Peru is a developing South American country with a population of 31.2 million. It is the 39th largest economy in the world, and the World Bank classifies the country as an upper middle-income economy, with one of the fastest growing economies in the world. This growth can be attributed to drastic economic reforms that kick-started the economic boom in the early 2000s, albeit 31.3% of the population still lives below the poverty line (Worldbank, 2016). The unemployment rate as an economic indicator describes the number of people who are actively looking for jobs within a country against the total workforce.
As of January 2015, the unemployment rate in Peru stood at 6.6%. Since 2001, unemployment has averaged around 8.07%, with an all-time high of 13% in 2005, and a record low of 5.6% in 2012 (Tradingeconomics, 2016). In this regard, this paper will further scrutinize the data behind unemployment in Peru, with a view to discern trends in the data and its relationship to the country’s economy.
In line with Okun’s law, there exist a clear negative correlation between the GDP of Peru and the unemployment rate (Sanchez-Castaneda, Serrani & Sperotti, 2012). This can be noted by the sharp and continuous decrease in the unemployment rate since 2002 that is in tandem with the countries sudden increase in GDP. Between 2000 and 2005 the unemployment rate averaged above 8%, which has continuously dropped to a modest 5.8% average in 2015 (Worldbank, 2016).
The annual GDP growth rate of Peru was as high as ~9% before the recession, although the country was able to recover and maintain their growth rate above 5%. This improvement in the country’s economy can be accredited to the economic reforms that were implemented a decade earlier. These reforms led to both financial stability and macroeconomic growth. This resulted in a period of expansion starting in 2000, which is the also period during which the country has experienced the largest decrease in the unemployment rate.
The unemployment rate in the country is often between 6 and 7 percent since the expansion period in the early 2000s. Peru has one of the largest workforces in the region with 76% of the population falling within the employment age (15 – 64 years) contributing to the workforce. Although the unemployment rate for the country is within a tolerable range, it has on occasion shifted to double digits. This was particularly true in 2005 where the rate shot up to 13%. Overall, the unemployment rate in Peru has been on a downward trend since this peak of 2005. In fact, the country’s economy was growing fast enough to shelter the country’s labor force from the disastrous effects of the 2008 recession. Growth is highest when the GDP progression rate is high and the inflation rates lower. Higher inflation rates discourage employers from increasing the size of their staff (Sanchez-Castaneda, Serrani & Sperotti, 2012).
It is important to note that it is becoming increasingly difficult for the country to sustain their explosive growth. The economy of Peru lacks the necessary strength to enable it to take the unemployment rate below 6%. Since 2012, the unemployment rate has shown some sign of a slowdown. According to Yamada, Lavado, and Martinez (2015), the GDP of Peru must increase by at least 4% each year in order to create enough jobs for the 360,000 workers joining the informal and formal workforce each year. This is due to the change in the structure of the labor force in recent years. Increasingly, the citizens of Peru are abandoning informal employment for the more stable formal job opportunities.
Over the past decade, the proportion of those involved in informal employment dropped from 76% to 68%. Peru’s strong economic growth played a significant role in this change. With such a shift the output per worker is bound to increase due to this structural change. The output per worker in Peru grew by an average of 4.4% between 2004 and 2013. This shift did not translate into a noticeable change in the poverty level (Yamada, Lavado, & Martinez, 2015).
Conclusion
Despite being a developing nation, Peru is one of the largest economies in the world. Classified as an upper-middle income economy by the World Bank, the country was able to successfully jumpstart this phenomenal growth through positive macroeconomic initiatives. Although 31% of the population lives below the poverty line, only about 6.6% of the country’s labor force remains unemployed. Further scrutiny of the data sets on unemployment in the South American country reveals certain distinctive patterns.
The recent drop in the unemployment rate is in tandem with Peru’s increase in national output. Increased output allowed the country to expand across most of their industries, in particular, the services sector. The unemployment can increase to double digits when there country has a precariously high inflation rate. The data also reveals a worrying trend. The explosive growth in employment is experiencing a slow down since 2013, and Peru is bound to find it difficult to give jobs to their massive workforce that grows by an estimated 360,000 workers each year.
References
Sanchez-Castaneda, A., Serrani, L., & Sperotti, F. (2012). Youth Unemployment and Joblessness. Newcastle upon Tyne: Cambridge Scholars Pub.
Tradingeconomics.com,. (2016). Peru Unemployment Rate | 2001-2016 | Data | Chart | Calendar | Forecast. Retrieved 26 February 2016, from http://www.tradingeconomics.com/peru/unemployment-rate
Worldbank.org, (2016). Peru. Retrieved 26 February 2016, from http://www.worldbank.org/en/country/peru
Yamada, Gustavo, Pablo Lavado, and Joan Martinez. “An Unfulfilled Promise? Higher Education Quality and Professional Underemployment in Peru.” Higher Education Quality and Professional Underemployment in Peru. IZA Discussion Paper 9591 (2015).
