VZCZCXYZ0000
RR RUEHWEB

DE RUEHBO #0163/01 0362227
ZNR UUUUU ZZH
R 052227Z FEB 10
FM AMEMBASSY BOGOTA
TO RUEHC/SECSTATE WASHDC 2635
INFO RUEHBO/AMEMBASSY BOGOTA
RUEHC/DEPT OF LABOR WASHINGTON DC
RUEHCV/AMEMBASSY CARACAS
RUEHLP/AMEMBASSY LA PAZ
RUEHPE/AMEMBASSY LIMA
RUEHQT/AMEMBASSY QUITO
RUEHSG/AMEMBASSY SANTIAGO
RUEHZP/AMEMBASSY PANAMA

UNCLAS BOGOTA 000163 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON ELAB PGOV CO
SUBJECT: COLOMBIA'S DOUBLE-DIGIT UNEMPLOYMENT -- BUSINESS AS USUAL 
 
REF: A) 09 BOGOTA 1829; B) BOGOTA 143; C) 09 BOGOTA 4120 
D) 09 BOGOTA 3236 
 
¶1. (SBU) SUMMARY. Colombia's unemployment rate reached 12 percent 
in 2009, the highest in Latin America.  This is the second 
consecutive year Colombia received this dubious distinction.  Even 
in the heydays of 5.7, 6.9, and 7.5 percent economic growth from 
2005-2007, respectively, Colombia still averaged double digit 
unemployment.  Complicating this matter is the large informal 
sector, which employs roughly 60 percent of the workforce.  The 
GOC's strategy to lower unemployment and reduce the informal 
workforce has several key components: initiate massive 
infrastructure projects, encourage more renewable energy 
development, increase the number of free trade zones, and implement 
a scaled labor tax payment system.  However, it does not solve the 
core problem -- the high cost of hiring formal sector workers. END 
SUMMARY. 
 
 
 
Highest Unemployment in Latin America 
 
------------------------------------- 
 
 
 
¶2. (U) The Economic Commission for Latin America and the Caribbean 
of the United Nations (ECLAC) ranks Colombia's unemployment rate as 
the highest in Latin America, followed by Chile and Argentina. 
Furthermore, Colombia is the only country in the region with an 
average unemployment rate in the double digits. 
 
 
 
¶3. (SBU) Unemployment for 2009 started out at 14.2 percent, hovered 
around 12 percent throughout the year, and fell to 11.3 percent in 
December, according Colombia's National Department of Statistics, 
DANE.  Although trending downward, analysts at a prominent local 
think-tank, Fedesarrollo, told us that unemployment will remain on 
average in the double digits for 2010.  The main reasons are the 
high payroll taxes and imposed social welfare programs 
(parafiscales) that employers are required to pay (reftel A). 
 
 
 
¶4. (U) Colombia has fought a structural unemployment problem for 
decades.  The average monthly rate for the last ten years, however, 
has been 13 percent, with a high in January 2002 of 17.9 percent in 
¶2002.  Double digit unemployment persisted despite high economic 
growth rates of 5.7, 6.9, and 7.5 percent from 2005-2007, 
respectively.  This economic boom achieved only three monthly 
periods (out of 36) of single digit (9 percent) unemployment. 
 
 
 
High Taxes Expand the Informal Sector 
 
------------------------------------- 
 
 
 
¶5. (SBU) In the last ten years, the informal sector has grown from 
48 to 58 percent of the workforce.  Growth of the informal sector 
leads to a variety of problems, the most pressing being a lack of 
tax collection, a drain on the government-financed health care 
system, and a potentially large populist movement, according to 
Mauricio Cardenas, senior fellow at Brookings Institute and former 
Minister of Transportation. 
 
 
 
¶6. (SBU) The informal economy in Colombia consists of all economic 
activities that circumvent the costs and rights associated with 
commercial licensing, labor contracts, financial credit and the 
social security system (reftel A).  The GOC categorizes the 
informal workforce into three groups: 1) informal workers with no 
specialization (e.g., street vendors, maids, nannies); 2) workers 
with specialized technical jobs (e.g., plumbers, cab drivers, 
artisans); and 3) independent professionals (e.g. consultants, 
individual medical and legal practices, contractors).  Fedesarrollo 
 
calculates that 93 percent of informal workers belong to the first 
two categories. 
 
 
 
¶7. (U) Although the first two categories do not pay taxes, they do 
receive subsidized social security benefits and limited healthcare, 
but no pension or worker compensation.  To cover the unfunded 
costs, the GOC imposes subsidies through taxes on both large 
businesses and the formal sector.  Recently, the GOC raised the 
value-added tax on beer, liquor and cigarettes from 3 to 14 percent 
to cover the gap in healthcare costs. 
 
 
 
Unemployment and Crime: An Unfortunate Marriage 
 
--------------------------------------------- -- 
 
 
 
¶8. (U) Analysts note that high levels of unemployment lead to 
sustained levels of criminal activity.  Colombia's 12 percent 
unemployment rate leaves 2.5 million people out of work and 
desperate for money.  Although the uptick in homicides in 2009 can 
be mostly attributed to gang violence (reftel B), the lack of jobs 
provides few alternatives to joining gangs, drug cartels, and 
guerilla groups. 
 
 
 
High Unemployment Doesn't Pierce Uribe's High Ratings 
 
--------------------------------------------- -------- 
 
 
 
¶9. (SBU) President Uribe came into office in 2002 with the goal of 
increasing security throughout the country, which would lead to 
increased economic development.  Security is significantly better, 
the economy has improved, and Colombia has attracted record foreign 
direct investment.  But double digit unemployment still remains. 
Currently, Uribe has around a 70 percent approval rating, based 
largely on his successful Democratic Security policy.  However, a 
December Gallup poll of Colombia's four largest cities shows that 
70 percent of respondents think unemployment is getting worse and 
70 percent disapprove of President Uribe's handling of the issue 
(his worst score of all the topics covered in the poll). 
 
 
 
¶10. (SBU) Former Minister of Defense and potential presidential 
candidate, Juan Manuel Santos, has stated publicly that the 
security situation has progressed enough that the country should 
focus primarily on the economy and job creation.  (Note: Santos 
will be a presidential candidate, and a leading contender, only if 
Uribe does not run for reelection.  Santos is well regarded in 
economic circles due to his experience as former Finance Minister 
and Minister of Foreign Trade.  End Note.) 
 
 
 
A Possible Way Out 
 
------------------ 
 
 
 
¶11. (SBU) Two major economic think tanks in the country, 
Fedesarrollo and the National Association of Financial Institutions 
(ANIF), highlighted two key measures to stimulate formal 
employment: 1) reduce payroll taxes and parafiscal costs for the 
employers, which currently adds 60 cents to every peso paid to an 
employee; and 2) reduce the subsidy program, which would enable 
companies to hire more workers. 
 
 
 
¶12. (U) The GOC's strategy to lower unemployment and reduce the 
informal workforce has several components: 1) invest in massive 
infrastructure projects (reftel C), including 160,000 new housing 
units; 2) promote renewable energy development to achieve 20 
 
percent ethanol and biodiesel mixes in gasoline and diesel, 
respectively (currently Colombia provides 10 percent ethanol and 5 
percent biodiesel - reftel D); 3) increase the number of free trade 
zones to attract more private companies and create more formal 
sector jobs; and 4) implement a scaled labor tax payment system 
that allows companies to report the number of hours an employee 
works per month as a percentage of full-time employment, and pay 
the equivalent percentage of labor taxes, (a "second-best solution" 
next to eliminating parafiscales - reftel A). 
 
 
 
Comment: High Unemployment is the Status Quo 
 
-------------------------------------------- 
 
 
 
¶13. (SBU) Colombians have grown accustomed to double digit 
unemployment and have not staged large protests, in part because 
the social net is sufficient to keep the public at bay.  Uribe's 
favorable ratings are still impressively high in his eighth year in 
office, as he remains focused on improving security.  While a raise 
in the minimum wage is popular among the work force, companies are 
less likely to hire because of the associated high payroll taxes 
and subsidized social benefits.  GOC officials often state they 
want to reduce unemployment levels, but until they reduce the 
burdensome taxes on the formal sector, unemployment is likely to 
stay in double-digits. 
BROWNFIELD