Bogotá — “The cause of the labor improvement is fundamentally the reduction of poverty, not the reform of [tax] contributions”, so says one of the recent tweets of Colombia’s President Gustavo Petro, which he used to question a report by researchers of the central bank (Banco de la República) on the possible impact of the labor reform that would make changes in the payment of overtime, Sunday working hours, among others.
According to the report by the central bank’s researchers, but which does not represent the view of the board of directors, “the results indicate that, in the medium-term scenario, the increase in wage costs [due to the labor reform] would cut 454,000 formal jobs, in a range between 152,000 and 746,000, depending on the estimated response of formal employment to wage costs, equivalent to a reduction % of the employment formality rate, in a horizon of between three and four years”.
Does reducing poverty generate jobs or improve the labor market?
Petro’s statements provoke the question of whether reducing poverty could translate into new job generation, or an improvement of the labor market. Bloomberg Línea consulted experts on the subject to gauge their opinions.
According to Petro, “between 2012 and 2017, poverty rates fell in Colombia, due to the increase in oil and coal revenues, and a better distribution of it thanks to [former president] Santos’ tax reform (...) Labor conditions deteriorated again in 2018, not because the tax reform was passed, which has little to do with it, contrary to what the authors say, but because poverty increased again due to the collapse of oil prices in 2017, and then because of Covid and [former president] Ivan Duque”.
Colombia has yet to publish official poverty figures for 2022, which makes it difficult to make decisions to fight against such inequality. According to data from the country’s statistics agency DANE, during 2021, 19.6 million people in Colombia were living in poverty (39.3% of the population), and 6.1 million in extreme poverty (12.2% of the total population).
Henner Solarte, an economist at Eafit University and who has worked on evaluating the impact of subsidies in Colombia’s Antioquia departmet, told Bloomberg Línea that “reducing poverty does not translate into the labor market improving (in terms of an increase in formal jobs and better salaries, because, looking at it the other way around, the existence of jobs alone is not enough to reduce poverty. It is the quality of the jobs that makes the difference”.
For her part, Natalia Galvis, a social policy consultant and expert on poverty issues, said she does not believe that the reduction of poverty levels leads to labor market improvements.
“I believe that the causality is the other way around,” she said.
“When a poor person manages to enter the labor market, their poverty is reduced, both monetary and multidimensional. Monetary poverty is reduced directly because they are already receiving an income from their main economic activity, and multidimensional poverty is reduced because from that income they will be able to make investments that are essential to improving their well-being,” added Galvis.
However, Solarte commented that employment generation alone is not enough to reduce poverty.
“An important role is played by the improvement of the labor market through productivity that allows workers to improve their remuneration and effectively get out of poverty. As well as the skills that workers develop through experience that allow them to move on to better jobs with better pay”.
How can jobs be generated for people in poverty?
For Natalia Galvis, the development of human capital is very important, and “this happens basically because there is access to quality basic, technical, technological and university education (...) this translates into greater opportunities to participate in the labor market”.
An example of this is the Jóvenes en Acción (Young People in Action) project, she adds. “This program has increased access to quality education for people from poorer households while providing continuity to transfer schemes during the training period so that people do not drop out and they complete the education cycle, which will later translate into greater opportunities to access the labor market.
According to Solarte, a person earning one minimum wage has an average of 8.4 years of education, while someone earning approximately three minimum wages has an average of 15.4 years, which is why it is important to focus on access to quality education.
Solarte added that another tool that can help the employability of people in poverty “is the care centers that allow caregivers, especially women, to have an opportunity to get an education or work because they free up time that was originally destined to caring for someone else, mainly children. And so one could list other ways to help employment from the supply side.”
“But I think there has been a lack of honest discussion of the government’s role in facilitating the demand-side employment problem. Part of the problem of unemployment and informality is the rigidity of our labor market. And the last central bank report evidences that: the risk that a labor reform (which makes the labor market more rigid) ends up destroying jobs”, added Solarte.
From the government’s point of view, the labor reform, which improves the conditions of those who already have work, will help workers to have better salaries, incentivize consumption and generate a virtuous cycle in the economy. However, it does not bring enough tools designed to lift the majority of Colombians out of unemployment, or out of informal employment, which totals around 15 million people.
