount to 124% of their labour income, making it unaffordable (OECD, 2019[36]).
There are special regimes with lower social security contributions (Table 3.1) for self-employed workers or employees in micro and small firms (Figure 3.11, Panel B). Self-employed workers that declare income to tax authorities pay lower contributions to the health system unless they belong to a poor household, in which case they are exempted. Social contributions for pensions are voluntary for self-employed workers. However, these social contributions represent 90% of the income of self-employed workers in the fourth decile, being a clear barrier to formalisation (OECD, 2019[36]). Other regulations concerning unemployment benefits, paid annual leave, profit sharing and family allowances are also considerably higher for medium-sized and large firms.
Although these special regimes and cost difference were set up to encourage formal firm and job creation, they add complexity and create strong distortions discouraging firms to grow or promoting splitting into small units (Garicano, Lelarge and Van Reenen, 2016[37]; Dabla-Norris et al., 2018[38]) and encourage informal employment (Dabla-Norris et al., 2018[38]). It would indeed be important to lower social security contributions for low-income workers while avoiding large jumps depending on firms’ size. One option is shifting from the schemes based on firm size to progressive social security contributions linked to workers’ income. This would remove the current disincentives for firms to grow and formalise while incentivising labour formalisation in a fiscally neutral manner. Evidence from the 2012 reform in Colombia shows the importance of decreasing non-wage labour costs to reduce informality (Bernal et al., 2017[39]; Morales and Medina, 2017[40]; Garlati-Bertoldi, 2018[41]). Several OECD countries, including France and Germany, have implemented strategies to encourage the employment of low-income workers by reducing their social contributions for this group (Cahuc and Carcillo, 2012[42]; Galassi, 2021[43]). Lower social contributions for low-income workers in Germany have shown to boost female employment (Konle-Seidl, 2021[44]). Similarly, Chile has introduced programmes aimed at formalising vulnerable workers, particularly youth and women, through employment subsidies that cover a portion of total social contributions and have proven effective in promoting formal employment (Bravo and Rau, 2013[45]).
Note: Data refer to single individuals without children, within the age range 15-64 and working as dependent workers in formal sector. Low income refers to 67% of the average wages; average-income refers to 100% of average wages; high-income refers to 167% of average wages. For Peru, the obligatory universal contributions paid by the employer comprise Health Insurance and the employer’s contribution to the unemployment benefit system (Compensación por Tiempo de Servicio, CTS, compensation for length of service). Those paid by the employee are contributions to the pension system.
Source: Data for the OECD come from Taxing Wages 2017, data for Peru are OECD calculations based on information provided in Policy Questionnaire by MTPE and ENAHO 2016.
Social protection is fragmented and has low funding and coverage
Peru has a well-established social protection system, but it faces several challenges such as fragmentation, low funding and low coverage, while its design incentivizes informality. The system comprises health, pensions, and poverty alleviation programs, while there is no unemployment insurance. Contributory “social security” benefits are available to formal workers, while non-contributory “social assistance policies” support the poor. Peru has also a semi-contributory healthcare system for some workers, such as the self-employed, with the state financing part of the social contribution. The result of this set-up is a segmentation of the labour force into two categories: formal workers covered by contributory benefits and employment protection regulations, and informal workers, covered by non-contributory social assistance programmes if they are poor. High informality prompts the need for non-contributory social protection benefits. These benefits provide vital aid to those in need but sustain the informal sector and perpetuate the fragmentation of the social protection system.
The system also creates inefficiencies in service provision and coverage gaps (Figure 3.12). The highest-income workers are more frequently protected by contributory schemes, the lowest-income workers by non-contributory schemes, but a large mass of middle-income workers who are vulnerable to falling into poverty and move frequently in and out of formality are left unsupported, except for health that provides universal coverage. Low social spending compared to developed economies and Latin American peers (Figure 3.13), is another key factor contributing to large coverage gaps in social protection.
Note: 2020 or latest year available. Vulnerable people are defined as all children plus adults not covered by contributory benefits and people above retirement age not receiving contributory pensions. LAC6 is the unweighted average of Argentina, Brazil, Chile, Colombia, Costa Rica and Mexico. LAC-6 is the unweighted average of ARG, BRA, CHL, COL, CRI, and MEX.
Source: ILO, World Social Protection Database, based on the SSI; ILOSTAT.
Note: Year 2019. Social expenditure comprises old-age, survivor, incapacity-related, health, family, unemployment, housing, active labour market support and other social policy areas. It comprises cash benefits, direct in-kind provision of goods and services, and tax breaks with social purposes. LAC-6 is the unweighted average of ARG, BRA, CHL, COL, CRI, and MEX.
Source: OECD Social expenditure database; CEPAL.
Stepping up the fight against poverty
Since the 1990s Peru has increased social spending to fight poverty, expanded coverage of social services and developed targeted social programmes. However, cash transfer programmes continue to provide low coverage and limited generosity, leaving many households without any support. Juntos, the main anti-poverty programme, is a conditional cash transfer programme introduced in 2005 for Peruvian families living in extreme poverty in rural areas. It aims to generate human capital and break the cycle of poverty by providing monetary incentives to households with at least one programme target member, such as pregnant women or children/adolescents, provided the household falls within the socioeconomic classification of poverty or extreme poverty and resides in a district with a poverty incidence higher than 40%. Evidence shows that Juntos increased demand for health checks for children, increased household consumption, and reduced poverty levels (Perova and Vakis, 2012[46]). It also had positive impacts on nutritional, cognitive and educational outcomes (Sánchez, Meléndez and Behrman, 2020[47]; Sánchez and Jaramillo, 2012[48]; Gaentzsch, 2020[49]).
Despite its positive effects, a low share of Peruvian families benefited from Juntos (Figure 3.14), and spending was low (0.1% of GDP in 2021). Benefit levels are also low, limiting their impact on families and poverty. Juntos provides PEN 100 (USD 26) per household monthly, equivalent to 30% of the poverty line in 2021, one of the lowest in emerging markets (ILO, 2017[50]), where on average amounts to USD 78 (Gentilini et al., 2021[51]). The benefit does not consider household characteristics and has not been updated since 2005, resulting in a loss of purchasing power.
Juntos has been redesigned in 2021 to improve coverage and impact. The programme now targets extremely poor households regardless of their geographical location and gives benefit top ups to incentivise further human capital development and health. An early childhood transfer of an additional PEN 50 is conditioned on access to basic health services, and a pilot programme offers an additional transfer of PEN 80 for households with children in secondary school in areas with higher school dropout rates.
The pandemic has highlighted the need for more wide-ranging measures to protect vulnerable populations. While emergency cash transfers helped ease COVID-19’s impact on poverty and income loss (Figure 3.15 and Box 3.2.), more permanent solutions are needed to fight poverty and address income losses during periods of hardship.
Source: World Bank, Atlas of social protection: Indicators of resilience and equity (ASPIRE).
Currently, social policy is channelled through seven nationwide social programmes, of which Juntos (conditional cash transfers), Pensión 65 (non-contributory pension), Qali Warma (nutritious meals and snacks to children in public schools and early childhood development centres), and Contigo (unconditional transfer for people with severe disabilities who are in poverty) are the most important. Social spending on these programmes was about 0.5% of GDP in 2021.
To respond to the COVID-19 pandemic, authorities implemented various emergency measures, including delivering food vouchers, creating new cash transfer programs, and expanding existing ones to provide support to vulnerable households and encourage social distancing, all of which have been temporary and have been already phased out. These programs targeted poor households and informal workers who were not previously covered by government social policies and or other responses to the pandemic. Evidence shows that these schemes helped prevent significant increases of poverty and income losses across the income distribution (Figure 3.15), particularly among rural inhabitants, indigenous peoples, and afro Peruvians (World Bank, 2023[4]). However, the initial implementation suffered from low coverage, difficulties reaching vulnerable populations and significant delays providing support during the crisis (Correa, 2021[7]). As the pandemic unfolded, authorities expanded the programmes in an ad-hoc way (Table 3.2), targeting different vulnerable groups and eventually reaching 8.4 million households (63% of total households in Peru). Despite implementing the most significant mitigation measures in 2020, the government sustained its efforts in 2021, particularly through the Bono Yanapay programme, which extended coverage to 67% of households (World Bank, 2023[4]). Without these benefits, the poverty rate would have been 2 percentage points higher in 2021, as 84.1% of poor households had access to COVID-19 pandemic cash transfers.
The delay in pandemic-related cash transfer programmes can be, at least partly, attributed to the lack of a comprehensive and up-to-date social registry of households. Several databases had to be merged and even created between mid-March and the beginning of June to identify the vulnerable households including workers with volatile or low incomes, many of whom are informal workers. In response, the government allowed excluded households to register or update their socioeconomic status on the platform of the National Registry of Households and become eligible for the transfer, adding 3.8 million households to the beneficiary database.
Note: Panel A. Countries covered include those with questions in the household survey that make it possible to identify the emergency transfers implemented in response to the COVID-19 pandemic. Panel B: The rate of change compares the median income in 2020 to that of 2019 and expresses the difference as a percentage. The interpretation of the graph is additive: the first bar represents the average household income per person from wages and salaries paid by a third-party employer; the second bar adds income from self-employment; the third bar adds income from transfers and the last bar adds in all other sources of income.
Source: Economic Commission for Latin America and the Caribbean (ECLAC), based on Household Survey Data Bank (BADEHOG).
Implementation issues due to low financial inclusion had also to be addressed during the pandemic, and significant progress was made to enable cash transfers to reach all those in need. Initially, delivery was made through bank windows, instead of digital mechanisms, leading to agglomerations and an increased spread of COVID-19. As the beneficiary registry grew, more modality payments were established, such as deposits in a bank accounts, ATM or agents’ withdrawals using mobile banking, and securities transporting companies to reach households located in hard-to-reach areas. The implementation of the “Cuenta DNI” in late-2021, as highlighted in chapter 2 of this survey, gave a boost to financial inclusion. This digital savings’ bank account allows families to receive cash transfers or any other state benefit.
To better support the poorest, it is crucial to expand the reach and benefits of cash transfer programmes. One option is to extend the coverage of Juntos to include all individuals living in poverty and provide them a benefit equivalent to the extreme poverty line. This would cost around 2.4% of GDP in 2021. Another option to better consider the household characteristics and to contain fiscal costs is to transform Juntos into a guaranteed-minimum-income scheme for the population below 65. This would involve a periodic cash transfer to supplement household incomes. This programme could build on Juntos and be financed from general tax revenues, with options to raise tax revenues discussed in Chapter 1. By setting the guaranteed minimum income to the poverty line, an illustrative calculation using household surveys, indicates that such programme would cost 1.1% of GDP in 2021 (Ñopo, forthcoming) or 1% net of the expenditure in Juntos. The benefit of choosing the national poverty line calculated by the National Statistics Institute, is that the minimum income would adjust automatically to changes in prices in the basic food basket. When children are part of the household, the cash transfer could be conditional on human capital accumulation and desired health behaviours, as in Juntos, to generate incentives for investing in education and health. The size of the benefit can also consider children’s age and educational level. Finally, it could eventually also be adapted to the costs of living of the different territories in Peru.
To maintain incentives for formal work and avoid that beneficiaries are reluctant to take up formal work for fear of losing their benefit, a graduation phase, in which the value of the transfer forgone is smaller than any additional income made should also be considered. For those already working, more hours worked, or better jobs could be encouraged, by reducing by a smaller amount the benefit for the extra income they earn. Ex-ante and ex-post impact assessments should be systematically conducted to evaluate the effects on formal labour force participation and adjust the design if necessary. Cash transfers could be also ideally tied to individual behaviour that promotes future employment outcomes such as school completion, training, and participation in public employment services to help families overcome poverty.
An alternative to the proposed guaranteed-minimum-income scheme is a negative income tax or earned income tax credit, which has shown positive effects on labour force participation, poverty reduction and reduction of informality in United States and some developing countries (Hoynes and Patel, 2017[53]; Gunter, 2013[54]). The main difference between the proposed scheme and the negative income tax is that the latter is financed directly through a progressive income tax that could offset social security contributions incentivising labour formality (Acosta, Pienknagura and Pizzinelli, 2022[55]). The advantage of the conditional cash transfer programmes is that it provides more flexibility to condition the transfer on positive educational and health behaviours.
Regardless of the approach followed, the social information system could still be improved by collecting relevant and frequent data to properly detect vulnerable households and be more agile to respond efficiently to household shocks, such as the COVID-19 pandemic or natural hazards. The significant efforts done recently to update the social registry should continue, especially for collecting data to accurately identify minority groups and vulnerable households. The current method of updating the registry primarily involves conducting in-person interviews. However, conducting high-frequency phone surveys would enable more frequent monitoring of households. Additional methods, such as on-demand inclusion of households have been shown internationally to improve targeting along various dimensions, including programme satisfaction and more flexibility in the timing of identification (Hanna, Khan and Olken, 2018[56]). For example, if local communities verify the final list of beneficiaries, excluded households can be added. Eligible households could enrol at an office; and only those close to the eligibility threshold would need home verification.
The targeting system (Sistema de Focalización de Hogares, SISFOH) also needs to be adapted to effectively reach the poor and vulnerable households. Eligibility is based on household material conditions and characteristics of the head of the household, such as type of housing, water supply, employment status, and ownership of household appliances. However, the system’s criterion of not paying contributions to the health system generates incentives against formal employment, creating a significant implicit tax. In the long term, the targeting system could also aim to capture temporary poverty to enhance its responsiveness and resilience.
Boosting protection against job loss
Peru does not have an unemployment insurance system and only very few workers have some income protection against job loss. The main protection mechanisms are the end-of-service severance pay and the individual unemployment savings accounts. The individual unemployment savings accounts (Compensación por Tiempo de Servicios) arefinanced by the employer and are compulsory for medium and large firms, but not for micro and small firms. As a result these instruments are typically only available to permanent workers, who constitute 5% of the total workforce and belong mainly to the highest deciles of the income distribution (de la Cruz, Manzano and Loterszpil, 2020[1]). During 2021, only 40% of private salaried workers was covered by this mechanism. This leaves a significant proportion of the population vulnerable to job loss. Moreover, the ability to withdraw funds from the individual accounts for non-unemployment-related purposes suggests that this mechanism does not effectively function as a protection against job loss. Instead, it operates more like a mandatory savings system.
Cash transfer programmes, such as the guaranteed-minimum income discussed above, could provide protection to workers during unemployment. For example, for workers earning the minimum wage, a cash benefit equivalent to the poverty line would imply a non-negligible 40% replacement rate. This would cost an additional 0.1% of GDP if all unemployed workers were to be covered for three months (the average duration of unemployment). For workers above the minimum wage, a contributory pillar could supplement the guaranteed-minimum-income and provide top-up benefits to achieve a replacement rate more in line with other OECD countries (60% on average). This contributory pillar could be primarily based on the existing individual unemployment accounts, or be mixed, as in Chile, where individual savings are supplemented by a solidarity fund financed by employer’s contributions and general taxation. The advantage of individual unemployment savings accounts is that they limit the risk of moral hazard and incentivize workers to prevent job loss and return to work quickly (ILO, 2019[57]; OECD, 2018[26]). However, individual unemployment accounts do not provide risk sharing. Individuals with lower contributory capacity are at higher risk of unemployment and have weaker protection, which is why the cash transfer programmes such as the guaranteed minimum income could serve as a minimum protection floor. Another option proposed by the ILO is to introduce an unemployment benefit system based on individual contributions of 1.16% of wages of all salaried workers with permanent or temporary contracts to a common unemployment fund (ILO, 2022[58]).
Strengthening protection via cash transfers would ensure all workers against unemployment, including the self-employed who usually do not contribute to unemployment insurance schemes. It would also have the added benefit of reducing labour costs for employers and encourage the creation of formal jobs. Currently, employers are mandated to contribute around 9.8% of wages to the individual unemployment savings accounts, which is high compared to a median of 2.8% for advanced countries or 1.5% for emerging economies (ILO, 2019[57]). For example, in Chile workers’ and employer’s contributions amount to a maximum 3% of wages in a very similar setup. Additionally, restricting withdrawals from the individual savings accounts to job dismissals and crediting any surplus contributions as pension entitlements upon retirement would help achieve the system’s original objective of protection during unemployment. Contributions can also be limited to a maximum number of years to accumulate sufficient resources to cover unemployment eventualities, such as 11 years in Chile.
All unemployed workers, with previous informal or formal jobs, should register with the labour market intermediation services (Centros de Empleo) to support their employment and training search. For that there is a need to strengthen labour orientation and intermediation services, including training, to help the unemployed enrol in cash transfer or unemployment benefits programmes while receiving support in their job search. Currently, the Public Employment Services are understaffed and there is a need to strengthen recruitment and training programmes for caseworkers (OECD, 2019[14]) to provide effective support.
Providing adequate pensions for all
A consequence of widespread informality is that very few people have old-age pensions in Peru (Figure 3.16. The Peruvian pension system consists of two parallel contributory schemes and a small non-contributory scheme called Pension 65. Special regimes also exist for the armed forces, police, and public servants. In 2019, less than half of the elderly population in Peru received pensions (Figure 3.16), with 26.1% receiving contributory pensions and 21.1% non-contributory pensions. The two parallel contributory schemes, one public and one private, have different rules and lack coordination and integration among the overseeing institutions (Table 3.3). Formal workers are free to choose to which system they contribute, but very few workers do. In 2021, 18% of workers contributed to the private scheme and 8% contributed to the public one, mostly upper-income workers.
Source : IADB SIMS.
The low coverage of pensions in Peru is largely due to high informality and low frequency of contributions. Approximately 50% of working-age men in Peru have never contributed to the pension system, and for women, this number is even higher at around 75%. Those who contribute do not do so systematically because of frequent job rotation into the informal sector (Jaramillo and Campos, 2021[17]). Indeed, on average workers contribute during 36% of their active lives, while those in the lowest income quintile only 28% in the private pension system (Bernal, 2020[59]). The pandemic has worsened this situation because of the six extraordinary withdrawals from private pension funds in 2020-2022, equivalent to 10% of GDP, that have left 80% of affiliates (2.3 million workers) with no pensions. While withdrawals early in the pandemic could be justified because of the sharp slowdown in economic activity, later withdrawals continued to deplete the private pension scheme, where assets have declined from 22% of GDP in 2020 to around 12% in 2022.
Not all workers who contribute to the public system are able to get a pension. The system requires at least 20 years of contributions and only one in five workers meet these criteria, usually those belonging to the highest income quintile (Ñopo, 2021[12]). A reform in 2021 facilitated access for those with at least 10 years of contributions, but very few contributors meet this minimum requirement. Those who do not meet the requirements do not receive any benefits or refunds, implying a redistribution from low to high income workers.
Both public and private contributory systems in Peru give low benefits (Figure 3.17, Panel A). Moreover, workers with similar career paths can receive different pensions under the two schemes (Figure 3.17, Panel B). In the public system, the minimum and maximum pensions have been updated only once in 2019, resulting in large losses of purchasing power and extremely low replacement rates. In the private system, low replacement rates of less than 30% (Freudenberg and Toscani, 2019[60]) are driven by low mandatory contributions compared to international standards (OECD average of 18.2% against 13% in Peru), low labour incomes and low frequency of contributions due to informality. Because pensions are capped in the public system, high-income workers tend to affiliate in the private system. While low-income workers would prefer to stay in the public system to get access to the minimum pension, stringent requirements access dissuade them. Early withdrawals from the private system are possible under numerous situations (OECD, 2019[61]). Most people (95%) withdraw most of their accumulated savings (up to 95.5%) when they reach the retirement age (Ñopo, 2021[12]), as this is allowed. As a result, the private system has become a way to save up to the retirement age, undermining one of the main purposes of a pension system which is to insure people in old age beyond retirement.
The non-contributory pension programme, Pension 65, mainly covers the poorest workers, leaving many vulnerable workers without any pension benefits. Although successful in alleviating extreme poverty in old age, benefits and coverage remain low (monthly PEN 125 or USD 32, 36% of the poverty line or 13% of the minimum wage in 2021). While coverage has increased since the programme’s inception eleven years ago, it only reached 24% of the elderly (627 924 beneficiaries) by the end of 2022. Benefits remain the same since the programme inception, even though the monthly cost of the food basket per person at the extreme poverty line has increased by over 38%. Despite increasing resources, spending remains low, with a budget of 0.1% of GDP (0.45% of the public budget) in 2021.
Note: Panel A: Year 2019. It shows the hypothetical gross replacement rates based on current pension system characteristics and rules. They are calculated for someone entering the labour market at age 20 and working a full career until the normal retirement age. Price inflation is assumed to be 2.5%, real earnings growth is 2% and the real rate or return is 3.5%. Panel B, is a calculated example of a workers that affiliated to the system between 1994 and 2019 with 20 years of contributions and contribution density of 77%. It compares the benefits the workers would receive in the public pension system or the private pension system with a profitability from AFP Integra (annuity interest=3%). LAC-6 is the unweighted average of ARG, BRA, CHL, COL, CRI, and MEX.
Source: OECD Pension models and (Ñopo, 2021[12]).
A comprehensive reform of the pension system is necessary to improve coverage, increase benefits and address informality. There is a need to expand coverage and benefits of the non-contributory pension. One option is to deliver a universal non-contributory minimum pension to all residents aged 65 and above. For example, providing a universal minimum pension equivalent to the poverty line to all Peruvians aged 65 and over – around 3 million people – would cost 1.6% of GDP (1.5% of GDP net of current expenditure in Pension 65), raising to 1.8% of GDP by 2050. Such benefit would provide a replacement rate of 40% to minimum wage earners. To encourage formal job creation, this minimum pension would be financed from general taxation, which would require mobilizing additional tax revenues. Options for raising more revenues are discussed in Chapter 1. Implementing such a universal minimum pension scheme offers the advantage of reducing contribution rates within the contributory system for low-income workers, thereby promoting formal employment.
To top up the non-contributory pension workers would contribute to the pension system, for which enrolment would become automatic and mandatory for all workers. To preserve incentives for formalisation, mandatory contributory rates could be made progressive, with lower contributions for wage earners below the minimum wage, where incentives for informality matter the most, and increasing gradually for higher wages. The contribution rates could be calibrated to achieve replacement rates of at least 50% of pre-retirement earnings, close to the average OECD replacement rate for men (59%), to ensure adequate pensions and fiscal sustainability. This could imply very low contributions for the lowest-income workers, and higher than current contributions for the higher-income workers. Finally, a third tier of individual voluntary savings could complement the other two pillars.
An alternative to address informality and reduce labour costs instead of progressive contribution rates is subsidising the social security contributions of low- and middle-income workers (OECD, 2019[61]), with the subsidy decreasing with income. Evidence from Chile shows that subsidizing social contributions has increased formal employment for vulnerable groups (OECD, 2022[62]). The risk is creating an incentive to remain informal or to under declare income, so it must be designed very carefully.
The fragmentation of the contributory public and private pension systems also needs a deep reform to address complexity, inefficiencies, and inequities, as analysed in the OECD Pension Review (OECD, 2019[61]). Aware of these challenges, in July 2022, a Multisectoral Commission, composed by the ministries of Labour, Economy and Finance, the Council of Ministers, the Central Bank and the Superintendency of Banking, Insurance and AFPs, was tasked with preparing technical reports evaluating the pension system and preparing a proposal for reform.
A priority should be removing the existing competition between the public and private systems and making benefits complementary. The contributory system could rely on public or private provision, on both or establishing notional accounts as done in other OECD countries. Maintaining private provision as the main system has the benefit of contributing to the development of local financial markets, and of establishing a clear link between contributions and benefits, incentivising workers to contribute regularly. The minimum pension discussed above could also be designed to provide both proper incentives to contribute to the pension system and higher pension benefits as the number of years of contributions increases.
To enhance pension coverage for the self-employed, mandatory contributions, as done in other Latin American countries and several OECD countries, could be implemented in a gradual manner. Improving incentives to increase voluntary contributions could also be considered. For example, by making automatic enrolment to a voluntary pension account. Financial incentives for voluntary contributions could also be improved. This should be accompanied by progressive contribution schedules, as discussed above, and innovative collection mechanisms using advanced technology, such as smartphones, to make it easy to contribute, or through utility bills (e.g. mobile phone, water, electricity). Encouraging long-term savings opens the door to saving smaller amounts which often does not occur, due to high transaction costs (Bosch et al., 2019[63]). Technological innovations can also help reach those disconnected from traditional savings systems. Some examples from OECD countries include a platform called “Retirement Miles” in Mexico encourages pension savings among low-income and independent workers. In Chile, the U-Zave platform allocates savings to a personal mutual fund through purchases in associated stores. Similarly, a Spanish start-up developed a mobile app called “Pensumo” or “Pensions by Consumption”, which enables members to save through purchases in associated businesses, and by participating in socially responsible activities (for example, recycling and road safety initiatives).
Other reforms to the design of the private pension system are needed as discussed in the OECD Pension Review (OECD, 2019[61]). A priority would be to limit early withdrawals from individual accounts to improve pension benefits. Early withdrawals could be limited to voluntary contributions or to extreme cases such as terminal illness. Other key priorities include optimizing the asset accumulation period by adjusting the default investment strategy to adopt a more optimal lifecycle approach. It is also important to align costs and fees and foster competition through improved disclosure and reporting on the costs and fees associated with pension funds. Moreover, placing limits on the frequency of changing funds and providers can help prevent cost increases resulting from unnecessary switching. Overall, the pension reform would also benefit from parametric changes including limiting early retirement, closing the 5-year gender gap for early retirement, and linking the retirement age to life expectancy.
Ensuring universal access to high quality health care services
Peru has made significant progress towards universal health coverage during the past decades (Figure 3.18, Panel A). Health coverage has increased from 37% in 2004 to 95% in 2019, according to the register of the universal health insurance, but socio-economic and geographic inequalities persist, (Figure 3.18, Panels B and C). Hospital services are highly concentrated in urban areas, with some regions having poorer access to healthcare than others (OECD, 2017[64]). Peru has a low density of healthcare workers per capita, 16.8 per 10 000 habitants in 2021, much lower than Latin America (23) and the OECD (30) (World Bank, 2021[65]) and unequally distributed across the country (Figure 3.18, Panel D).
The COVID-19 pandemic has revealed the health system is overwhelmed. Peru stands out in the international context as the country with the highest number of deaths per population worldwide, with over 6 000 people per million (according to Our World in Data). Age and the region of residence have been the main determinants of the probability of dying from COVID-19, while mortality rates were homogeneous throughout the income distribution (World Bank, 2023[4]). Poor infrastructure at primary care and hospitals, lack of specialised personnel, and governance problems are part of the explanations (Schwalb and Seas, 2021[66]). During the pandemic, visits to healthcare centers declined significantly because the system became overwhelmed by COVID-19 cases and did not recover pre-pandemic levels in 2021 (World Bank, 2023[4]). Even before the pandemic, many people were relying on pharmacies to meet health care needs instead of visiting recognized health care providers, as 45% of the population that required care had not visited a health center, and the number climbed to 55% by 2021.
The health system in Peru is highly fragmented, with multiple regimes and different rules. It is composed of three regimes: a non-contributory mechanism, called the Integral Health System (SIS); a contributory system called the Social Security in Health (EsSalud); and private supplementary healthcare providers (EPS). The non-contributory mechanism (SIS) covers around 60% of the population, mostly belonging to the lowest income percentiles and informal workers, and is primarily financed by general taxation. Part of this system is also semi-contributory, although it makes up a minority of SIS affiliates, as non-poor self-employed and microentrepreneurs can contribute a small amount and enroll. The contributory system, EsSalud, covers 26% of the population, mostly higher-wage workers, and is financed exclusively by labour charges. The private health insurance is only held by 3% of the highest-income population. Each system provides the same services to its affiliated population with its own budget, working in parallel with no coordination of functions and are managed by different ministries with limited effective stewardship of the health ministry.
The health regimes provide services that differ significantly, resulting in inequities. SIS offers a large primary coverage, but with inadequate infrastructure and equipment (Phillips, 2022[67]). For example, while SIS has 40 primary care facilities for every 100,000 affiliated, EsSalud has only four leading to longer waiting times for appointments. On the other side, EsSalud has a better provision of more complex health care interventions (Ñopo, 2021[12]) and better cost coverage (Seinfeld et al., 2021[68]). As a result, out-of-pocket expenses can differ significantly depending on the health scheme and typically higher for households affiliated to SIS for complex illnesses.
The financing of the health system incentivizes informality (Torres, 2021[69]). While the non-contributory system SIS provides free access, formal workers need to contribute 9% of the monthly salary to EsSalud at the minimum wage. However, users’ satisfaction with both systems is similar (Ñopo, 2021[12]). This leads to formal workers paying for what informal workers receive for free or at a very low cost, and leads to contributions to the health system viewed as a tax on formality by workers and employers. The health system creates other complexities that result in awkward incentives. For instance, there are semi-contributory regimes that require self-employed and microentrepreneurs to pay for identical coverage as the free schemes.
Note: Year 2021 for Peru. Panel A shows 2019, data for Peru is 2021 from the register of the universal health insurance. Panels B and C show data from Household Surveys. SIS is the non-contributory health system, EsSalud is the contributory system and EPS are private institutions.
Source: INEI-Encuesta Nacional de Hogares; OECD Health Statistics 2021.
Public healthcare in Peru is also underfunded and resources are fragmented over the different subsystems, creating inequalities for access. While public health expenditures rose to 3.3% of GDP in 2019 (Figure 3.19), spending has not kept pace with the expansion of the coverage. For a comparison, per capita spending in EsSalud is 40% higher than per capita spending in SIS (World Bank, 2021[65]). While technical inefficiencies, including low capacities as highlighted in Chapter 2, may partially explain low public expenditure, underfunding remains a clear issue that leads to high out-of-pocket spending. At 30% of total health expenditure, out-of-pocket spending in healthcare is among the highest in the OECD. Out-of-pocket spending is primarily borne by the wealthiest households, but only because they can afford such expenses, meaning that poorer households lack access to certain services.
To achieve universal access to high-quality healthcare services and reduce inequities and incentives for informality, increasing public healthcare spending is necessary. According to the World Bank, an additional 1.2% of GDP is required to achieve universalisation and increase the quality of health services (World Bank, 2021[65]). Since health financing through labour charges creates disincentives for formal job creation, increasing the financing from general taxation would help. Options to increasing general taxation are discussed in Chapter 1. To boost formalisation incentives, health contributions for low-income workers could be lower, particularly around the minimum wage where formality incentives matter the most. A gradual schedule of health contributions could be based on workers’ income, shifting more of the burden into higher income ranges, away from the vicinity of the minimum wage, by starting at zero for poor workers and increasing for higher-income groups (World Bank, 2021[65]).
Source: OECD, Health Expenditure and Financing database.
To address current inefficiencies and inequities, it is necessary to strengthen coordination between the multiple public insurers and gradually integrate these systems. This could be achieved through greater use of service-exchange agreements between SIS and EsSalud, standardising typologies of care providers across subsystems and establishing minimum quality standards (OECD, 2017[64]). In June 2019, guidelines for service exchanges were approved, and a few institutions have started implementing them. However, challenges regarding the definition of services and their scope hinder widespread adoption. Amid the COVID-19 pandemic, there was a push for health service exchanges, which should be continued moving forward. Legislation could better define the levels of coordination to guide joint actions of public insurers. Further integration would require pooling all existing resources and distributing them to existing insurance schemes based on a pre-defined per affiliate value adjusted by health risks and sanitary outcomes, and developing a common tariff for general benefits to facilitate the mobility of insured persons between different provider networks. A unified public healthcare system with universal access and a common set of high-quality healthcare benefits could be supplemented by regulated voluntary private insurance, an approach followed in some OECD countries such as France.
Achieving universal health coverage cannot be done without improving the quality of healthcare provision. Effective stewardship by the Health Ministry will be essential to set health priorities and establish a standard methodology for tariff calculation to improve the purchase and sale of services (OECD, 2017[64]; World Bank, 2021[65]). Strengthening coordination and coherence of services delivered among public insurers would allow for economies of scale and reduced inequities and inefficiencies in access to healthcare. A regulatory framework that establishes a common service plan and fee schedule should be implemented, with mechanisms to ensure compliance by insurers and providers. A transparent data infrastructure that ensures compliance with quality and outcome standards, reduces payment delays, and monitors costs is also needed. Improving healthcare infrastructure and the density of the health workforce and better distribute it across Peru’s geographical areas is crucial.
Addressing unequal educational attainment
High quality education is crucial for raising productivity and reducing inequalities. A well-educated workforce can help decrease labour informality, as higher labour productivity affords paying for higher labour costs. Despite low public education spending (2.7% of GDP in 2018, compared to an OECD average of 4.4%), Peru has made notable strides in providing universal basic education, with at least 96% of adults completing primary education in 2020, surpassing Latin American countries (Figure 3.20). The impact of the COVID-19 pandemic on educational attainment in Peru has been significant. World Bank estimates indicate that 1.7 years were lost in learning-adjusted years of schooling, one of the highest rates in the region (World Bank, 2023[4]).
Prioritizing universal access to high-quality early childhood education is crucial for improving educational outcomes later in life, particularly for children from low-income households (Alcázar, 2020[70]; Karoly, 2005[71]). Early childhood education and care is also essential to develop future children’s skills and facilitate both parents’ labour market engagement (OECD, 2023[72]), especially for women. By 2022, 6.4% % of 0- to 2-year-old children were enrolled in Cuna Más, a large-scale early childhood development intervention that has shown good results in terms of educational outcomes (OECD, 2019[14]). While coverage for children aged 3 to 5-years-olds improved significantly to 94% in 2019 from 81.5% in 2013 (INEI, 2022[73]), pandemic-related school closures led to a drop in enrolment rates to around 85% in 2020 and 2021, with a slight recovery in 2022 (90%). There are high disparities in access to high-quality early childhood education with rural and remote areas lagging. A non-school-based early education programme (PRONOEI) has improved access for children from disadvantaged backgrounds, but it has not been effective in providing the same quality of education as formal schools (Box 3.3). Access to formal early education schools remains low for lower-income families in remote rural zones as formal schools are mainly located in urban areas and there is limited transport connectivity. Improving children’s access to early education and care requires an expansion of education services for 0-to 2-year-olds, including Cuna Más day-care. Furthermore, improving access to formal public early schools for 3-5 years olds would imply higher investment to expand capacity and formal schools across the country. While PRONOEI programme has helped to increase access of children from vulnerable backgrounds, improving the funding of the institutions would likely deliver better outcomes, with a view towards transforming these into formal schools in the future. These reforms would reduce poverty, increase social mobility and integration (OECD, 2018[74]), and help reduce dropouts (Heckman and Masterov, 2007[75]; OECD, 2016[76]). Additionally, mothers, for whom affordability of early childhood education is the main barrier to the labour market, would feel encouraged to search for a job.
In Peru, early education is mandatory for children aged 3-5 years. The Ministry of Education oversees the early-childhood education programmes, which are implemented through a combination of public and private schools, and community-based organizations. Non-School-Based Early Childhood Education Programme (PRONOEI) is a public early childhood education programme that aims to provide comprehensive care and education to children in rural and remote areas where access to formal education is limited. In these centres, teachers are typically community members who are trained to provide early childhood education and care to children in their local communities, many times mothers from the community. PRONOEI community educators work closely with parents to promote children’s development, and they are often responsible for organizing and leading learning activities, and preparing nutritious meals.
The programme has been instrumental in promoting early childhood education in remote and rural areas of Peru, providing access to education for children who would otherwise lack childcare. Evidence suggests that the PRONOEI programme has positive effects on education results, children’s cognitive and socio-emotional development, relative to those not participating in education, particularly for children who come from disadvantaged backgrounds and have limited access to education. However, PRONOEI students tend to obtain worse outcomes than students from school-based background (Cueto and Díaz, 1999[77]; Cueto et al., 2016[78]). This is at least partly explained by PRONOEI educators lacking formal education beyond the secondary level, and their training may not be as extensive or rigorous as that of teachers in formal schools. Other challenges are related to the retention of trained educators in the PRONOEI programme, particularly in areas where opportunities for career advancement and professional development are limited. Inadequate infrastructure, and low financial resources for programme implementation contribute to poor educational outcomes.
Access to secondary education has improved, with 41% of the population aged 25 years and older attaining secondary education in 2021 from 36% in 2010 (INEI, 2022[73]), above some Latin American countries and close to the OECD average. However, educational exclusion remains a concern. Gender gaps in educational attainment remain relatively high, as 34% of women compared to 42% of men aged 25 years and older achieve secondary education (INEI, 2022[73]). Work obligations of female teenagers outside of school and teenage pregnancies are the main factors explaining school female dropouts, especially in rural areas (OECD, 2022[11]). In rural areas only 32% of the population completes secondary education and 8% completes higher education. While conditional cash transfer and scholarship programmes like Juntos and PRONABEC (scholarships and educational loans to talented students from poor backgrounds), have reduced exclusion, disparities still exist between regions and ethnic groups. For example, students in Lima attain a higher level of education than students from vulnerable regions (INEI, 2022[73]), and individuals from indigenous backgrounds study an average of four years less than those who speak Spanish. These inequalities have been aggravated by the pandemic. According to the Ministry of Education, the average attendance rate for secondary education in 2020 was 56%, compared to 90% in 2019, with the impact being larger for those from vulnerable backgrounds. Targeted academic support could reduce educational exclusion. For example, expanding the bilingual education programme for indigenous children to secondary education, prioritising the geographical areas characterised by the largest shares of children with a limited proficiency in Spanish, would help to reduce dropouts. Expanding the extended school-hours programme (Jornada Escolar Completa), prioritising students from vulnerable backgrounds, would also help by providing academic support and a safe environment. Particular attention should be paid to the quality of the teaching provided during these extended hours. Conditional cash transfers, such as Juntos, could be a powerful tool if the conditionality focuses on teenage girls’ pregnancy prevention and regular attendance and school completion (OECD, 2019[14]).
Improving the quality of education
While there has been substantial progress in education performance in the last decade, challenges related to quality and equity persist. Learning outcomes in Peru continue to lag the OECD average and other Latin American peers (Figure 3.21). Students’ performance is highly influenced by their socioeconomic status, with primary education students from low socioeconomic backgrounds having 16% lower probability of meeting the minimal educational requirement in mathematics (Alcázar, 2020[70]). Ethnic background and geographic location also significantly impact learning outcomes. Gender skill gaps are also significant. A greater proportion of 15-year-old girls perform below average in mathematics and science compared to their male counterparts, while girls perform better in reading than boys. This is reflected in the later education and occupation choices of women, with 25% of female tertiary graduates studying a STEM degree compared to more than 35% of male tertiary graduates in 2019 (OECD, 2022[11]).
Source: OECD, PISA 2018 Database and INEI.
The pandemic exacerbated inequality in education opportunities. The government promptly launched a distance learning programme (Aprendo en Casa) and distributed tablets with internet access to 24% of primary and secondary students (Plan Cierre de Brecha Digital) to address the long school-closures. However, less than 50% of primary education students had a computer at home and only 25% of households had internet access. Students from vulnerable backgrounds were particularly disadvantaged, with only 17% of them using digital tools to connect to classes compared to 59% of students from higher-income households (IPE, 2021[79]). Even students participating in online classes have experienced a decline in learning outcomes, with an average drop of 14% in reading and mathematics performance between 2019 and 2021 (MINEDU, 2021[80]). The proportion of students performing below the minimum level in the PISA test increased by at least 22% from PISA 2018 (IPE, 2021[79]). Closing these gaps will require targeted academic and tutoring support provided by well-trained teachers, prioritizing disadvantaged students. One example is through after-school or summer school remedial programmes, which have been shown to be effective in Finland, Portugal, France or India. Authorities could also expand coverage of the Digital Gap Closing programme (Plan de Cierre de Brecha Digital) to ensure that every student in the country has access to and actively engages with digital technologies.
Improving access to high-quality education requires enhancing teaching quality, learning materials and infrastructure. The welcome 2012 teacher reform aimed to improve educational quality by offering better labour conditions and merit-based career advancement (Box 3.4), while a monetary incentive programme (Bono escuela) launched in 2014 rewarded teachers for students’ achievements. However, efforts to develop stronger professional pathways for teachers must continue, as only 64% of all teachers attain the minimum quality requirements in secondary education (UNESCO, 2023[81]). Improving quality of teacher’s initial training is key. Challenging working conditions, inadequate training, and lower salaries than for other professions limit the attractiveness of the teaching profession in Peru (UNESCO, 2017[82]).
In 2012, the government introduced a law (Ley de Reforma Magisterial) with the aim of improving the quality of teaching and the professional development of teachers. The reform introduced new evaluation criteria and professional development requirements for teachers, and a new system for promoting and rewarding good performance. The new system bases teacher selection and promotion on periodic mandatory performance evaluations. Based on these evaluations teachers can search for opportunities to move horizontally and vertically through the system. Contrary to the old law, teachers can be dismissed after three failures in performance evaluations to retain the most talented teachers. The new law expands the number of performance areas where teachers can be evaluated, including innovative pedagogical practises, institutional management, teacher training and research and innovation. The law also simplifies payroll management and establishes fixed pay rises linked to the performance evaluations. The reform has contributed to improve teacher quality and student performance while increasing incentive for professional development. However, implementation delays and salary raises not subject to meritocratic evaluations could hinder teacher motivation.
Source: (OECD, 2016[83]; UNESCO, 2017[82]; SOPLA, 2014[84]).
There is also a need to better align the number of teacher candidates with the needs of the education system, particularly in rural areas where there is a large share of students of indigenous backgrounds. Too many teacher candidates apply for public positions in urban areas while in rural areas there are shortages with only 11% of available positions being filled in 2020 (World Bank, 2022[85]). As a result, contract teachers, who lack necessary qualifications, tend to occupy positions that permanent teachers, with higher qualification, reject, usually in schools in disadvantaged backgrounds. Highly qualified teachers in pre-primary centres in Chile, Denmark, Turkey and Norway, are 11% more likely to teach students from disadvantaged backgrounds (OECD, 2019[86]). Additionally, the number of multigrade schools in rural areas is large, as 78.3% of total primary schools have only one teacher for the whole primary education (CIES, 2021[87]). Meeting the different needs of all students in multigrade schools requires highly qualified teachers specialized in many subjects. Reallocating high-qualified teachers to more disadvantaged schools, improving working conditions and reducing the number of grades a teacher must serve would reduce the gap in learning outcomes. Peru could draw from Korea’s experience with mandatory allocation and rotation schemes for teachers according to the needs of each school to attract good teachers in disadvantaged schools via extra incentives, such as additional salary, smaller classes, less instructional time, additional credit towards future promotion to administrative positions, and the ability to choose the next school where one works (OECD, 2018[88]; IDB, 2020[89]).
Adequate school infrastructure is crucial for promoting engagement and enhancing learning outcomes. However, in Peru only 26.2% of total classrooms in pre-primary, primary and secondary public schools were in good condition in 2018, with even lower numbers in rural schools, at 24% (INEI, 2018[90]). Around 60% of schools nationwide lack some basic services, of which 40% have no water, 36% have no drainage and 30% have no electricity, making the learning process challenging. In 2014, the Education Ministry implemented the National Programme of Educational Infrastructure (Pronied) with the aim of reducing educational infrastructure gaps. However, implementation has been weak driven by poor coordination between national and subnational governments and low implementation capacity. In 2021, 30% of the budget allocated to Pronied and the regional governments was not executed. Reforms to enhance procurement, reduce corruption and improve budget process and coordination, discussed in Chapter 2, are essential for this.
Improving the transition from education to the labour market
Access to higher education has increased in Peru but it has come at the expense of quality. 30% of the Peruvian population aged 25 and above hold a tertiary degree, more than in many other Latin American countries. However, over 80% of the population aged 16-25 scores at the lowest levels of proficiency in literacy and numeracy according to the OECD PIAAC survey (OECD, 2023[91]). Additionally, the number of active universities has almost doubled from 74 to 139 between 2000 and 2019 (OECD, 2016[83]), many of them unregulated, resulting in relaxed admission requirements and low student skills (OECD, 2019[14]). In 2020, the government launched the National Policy for Higher and Technical-Productive Education to 2030, with a focus on increasing access to higher education for at least 50% of the country’s youth, emphasizing the access of youth from vulnerable backgrounds. A welcome 2014 higher education institutions law tried to improve regulation and quality across programmes and providers, creating an institution responsible for guaranteeing minimum quality standards. So far 92 universities and two graduate schools have met the minimum quality requirements in the initial stage of the higher education licensing process. However, only 73 vocational education institutes meet the quality criteria. It is crucial to further enhance the quality of these institutions by reinforcing quality assurance mechanisms and providing support for continuous improvement processes.
Peru needs to reinforce its vocational education and training (VET) system, which is currently not well aligned with the needs of the labour market (OECD, 2019[14]). The demand for high skilled workers has been outpacing the supply. VET programmes could increase the supply of skills in high demand, such as IT technicians, personal care workers or health professionals. Peru’s VET system is characterized by strong sectoral schools (e.g. in manufacturing, construction, and tourism) but enrol only around 15% of VET students. The remaining non-sectoral public and private schools are weaker providing low-skilled technicians with little work practice and offer too few opportunities to acquire advanced skills. Engaging firms in the co-design and running of non-sectoral schools’ programmes and providing training could better align learning with labour market demands, while increasing work-based learning opportunities. Higher participation in work-based training would increase employability and reduce skill mismatches. Some OECD countries provide financial and fiscal incentives to provide apprenticeships in dual VET systems. For example, in France students receive financial aid and companies receive financial and fiscal incentives to hire apprentices, alleviating financial constraints and potentially promoting formal employment. Employers should also play a more active role in the design and implementation of active labour market policies, and university programmes to enhance the quality and relevance of skills.
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