Gustavo Petro’s Labor Reform Hurts Vulnerable Workers

Colombia's Unemployed Become Risky Bets, Face Fewer Formal Openings

Analysis, Grid

On March 16, 2023, the Gustavo Petro administration presented a Labor Reform Bill to Congress. (Sebastián Díaz)

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On March 16, 2023, the Gustavo Petro administration presented its Labor Reform Bill to Congress. Ignoring the harm to job creation, the executive has touted job stability for the minority of workers in Colombia’s formal sector.

The stubborn fact behind the feel-good language is that burdening employers will make them less likely to hire and more likely to fire workers when possible. This is particularly the case for small and medium-sized enterprises, which comprise 98 percent of the formal sector. Unemployed and informal workers will be worse off as Colombia’s unemployment climbs.

Petro’s supporters, on February 14, held a rally in Bogotá, Colombia, where they backed the bill. Addressing his supporters from the presidential Casa de Nariño, Petro encouraged them to be vocal: “It is the people’s job to promote even further changes … real change does not consist in winning elections but in consistent demands.”

On February 15, Colombians opposing Petro’s policies, including the labor reform, organized nationwide counter-demonstrations. These demonstrations appear to have had larger participation, consistent with waning support for Petro.

By promoting combative street protests, Petro is pressuring congressmen into passing the labor reform. However, with his dwindling approval rate of 51 percent, it remains uncertain whether the bill will pass because many congressmen are inclined to follow opinion polls more than partisan alliances.

The Historical Pact, the political alliance with which Petro won the presidential election, is falling apart. In both the Senate and House, around 37 percent of congressmen support Petro unconditionally. When he took office, congressmen from even the Conservative Party supported him. The honeymoon period is over, and they are reluctant now.

If the executive fails to pass the reform now, it will likely become even harder as his tenure loses its luster.

How Labor Reform Promotes Unemployment

Labor Minister and Communist Party Leader Gloria Ramírez presented the bill. It demonstrates the president’s commitment to leftist ideology rather than managerial prudence. Petro wants to end “the neoliberal rules,” which have resulted in “worker exploitation.” Neoliberalism is an ill-defined pejorative, so which rules those are is anyone’s guess.

According to the executive, the bill seeks to guarantee “labor stability.” To achieve this, the new default rule for hiring will be indefinite-term contracts, because apparently being chained to one employer is labor-market empowerment. To stop companies from using service and fixed-term contracts on an ongoing basis, the bill limits these types of contracts to a maximum of two years, and employers must provide a justification.

The bill forbids employers from terminating employees from so-called priority groups without a just cause. Workers who are handicapped, pregnant, and/or three years or less away from retiring will need a judicial order to be terminated. In addition, employers will need a judicial order to dismiss workers with labor-union privileges. Instead of promoting job stability, this will discourage employers from hiring people with these characteristics because getting rid of them will be so difficult.

The bill seeks to reduce the standard 48-hour working week to 42 in the next six years. The central planners want night shifts to start at 6 p.m. rather than 9 p.m., as though dictating worker start times is a legitimate role of the federal government. Similarly, now with price fixing, the reform will increase the overtime pay rate from 75 percent more than the regular hour to 100 percent more. This arbitrary and onerous change will impede nightlife and tourism and make them more expensive.

Digital platforms such as Uber and Rappi—Colombia’s first digital unicorn company—will have more obstacles to their operation if the bill passes. The platforms will have to register every worker as an employee, instead of having service contracts. This means digital companies having to pay for their social security and other benefits, thus reducing funds available for regular compensation. According to the guild of applications and innovation, In Alliance, the reform is set to destroy around 80,000 jobs because enrolling all workers is impossible.

To maintain their profit margins, platforms will have to charge more, undermining digital companies and innovation. Platform service quality will also fall on account of fewer available employees. In November 2022, the Congress approved a tax reform, so digital companies are already paying an additional 3 percent of their gross income.

The labor reform requires employers to provide workers with increased severance pay. Instead of paying for 30 days of work when firing an employee, employers will need to pay for 45. Further, employers will have to pay an extra 45 days for every year the employee has worked. This provision makes job creation a more expensive burden for employers, especially smaller ones that lack economies of scale and can ill afford disruptions.

While the bill’s façade is more so-called rights for workers, it will only benefit people with a stable job in the formal sector. Meanwhile, around 14 percent of Colombians are unemployed, and 60 percent work informally. They will find themselves further left out and abandoned by the supposedly worker-oriented president.

How will the reform improve the lot of workers if it leaves behind the majority of Colombians? The question answers itself.

A Blow to Productivity

The National Federation of Merchants estimates that, if the reform passes, the costs of hiring will rise by 35 percent, which translates to 5 percent higher unemployment in years to come. Lucio Bernal, president of Home Sentry stores, warns that the reform portends an exodus of companies and the destruction of many small businesses.

According to the OECD, Colombia is the least productive member country, despite working the longest hours. One labor hour generates US$17.70 of value, while Chilean, Costa Rican, and Mexican employees generate $35.20, $28.80, and $21.90, respectively.

The reform fails to explain how fewer working hours and lower labor-market fluidity will raise productivity. Hint: they will not, and productivity is the underlying driver of long-term earnings growth. The government is haphazardly opening fire at poor worker outcomes while not addressing the underlying causes nor offering legitimate solutions.

Petro is making a faux attempt to appear empathetic to Colombians, perhaps to raise his poll numbers. This reform, however, is an enemy of Colombians and will benefit the precious few protected union workers, and especially union bosses, wanting more for themselves and less for everyone else. Ironically, a tighter labor market will drive more people into informality and reduce opportunities to work. Thanks, but no thanks.

Andrés Sebastián Díaz Ponce

Andrés Sebastián holds a bachelor’s degree in political science and international relations from the University of the Americas, Ecuador. He founded Libertario, a Spanish-speaking community that promotes the ideas of liberty in Latin America, and he collaborates with the Ecuadorian liberal think tank Libre Razón. Follow @asdp250.

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