Measuring the Cost of Salaried Labor in Latin America and the Caribbean

Abstract

work is licensed under a Creative Commons IGO 3.0 AttributionNonCommercial-NoDerivatives (CC-IGO BY-NC-ND 3.0 IGO) license (http://creativecommons.org/licenses/by-nc-nd/3.0/igo/ legalcode) and may be reproduced with attribution to the IDB and for any non-commercial purpose. No derivative work is allowed.Any dispute related to the use of the works of the IDB that cannot be settled amicably shall be submitted to arbitration pursuant to the UNCITRAL rules. The use of the IDB's name for any purpose other than for attribution, and the use of IDB's logo shall be subject to a separate written license agreement between the IDB and the user and is not authorized as part of this CC-IGO license.Note that link provided above includes additional terms and conditions of the license. 2 AbstractThis paper presents new data documenting the cost of salaried labor in 20 Latin American and Caribbean countries. We gather data on the three main costs associated to hiring salaried labor; (i) minimum wages and other monetary benefits, (ii) mandated contributions for social insurance and other benefits and (iii) job security provisions. We present two new indicators. First, we calculate the average non-wage cost of salaried labor (NWC). This indicator answers the following question: for the average wage, what additional share of wages must be satisfied by workers and employers to fulfill all the law mandated non-wage costs of a legal salaried relationship. Our second indicator combines these non-wage costs with the nominal restriction that legal wages cannot be lower than the minimum wage. We calculate the annual dollar value of paying a worker the minimum wage plus all mandated non-wage costs as a share of GDP per worker. This constitutes the minimum cost of salaried labor (MCSL). We highlight seven important facts; (i) The average non-wage cost of salaried labor (NWC) for the region is 49% of wages.(ii) There is a large dispersion across countries like Argentina, Brazil and Peru with costs around 70% of wages and countries like Trinidad and Tobago, Jamaica and Chile with cost less than 40% of wages. (iii) Mandatory contributions are the most important component of the average non-wage cost of salaried labor with 27.3% of wages followed by additional benefits with 13.8% of wages while job security provisions account for another 8.4%. (iv) On average, mandated contributions from employers amount to 17.5% of average annual wages, versus 9.8% of mandated contributions from employees. (v) The minimum cost of salaried labor (MCSL) is on average 39% of GDP per worker.(vi) Variation of the MCSL across countries is even larger. For countries like Mexico, Trinidad and Tobago or the Dominican Republic the MCSL it is below 15% of GDP per worker while the minimum cost of hiring a salaried worker in Honduras is 95% of GDP per capita. (vii) Despite having below average NWC, the five poorest countries in our sample are those presenting the highest MCSL, due to high minimum wages relative to GDP per worker.

Ecuador Trade and Investment Competitiveness Report

“…Chile is the only country in Latin America in which workers receive no bonus payment. The bonus paid in Ecuador is similar in size to the bonus paid in Panama and Peru, but double that of Argentina, Brazil, and Colombia (Alaimo, Bosch, & Gualavisi, 2017). In 2015, the Law for Labor Justice established that workers could be paid thirteenth and fourteenth salaries in instalments throughout the year, instead of in lump sums.…”

Dominican Republic Systematic Country Diagnostic

“…Labor force participation is around the regional average, with large differences across income groups, education levels, and sex. 77 Despite small increases in the participation of both groups since 2006, participation of the bottom 40 percent is lower than for 76 The estimates of non-wage labor costs come from Alaimo et al (2017), and include three components; (i) the additional mandated benefits (such as bonuses and paid leave) that a salaried worker is entitled to receive according to the legislation, (ii) the mandatory contributions to finance social insurance systems and other benefits (such as training, housing, among others), and (iii) a monetized version of job security provisions. 77 Labor force participation is computed using population between ages 15-65.…”

Special Tax Regimes in Latin America and the Caribbean: Compliance, Social Protection, and Resource Misallocation

“…Labor regulations are summarized using the cost of salaried labor estimated by Alaimo, Bosch, Gualavisi, and Villa (2017), who compute the payroll tax-equivalent of mandatory provisions such as social security contributions and severance payments.…”