More than half of Colombia’s economy is informal which leaves the majority of workers untaxed and without pensions — a government-sponsored program is fighting back by training workers, investing in companies, and creating jobs.
“Our institute is about development, not just employment, but social development and opportunities for young people who face stark challenges in their communities,” Consuela Gutierrez de Quijano told Colombia Reports.
Gutierrez is SENA’s chief of public service for employment in the northwestern department of Antioquia. She is keenly aware of the dilemmas confronting growth in Colombia — the overwhelmingly informal economy, the brain drain, the fact that in some areas children stay home because it is too dangerous to walk to school. “There are serious security problems for young people,” Gutierrez said, “but there are also many opportunities.”
SENA provides professional and educational training in a vast array of professions, from computer technology to culinary arts, auto mechanics and design, as well as language classes, and free virtual courses. It has an annual budget of more than $2 billion.
SENA combats economic informality by cultivating the labor that the formal market needs. In Colombia’s occupational pyramid there is a shortage of hi-tech professionals for example. This is where SENA proves its value.
The size of the informal economy is problematic. It leaves many Colombians without adequate social security. The pay is often below minimum wage. A large informal economy reduces productivity and impedes development on an industry-wide scale by forcing the government to raise taxes on formal businesses.
According to Lars Christian Moller, the World Bank’s senior country economist for Colombia, “formal labor in Colombia is very expensive for two reasons. First, because of the minimum wage which is equivalent to more than 70 percent of the average wage. Second, because of the high non-wage labor cost that the employer pays (amounting to 45 percent of the labor cost). Both are among the highest in the world, according to the OECD.”
Gutierrez favors lowering taxes on formal businesses to incentivize growth, but categorically denies the idea that Colombia should lower its minimum wage which, as of December, was $312 a month.
“For the love of God, no! Often as many as three or four people must live off of the earnings of one minimum wage worker. It is not enough.”
Colombia’s president Juan Manuel Santos won the 2010 presidential election running on a job creation campaign. In December of 2012, Congress passed a comprehensive tax reform that the finance ministry said would lead to “more modern [and] formal employment, that meets all the conditions…[of] a more developed society, a modern society.”
“Bringing down the cost of formal labor, as proposed in the current tax reform, should therefore help reduce informality and unemployment, and therefore inequality,” said Moller.
The new tax reform brings down the cost of labor by replacing the employment tax, “a handbrake” to job creation as Colombia’s finance minister put it, with a new equity tax. This theoretically makes firms more open to hiring more workers because the tax burden is shifted to profits rather than the actual labor itself.
The “progressive” tax reform and programs like SENA aim to address the systematic problem of Colombia’s informal economy by preparing Colombians for the modern labor market.