Are labour inspections effective when labour regulations vary according to the size of the firm? Evidence from Peru

• DOI: http://doi.org/10.1111/ilr.12107
• Published date: 01 June 2018
• Date: 01 June 2018

International Labour Review, Vol. 157 (2018), No. 2

Copyright © The author 2018

Journal compilation © International Labour Organization 2018

* Senior researcher, Center for Distributive, Labor and Social Studies (CEDLAS), Facul-

tad de Ciencias Económicas, Universidad Nacional de La Plata, Argentina, email: mviollaz@

cedlas.org. The author would like to thank Ravi Kanbur and David Jaume for their valuable insights,

and an anonymous reviewer for the constructive comments that helped to improve the manuscript.

Responsibility for opinions expressed in signed articles rests solely with their authors, and

publication does not constitute an endorsement by the ILO.

[Correction added on 6 November 2020, after initial online publication. A duplicate of

this article was published under the DOI 10.1111/ilr.12038, this duplicate has now been deleted

and its DOI redirected to this version of the article.]

Are labour inspections effective

when labour regulations vary according

to the size of the rm? Evidence from Peru

Mariana VIOLLAZ*

Abstract. This article analyses the impact of enforcement of four labour standards

(pension system enrolment, minimum wage, maximum weekly working hours and

written employment contract) on compliance in Peru, where labour regulations and

penalties vary according to rm size. The author uses household survey data to

analyse a factor not previously studied – adjustment by rms through downsizing

to benet from lower nes and less stringent regulations. The empirical ndings

indicate that enforcement efforts have little effect on either the degree of compli-

ance or the size of rms.

Non-compliance with labour market regulations is widespread in Peru, as

it is in many Latin American countries. In the Peruvian private sector in

2014, 54.2 per cent of salaried workers received no pension benets, 48.8 per

cent did not have an employment contract and 32.4 per cent received monthly

earnings below the legal minimum wage (CEDLAS and World Bank, 2016).

As in other contexts, the share of workers deprived of employment benets

is larger in small-sized rms. For example, according to the Peruvian house-

hold survey, 87.6 per cent of salaried workers in private rms with ten or fewer

employees received no pension benets in 2014, while the gure was 48.9 per

cent for workers in rms with 11 to 100 employees (ibid.).

The Government of Peru implemented a set of policies during the 2000s

with the aim of increasing the level of compliance with labour regulations.

These measures included a special labour regime for small-sized rms called

the Labour Regime for Micro and Small Enterprises (MYPE regime), which

was set up in 2003 and expanded in 20 08. Initially, this regime relaxed some

legal requirements for micro rms (1–10 employees), and as from 20 08 it also

International Labour Review214

began covering small rms (11–100 employees), although it made fewer excep-

tions for the latter. Thus, small rms are subject to stricter labour regulations

compared with micro rms regarding some aspects (e.g. health insurance con-

tributions). Other labour standards continue to be applicable to all workers,

regardless of rm size (e.g. minimum wage).

The labour inspection system is another strategy used by the Govern-

ment of Peru to increase the level of compliance with labour regulations. As

in other developing countries, inspection activities are focused on formal rms,

and labour inspections are led and conducted by regional agencies distributed

throughout the country. When a labour inspector detects the violation of a la-

bour standard, a monetary ne is issued, which in Peru varies according to both

the severity of the violation and the number of affected workers. Fines also

vary according to the size of the rm concerned, with micro and small rms

beneting from a 50 per cent reduction in the amount of the ne.

In this article, I explore microdata from Peruvian household surveys for

the 2008 –13 period to analyse how changes in the level of enforcement of la-

bour regulations affect the rate of compliance at the regional level, within a

context in which labour standards and labour inspection penalties differ ac-

cording to the size of a rm.1 I expect the usual forces analysed in literature

to come into play, namely the deterrent effect of labour inspections and social

norms and the displacement of workers to the informal sector of the econ-

omy where rms are not inspected. However, in Peru labour market regula-

tions have been designed in conjunction with a penalty scheme that depends

on the size of a rm, which allows enterprises a margin of adjustment that has

not been previously analysed. Specically, when enforcement increases, rms

may choose to reduce staff levels so that they are in a lower legal category in

order to take advantage of lower nes and less rigid labour regulations. This

downsizing process may have impacts on the level of compliance, and these

impacts may be different for rms of different sizes. In this study, I attempt to

empirically identify which trends dominated for micro, small and large rms

in Peru between 2008 and 2013, isolating the downsize effect.

This article contributes to the literature on the relationship between the

enforcement of labour regulations and labour market outcomes. The high level

of non-compliance with labour laws has triggered a number of studies that em-

phasize the importance of enforcing labour regulations, especially in develop-

ing countries (for example, Boeri and Jimeno, 200 5; Almeida and Carneiro,

2009; Ronconi, 2010). Country case studies have produced mixed evidence,

however. Some show that improved labour law enforcement increases com-

pliance with labour market regulations, although the effects are usually minor

(Ronconi, 2010; Almeida and Carneiro, 2012; Almeida, Carneiro and Narita,

1 This article focuses on labour inspection activities, which represent only one aspect of the

enforcement faced by rms.